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High Court of Australia Transcripts |
Sydney No S150 of 2000
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
COMMERCIAL NOMINEES OF AUSTRALIA LIMITED
Respondent
GLEESON CJ
GAUDRON J
McHUGH J
KIRBY J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON THURSDAY, 14 DECEMBER 2000, AT 10.20 AM
Copyright in the High Court of Australia
MR D.H. BLOOM, QC: If it please the Court, MR J.L.B. ALLSOP, SC and I appear with MR J.H. MOMSEN for the appellant. (instructed by the Australian Government Solicitor)
MR T.M. JUCOVIC, QC: If it please the Court, I appear with my learned friend, MR K.J. BURGES, for the respondent. (instructed by Corrs Chambers Westgarth)
GLEESON CJ: Yes, Mr Bloom.
MR BLOOM: If your Honours could turn to our written submissions, starting at paragraph 18, I will endeavour in this way to take your Honours to the issue in the matter and then to the Full Court's judgment. Your Honours will see that the loss carry forward provisions, section 80, which applied up until the 1989 tax year, section 79E which applied thereafter, entitle a taxpayer to a deduction for so much of the losses incurred by it in any of the seven years next proceeding the year of income. Then 79E(3) over the page is the current provision. Both provisions apply in this case because the two loss years are 1989 and 1990.
Your Honours should know there is also a part in the Act, Part IX, dealing entirely with superannuation and related business. That is, in our submission, essentially regulatory, and there are only a couple of provisions of that to which I will need to take the Court.
Now, at all times the fund in this case was constituted as a trust with a trustee and at all times it was a complying superannuation fund, being an eligible one and subject to the operation of the regulatory provisions of Part IX.
At all times the taxable income of the fund was to be calculated on the hypothesis, that is, as if the trustee of the fund was a taxpayer being a resident. This device, which applies also in Division 6 to all trust estates, is there so that the income of a trustee as trustee of a trust will not be amalgamated with his income as a trustee of any other trust or his own personal income. So the hypothesis is that the trustee is the trustee of an hypothetical fund. In effect, the sole income that he is earning and the sole deductions that he is incurring relate to just that one trust fund or superannuation fund.
Section 278 of the Act provides that it is the trustee, from time to time, who is the person liable to pay tax in relation to that hypothetical entity. Nowhere in the Act is there any express criteria that tell us when the hypothetical taxpayer will continue to exist, so that the taxpayer is the same taxpayer for loss purposes for section 80 or section 79E. It is our submission that, in those circumstances, to the extent to which equitable principles may intrude, they will be applied.
We have set out in paragraph 26 an attempt to define as best we can and as short we can a trust and focus upon the relationship, that is the relationship between trustee and beneficiaries in relation to particular property and none of that was disputed in what fell from the Full Court. If I then take your Honours to their judgment in volume 4 at pages 738 to 739, starting at paragraph 50 on page 738. They say:
The approach of the Assessment Act in relation to trusts is to direct attention to the trust property. "Fund" when used in Part IX must mean a "stock or sum of money, especially if set apart for a particular purpose".....or a "stock of money or pecuniary resources".....The use of the term "trust estate", which is not defined in the Assessment Act, is analogous to the use of the expression "fund" as that expression is defined and used in Part IX.
With that we would agree but point out, of course, that the term "trust estate" is two words, not one. The estate is the interest in property but the word "trust" is what tells us the nature of that interest in property that we are looking for. Their Honours continue:
Neither refers to a legal person. Both terms must be taken to refer to the conglomeration of property in respect of which trust obligations and corresponding rights exist from time to time. Putting it another way, a trust estate or a superannuation fund will be that property the ownership of which is divided between trustee and beneficiary. The trustee will always be ascertainable. However, the class of beneficiaries, while identifiable, will not necessarily be closed and all beneficiaries may, of course, not be ascertainable.
The trust obligations of the trustee and the corresponding rights of the beneficiaries may vary from time to time, in accordance with law. Similarly, the property that is the subject of such obligations and rights will not be static. Parts of the property might be distributed so as to cease to be subject to trust obligations. Further property may accrue as income or by further settlement so as to become subject to obligations where previously that additional property was not.
However, at any given time it will be possible to identify the property that is the subject of the trust obligations and in respect of which the rights of beneficiaries exist.
If I may pause there, one can identify the property without any difficulty, but here what we say has fundamentally changed is the second part, the trust obligations in respect of which the rights of the beneficiaries exist.
It is the income which accrues from that property, -
they say -
less outgoings from that property, that go to make up the taxable income of the trust estate or fund -
this notional taxpayer -
Thus, the Assessment Act requires a calculation of taxable income in respect of the trust property, to which it sometimes refers as the trust estate and at other times as the fund (in Part IX).
The Assessment Act 1995 then imposes a liability either on the beneficiaries or, in some cases, on the trustee in a representative capacity. "Superannuation fund", as that term is defined in the SIS Act and the Assessment Act, contemplates a continuing regime regulating the manner in which a fund may be added to and the manner in which payments may be made from it. So long as one can identify a continuity of that regime, that will be sufficient.
Thus, in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property -
If that sentence stopped there, we would be in agreement with their Honours, with respect, but it does not. It continues and says:
in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.
GLEESON CJ: How could it be otherwise?
MR BLOOM: Here, what was called the power of amendment was a power to revoke and replace. So, if it is a true amendment, the sentence is correct, but what their Honours, with respect, overlook is that the amendment here authorises a complete revocation of replacement with new trusts. That therefore changes the continuity of the regime of trust obligations to which they earlier refer in that sentence.
So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the "taxpayer" for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.
If that referred again to mere amendment, we would not cavil with it but what happened here was much more than that. They say:
In the present case, there has been continuity of the regime regulating the Fund.
Because, they say:
The amendment that took place in 1993 was in accordance with the provisions of the Original Trust Deed.
Again, if it was a mere amendment, that might follow but what happened here was something quite different. They conclude:
Accordingly, there has been sufficient continuity - - -
GLEESON CJ: How did Mr McMahon deal with this question?
MR BLOOM: Similarly. It might be best to pick it up in the Court's - he really proceeded upon the basis - the cases relied upon before him were essentially the stamp duty cases dealing with resettlement: Davidson and Chirnside and similar cases here and in England. He said that he thought the variations would not amount to a resettlement and that upon that basis there was sufficient continuity. That is at, really, pages 715 to 716 of the same volume, volume 4.
Your Honours, at the back of our written submissions are extracted sections 272 and 278 of the Tax Act. Section 272, which is essentially equivalent to section 95 in Division 6, says:
The taxable income of an eligible entity shall be calculated as if the trustee were a taxpayer and except in the case of a foreign superannuation fund or a foreign approved deposit fund) a resident.
There is nothing specific that turns on that concept of eligible entity, and, in particular, nothing is given a status of a separate legal entity for any purpose. Section 278:
The trustee of a complying superannuation fund is liable to pay tax n the taxable income of the fund of the year of income.
Not otherwise. That equates, effectively, to section 96 of Division 6. So, the problem for the Court really arises both in relation to superannuation funds and other trusts that come within Division 6. At paragraphs 5 to 17 we have endeavoured to set out the essential facts in our submissions. By a trust deed dated 11 March 1988 a superannuation fund known as the "Control Data Australia Employee Benefits Fund" was established. Control Data Australia was the principal employee and the first trustee.
In December 1989, it changed its name to Miden Pacific and the trust deed was amended to rename the superannuation fund the Miden Group Superannuation Fund. The fund was established by a trust deed for the purpose set out in recital A to that deed, that is, the principal employer has decided to establish an indefinitely continuing superannuation fund, hereinafter called the "Fund" for the purpose of providing superannuation benefits for those of its employees and of the employees of its associated employers who, being eligible for membership, become members of the fund and for the dependents thereof.
There were annexed rules to which I will come very shortly. Up to at least the date of the operative effect of the changes to the trustee deed in the new deed, that is 1 July 1992, the new deed was actually executed on 1 November 1993 but expressed to relate back to 1 July 1992 and the - - -
McHUGH J: Does your case come to this that there were two funds?
MR BLOOM: That is an alternative version of the case, your Honour. The principal case is that there was a completely new fund, that the deed of 1 November 1993 established one completely new fund in the alternative to.
GLEESON CJ: Is the consequence of your alternative argument that these losses are all for the benefit of one of the funds?
MR BLOOM: Yes, in so far as it relates to the former Miden Group employees, yes.
McHUGH J: The difference between your submissions and, in particular, the reasons of Mr McMahon, seem to turn on the level of generality at which you define the rights under the fund and Mr McMahon seemed to take the view that the trust continued, that the accrued rights of employees were preserved, all the assets of the funds were available to meet the claims. You want to get down and dirty, so to speak, and get down to the particulars.
MR BLOOM: Your Honour, I need to, because what both he, with respect, and the Full Court overlooked is that the change that was made, pursuant to a power in the old deed to do it, was to say, "Get rid of the old deed, you never need to look at that again. Here is a new deed and the beneficial interests under this new deed are entirely different to the beneficial interests under the old". I hope to demonstrate that by taking you to as little of the two deeds as possible in order to make that point good.
Now, I was saying that the deed was executed on 1 November 1993 but related back, or purported to relate back, to 1 July 1992, and there is a reason for that, namely that, from 1 July 1992, without the benefit of the deed, there had been a taking on of members and an operation pursuant to the terms of the deed that was yet to come into effect. So that when the deed was signed on 1 November 1993, it operated immediately with respect to people who had already been sitting there, as it were, as accepted C class members, and immediately with respect to the old A and B who became new A, and immediately with respect to any new Miden, that is the old employer/employees, who became new B.
Just to go over that again - there were new C who were unrelated to Miden altogether. There were new A who were the original A and B employees under the original deed and any Miden old employer/new employees, that is post 1 July 1992, would become B under the new deed.
GAUDRON J: Had these new members actually become members of the fund prior to 1 November?
MR BLOOM: The deed published accounts and details, and all those sorts of things, as at the end of the year ending 30 June 1993 upon the basis that it was up and running and operative and there were a large number of members who are reflected as members between 1 July 1992 and the date of execution of the deed. I will take your Honours to short passages in the evidence.
GLEESON CJ: Where did the new members come from? Did people go out into the highways and byways to find them?
MR BLOOM: Yes, a prospectus was published and they were publicly admitted.
GLEESON CJ: Is this a variation of marketing tax loss companies? You market tax loss superannuation funds.
MR BLOOM: Yes, your Honour, yes.
CALLINAN J: What was the amount of the losses, I just wondered, approximately?
MR BLOOM: About $15 or $16 million; substantial.
CALLINAN J: What was the income of the fund in, say, 1994?
MR BLOOM: The fund originally was in loss, obviously, your Honour, because there had been a power under the old deed to direct surplus, that is funds that were surplus to the defined benefits for the existing members, back to the employers. Under the tax system that then prevailed such repatriations would be deductible to the fund, and hence causing the losses, and assessable income of the recipient employer.
McHUGH J: That seems a strange notion of a loss, does it not, in a sense? But it was an allowable deduction?
MR BLOOM: For tax purposes, of course, your Honour, and we live in that rare - - -
GLEESON CJ: But it was not any kind of trading loss, was it?
MR BLOOM: No. The superannuation fund losses were caused by the repatriations which were allowable deductions.
GLEESON CJ: Why? Nobody doubts that, but why?
McHUGH J: You pay money out of the fund and it is a loss.
MR BLOOM: You pay money out of the fund and it is deductible, and if it exceeds your income then you have a loss for tax purposes. Yes.
McHUGH J: Even though you said you would pay the money off to the employer?
MR BLOOM: Yes, and the employer is assessable on that which is paid out to him.
GLEESON CJ: Right.
MR BLOOM: What it shows is that, in effect, the benefits under the old fund, the interest under the old fund, were in the employees with, as it were, a sort of a gift-over, subject to a power of appointment, if you like, in favour of the employers should there be an actuarially certified surplus, so the equitable interests in the old fund were held by employees with a sort of a gift-over - - -
GLEESON CJ: Just to revert to that last matter that we were discussing as a matter of interest, what you did not mention, of course, was that because the employers were losing money in their trading operations, the fact that it was assessable income to them did not matter.
MR BLOOM: That is right, and not only did it not matter but they all eventually went into liquidation and that had a consequence, of course, that by 1995, the income year with which your Honours are concerned, none of the Miden employers existed to make contributions to the new fund and none of the Miden employees, that is old A and B and new B, could then have any contributions made in respect of them to the new fund.
GLEESON CJ: When tax loss companies were marketed it was the creditors, generally, who got the benefit of the value of the - - -
MR BLOOM: Yes, your Honour, by assignment of the debt.
GLEESON CJ: Who gets the benefit of the value here?
MR BLOOM: The new members of the fund get a significantly better return on their investment because of the existence of the tax losses. The old Miden Group only profited to the extent that it was able to take the moneys back and use those to pay some of its creditors. The ongoing benefit is for the new people who come into the fund and get a return enhanced by the tax-free status, if you like.
GLEESON CJ: But the creditors of Miden did get a benefit out of this?
MR BLOOM: I am assuming so, your Honour. I do not know the answer to that. When your Honour says "a benefit out of that", the losses had arisen before 1992. The repatriations had taken place before then and it was as a consequence of that that the vehicle, if you like, was available as a loss vehicle to entice others to come into it.
GLEESON CJ: But the marketability brought some benefits to the creditors?
MR BLOOM: Yes. Repatriations, your Honour, took place in 89 and 90 and it was not until 92 that the fund, or the trust, came under the control of the new people and not, of course, until 93 that the deed to give effect to that new regime was actually executed.
GLEESON CJ: This is exactly the same as the argument that used to arise with tax loss companies, whether or not the business that was being carried on was the same business.
MR BLOOM: When your Honour says "exactly the same" - - -
GLEESON CJ: There was a lot of litigation, was there not?
MR BLOOM: On same business, that was one of the tests, yes.
GLEESON CJ: The issue that used to arise was whether or not having regard to what I will call the reconstitution of the activities, the company was entitled to carry forward losses or whether it had started up a new business and lost that entitlement.
MR BLOOM: That, as your Honour recalls, was one of two questions. The other was whether, in the case of a corporation, there was continuity of beneficial ownerships. That was the other thing that was specifically provided for, and then there were some other anti-avoidance sections.
Here it is rather different. Here the question is more that continuity of beneficial ownership question than continuity of business question. Here the question is, is it the same trust estate? Have the obligations so changed that it is not the same trust estate in 1995 as it was in the years of loss?
GAUDRON J: What are the rights of the new A members, Mr Bloom, are they sort of static, as it were?
MR BLOOM: Effectively, yes, but they have now been frozen. The fund went from a direct benefit fund which was benefits provided by reference to a percentage of salary on the usual events that apply in a super fund to an accumulation fund. An accumulation fund is more like a bank account and there were insurance policies involved and so, those members became entitled to what was there in their fund. Now, they would be entitled to whatever accumulations happened between the date when their employers ceased to be able to contribute for them and they also ceased to be able to contribute accordingly. But whatever is there is frozen and it is only the accumulations of interest compounding, one hopes, on that that they are entitled to.
In terms of numbers of them, there is a passage in the reasons of Mr McMahon at 702, paragraph 14, that:
As at 30 June 1995 -
the income year in which it sought to use the losses -
there were 28 category A, and 37 category B (that is 65 M employees) and 133 category C members.
Now, again, your Honours, category A are the previous A and B. Category B are Miden employees who joined post 1 July 1992 and category C are these new publicly introduced members.
GLEESON CJ: It is not many, is it?
MR BLOOM: No, that was 1995. Things, one would expect, have changed since then. But the As and Bs will remain static. The growth will be in the Cs.
Now, your Honour see at paragraph 10 of our written submissions that the old deed provided defined benefits by reference to a percentage of final salary as I have told your Honours. In circumstances where the assets of the trust were considered surplus to such defined benefits, that is by the actuary, assets could be removed from the trust and paid to the principal employer. This occurred in years of income ending 30 June 1989 and 30 June 1990 in those amounts. Those are the amounts that were available as allowable deductions and gave rise to losses in the 1989 and 1990 years. I will simply give your Honours a reference to the sections that permitted it: it was former section 279C that gave the deduction; and section 82AAQ made such payments assessable. They are in the supplementary materials, if your Honours have need to go to them.
Prior to November 1993, Miden Pacific retired as trustee and was replaced by six individuals. By November the Miden Group was in considerable financial difficulty. Shortly thereafter it went into insolvency administration. This fact had been foreshadowed by a decline in employer contributions before 1993 brought about by financial difficulties.
On 1 November 1993 the new deed, styled "Deed of Amendment", was executed, pursuant to which the respondent was appointed trustee. The changes were, in general, expressed to take effect from 1 July 1992. While the new deed was executed on 1 November 1993, the trust had been operating in its amended form for some time.
In short, the trust changed by means of a wholesale deletion of replacement of all the relevant terms of the trust from one which provided superannuation benefits to employees at the Miden Group of companies under a defined benefit regime, to one which was an accumulation fund providing superannuation benefits not only to the employees and former employees of the Miden Group, but also to the public as category C members. I should just note, your Honours, that further there was no similar power to appoint surplus under the new deed, so that gift-over type of provisions had gone when the new deed came to take effect.
By 1995, and the early financial demise of Miden Group, the former employees of the Miden Group as category A and B members could no longer have contributions received by the fund in respect of them and the Full Court so finds at page 732 at paragraph 28. By the 1995 year of income an amount of $11 million was recorded by the trustees, the then balance of the losses arising from the repatriation of surplus in 1989 and 1990. To have determined the issue of the availability of these losses is deductible against income derived after the changes. The trustee lodged a 1995 return disclosing a taxable income and it did that by not claiming sufficient of the losses to give it a negative balance, but rather a positive balance.
GLEESON CJ: If those surpluses had not been repatriated and there had been no change to the fund, what would have been the destination of the surpluses?
MR BLOOM: They still would have gone back to employers, as we see it, to the extent which they exceeded the amount required to provide the defined benefits. I will come to the deed and perhaps that is the easiest way to do it. It your Honours would go to, firstly, the old deed in volume 1, firstly at page 12 there is an index commencing from page 8, and this is what is described as a working copy of the deed, but it is all your Honours need for present purposes. Your Honours see at page 12, it was made in "March 1988", Miden Pacific is "Principal Employer":
The Principal Employer has decided to establish an indefinitely continuing superannuation fund.....for the purpose of providing superannuation benefits for those of its Employees and of the Employees of its Associated Employers who, being eligible for membership, become Members of the Fund and for the Dependants thereof.
The question may have arisen, your Honours, of course, if it had been desired to add as associated employers under the provisions of this clause, members of the public completely unrelated to the principal employer, but that was not the way in which it was sought to be done. What was done, in fact, was using the power to revoke and replace to put in completely new provisions altogether. Then your Honours see a clause at about line 25, the fund is:
controlled and administered by the Trustees upon the trusts of this Deed -
and they are the trusts that are then entirely replaced. If your Honours then go to page 14, there is a definition there of "Associated Employer" and a definition of "Beneficiary". In particular:
"Beneficiary" means a person (including any Member) who is beneficially entitled to receive a benefit from the Fund -
And then going to page 25, clause 1.2.2 at line 45:
The headings in the Deed and any index are for convenience only and shall not affect the interpretation thereof.
Going to page 42, that is the clause 1.17, at about line 33, dealing with the "Residual and Surplus Assets". Firstly, if there are "No Members or Beneficiaries" then the funds dissolve, the assets:
realised and the proceeds distributed to the Employers in such shares as the Principal Employer shall determine.
And then clause (b) over at page 43 - - -
GLEESON CJ: Just before you pass from that, was it within the capacity of someone, the employer or someone else - perhaps someone else likely to do what the employer wanted - to produce the result that there were no members or beneficiaries? In other words, if you are facing a situation where there was a huge surplus and a small number of beneficiaries, could you get rid of the beneficiaries?
MR BLOOM: I was once involved in a case, your Honour, where people were made members of a superannuation fund and were not told about it and then shortly prior to their becoming 65, they were given a very small amount of money and invited to leave the employment of the company before they reached 65 and thus forfeiting their benefits. That sort of thing no doubt could happen but it would not be appropriate. If they were terminated appropriately, they would have to be paid out in accordance with the benefits provided under this deed.
GLEESON CJ: It was not an uncommon problem to have a superannuation fund with large surplus assets and a very small number of potentially eligible employees. The question used to arise as to what you could or should do to produce the consequence that the last person left standing did not suddenly become a millionaire.
MR BLOOM: Your Honour has seen that there are only 30-odd old A and B employees, that is as at 1 July 1992, and no doubt some such steps could well have been taken. But what was done instead was under the next clause to work out how much was necessary to pay the defined benefits and then repatriate the excess. That was under subclause (b) on page 43:
if as at any particular date the Total Fund Value exceeds the Total Notional Retirement Entitlement, the Trustees shall if so requested by the Principal Employer pay or cause to be paid from the Fund to the Principal Employer or any other Employer nominated by the Principal Employer all or any part of such excess. Any amount so paid to an Employer shall become the property of that Employer free from any obligation or liability to the Trustees, the Fund or any Member or Beneficiary.
It was repatriations under this clause that led to the losses.
GLEESON CJ: The employer had presumably got a deduction for the contributions.
MR BLOOM: Yes.
GLEESON CJ: Was this funded entirely by contributions from the employer?
MR BLOOM: I think it was possible for employees to make contributions, the amount to be fixed in the discretion of the employer. I cannot tell your Honour what the answer to the question is though.
GLEESON CJ: Your use of the word "repatriation" conveyed to me the idea that the money was going back to where it came from in the first place.
MR BLOOM: Yes, your Honour, I believe that to be correct. At page 57 we draw your Honours' attention to 1.33, the reference to the "Member's or beneficiary's interest" on the second line, and in 1.34(a) on the seventh line, "interest in the Fund". Over the page at 1.35:
The Trustees may adjust the rights, benefits and interests of a Member or Beneficiary -
and at 61 is the power of amendment. Before I come to the power of amendment, I have only emphasised the interests of beneficiaries under the fund and that gift-over, because the Federal Court incorrectly, in our respectful submission, suggested that the rights of the beneficiaries were only a right to compel due administration. We say, with respect, they were more than that, and we will take your Honours to a few cases dealing with superannuation funds and the interests of beneficiaries thereunder. At page 61 is the power of amendment:
Notwithstanding Clause 1.41, the Trustees by deed or by oral or written resolution and with the consent of the Principal Employer may amend add to delete or replace all or any of the provisions -
for two particular purposes, (a) or (b), neither of which are relevant here. The amendment here was done under 1.41:
Without limiting Clause 1.40, the Principal Employer by deed or by oral or written resolution may amend add to delete or replace -
and that is what was done here, a deletion and a replacement -
all or any of the provisions of the Deed (including this Clause) -
The only proviso to that is over at page 62, and that is that:
the Actuary (whose decision shall be final) determines that such amendment addition deletion or replacement will not substantially prejudice the Accrued Benefit Value of such Member or Beneficiary -
and that term is defined at page 13. I will not take your Honours to it, but if you want to make a note it is defined at page 13. Now, Part 2 of the trust deed deals with "Contributions and Benefits of Category A Members" at page 66. Category A members, your Honours, were Miden employees other than post-1979 American members, the group being an American company.
GLEESON CJ: What does 2.2 mean?
MR BLOOM: Clause 2.2 - category A not required but they are "deemed to have contributed at the rate of 5% of Salary" - I do not know, your Honour. That took away the need for them personally to contribute but there is obviously a deemed contribution for them - - -
GLEESON CJ: Is that relevant to calculating their entitlement?
MR BLOOM: Yes, not to treating them as having a figure, yes. Then your Honours see the benefits are referable in 2.3 to final average salary, which again is defined, and it is a percentage in each case of final average salary. The same, really, for the other circumstances, and then if you go to Part 3 of the trust deed at page 80, deals with the category B members, and category B members are post-1979 American employees. They make no contribution and they are entitled to death benefits only but, again, it is calculated by reference to the member's annual salary, at page 80, clause 3.3.
The new deed is to be found in volume 2. It is called, of course, a "Deed of Amendment", and we take no issue with its description although that is not an apt description of what it does, we say, and as I have told your Honours - it is at page 234. You will see the date is 1 November 1993 but, as I said, your Honours, the fund had, in fact, been purporting to operate under these terms since the year commencing 1 July 1992. Now, if your Honours go to volume 4 - I will come back to this deed in a moment, if I may - firstly, at page 650, you will see the statement of the trustees as at 30 June 1993:
As you are by now aware The Miden Group Superannuation Fund has gone through a number of quite major changes recently.
. The Funds' governing Deed has been completely revised.
. The Fund has been converted from a defined benefit to an accumulation Fund.
Under the heading "Trust Deed" at line 40:
The Fund's Trust Deed (the document containing the rules of the Fund) has been substantially redrafted. The main purpose of this was to convert the Fund from a defined benefit to an accumulation basis and accommodate Part C Members. The differences between the two styles of fund and the new benefits to apply to Parts A and B were explained to members in January 1993. If you are a Part A or Part B Member and would like to have any of the changes explained to you again, please contact any member of the Fund's Board of Management.
Et cetera. Now, that is stated as at 30 June 1993, of course. Then at page 583, paragraphs 6, 7 and 8, exhibit R is a table disclosing all persons members of the fund at 30 June 1992, 145 of them. Exhibit S is a table disclosing all persons who joined the fund between 1 June 1992 and 30 June 1995 who were Miden employer sponsored, and 49 of them. Exhibit T was a list of those who joined the fund between 1 July 1992 and 30 June 1995 whose employer sponsor was an entity other than one of the Miden group. So, you see that is operating between 1 July 1992 and 30 June 1995.
Then at page 588 one has exhibit S which are the new category B members, new Miden employees coming in between 1992 and 1993, and at 589 you have the new category C and you see that the first of those is actually admitted on 3 June 1993, Mr Allen or Miss Allen at the top.
GLEESON CJ: Did you tell us that Miden went into liquidation?
MR BLOOM: Yes, your Honour.
GLEESON CJ: When was that?
MR BLOOM: Before 1995 but after 1993. So, your Honours see at the top there are employees joining in June 1993 as category C employees. The deed, of course, not yet executed. The liquidator was appointed to Miden Pacific, your Honour, on 26 May 1994 and page 699 recites that fact, volume 4. Before again coming back to the deed, if I could just go to the Full Court's judgment in volume 4, just in light of what I have taken you to and just suggest, with respect, that their Honours may have got something wrong. Paragraph 41 of the judgment which is at page 735:
The Amending Deed did not, of itself, create new beneficial interests. It merely created the potential for such interests -
In the light of the fact that it was already operative, in effect, before it was even executed, so that it came, as it were, to people there ready to take immediately under the terms of its deed, even if it did not operate retrospectively, which was its intention, must have operated from the date of its execution with regard to those people, we say with respect.
GLEESON CJ: You mean at the time it was executed there were category C members?
MR BLOOM: Yes. It had As and Bs and Cs at the time of its execution and they had interests, not just rights, to have the fund duly administered, we will seek to submit.
Now, your Honours, back to the deed, and at page 238, if I may take your Honours through the recitals, again your Honours see the date. Recital A refers to the old fund, to amendments from time to time, to commercial nominees which is now the trustee being:
appointed as trustee by the Original Employer.....Under rule 1.41.1, the Original Employer may amend, add to, delete or replace -
and that is then set out. There are consents:
G. As at 1 July 1993, the Category A and Category B Employers ("Miden Employers") were overdue in the payment of their contributions for Category A and Category Members and the Trustee has determined to:
(a) pay 80% of any benefit which becomes payable from the Fund; and
(b) pay the remaining 20% of the Benefit when the Trustee determines sufficient funds are available.
H. For the purposes of the amendments proposed under the deed, the Actuary has determined the Accrued Benefit Value of -
the existing A and Bs and then there are, under the heading "Operative Provisions" on page 240, in particular clause 2:
The Trust Deed is amended by:
(a) deleting Parts 1, 2 and 3 of the Trust Deed -
and that is the whole of the original trust deed and -
(b) inserting the rules attached to this deed ("Rules").
3. This deed includes the Rules and the Rules include Schedules 1, 2 and 3 -
and here is the new declaration of trust -
4. The Trustee must hold the assets of the Fund on trust to apply them in the manner set out in the Rules.
Heretofore it did not have to do that. The trusts were entirely different. There is a provision to the same effect at page 274 - if your Honours would just note clause 10.2:
The Trustee holds the assets of the Fund on trust to apply them in the manner set out in the Rules.
In clause 2 where it says:
The Trust Deed is amended by -
that deletion and that new insertion. "Amend" is defined at 253 to include "delete or replace". So again, although the word "amendment" is used, it is used to describe an act of deletion and replacement, even in this deed. Paragraph 6 at page 241:
The amendments contained in this deed take effect from 1 July 1992 except -
certain things, which I do not to take your Honours to. Paragraph 7:
As a consequence of the amendments effected by this deed and the Funding Agreement, the Trustee must:
(a) allocate to each Member Contribution Account (of Category A and B Members (as defined in the Rules), the Accrued Benefit Values determined by the Actuary as at 30 June 1993; and
(b) allocate.....that Member's share of the.....Funding Liability.
Then, your Honours, one comes to the rules, 244. The general terms are set out at 244 to 289. The benefits for category A members are in Schedule 1 at 290 to 292, for category B in Schedule 2 at 293 to 296 and for category C at 297 to 298 in Schedule 3.
Now, if your Honours go to 254, there is the provision dealing with termination which led to the termination of the Miden employers and the right of the Miden employees to have any more contributions made by or in respect of them and that consequence comes from clause 3.4 at 254. 4.1, 4.2 deal with the new category B members and 4.2 the new category C. Schedule 1 commences at 290. That is the As. It is no longer a defined benefit. It is now a fund to which:
Each Employer must contribute to the Fund for each Member:
(a) 5% of Salary -
compared to what was the position under the old deed, which was that they would contribute that which, in their discretion, they decided they should contribute, plus an amount necessary to pay for an insurance policy and the benefits are all defined now in terms of the "Accumulated Credit".
GLEESON CJ: Is that associated with some requirements about compliance? Is there something in the legislation that would make it non-complying if the employer had a discretion as to how much to contribute?
MR BLOOM: That may be the case, your Honour, yes. I am not sure of the answer to that. I will have that checked. I think the situation is that in order to be a compliant fund contributions must be made, but whether the amount of that above $1 can be in the discretion of the company, I do not know the answer to that. Contributions certainly must be made if it is to be a compliant fund.
Your Honours see that all of the benefits are now described by reference to the accumulated credit. That is the amount standing to the credit of the various accounts in the name of that member in the fund as opposed to the defined benefit, which was the position under the old deed. Of course, there is no equivalent to what I have loosely called the "gift over" in this deed at all, so the beneficial interests have changed significantly. Page 293, Schedule 2, to the same effect.
The comparison with this compulsory contribution in 2.2 as it was for the A category members is to be found in the old deed at clause 1.22 at appeal book 47, volume 1. Again, benefits defined by reference to the accumulated credit. Category C, which is the Midas - no relationship to Miden. Midas are the new C people. I think this may bear out what I told your Honour the Chief Justice:
Each Member must contribute to the Fund in the amounts or at the rate specified in the Employer's Application.
The Employer must contribute to the Fund for a Member in the amounts or at the rate specified in the Employer's Application.
So it had to be a positive but it was a matter of discussion between employer and employee. Retirement benefit, et cetera, again worked out by reference to the accumulated credit account.
If I might then ask your Honours to go back to our written submissions at paragraph 29, we say, with respect, that it is incomplete and productive of error to say, as the Full Court did, that the Act directs itself to the fund or trust estate as property simpliciter. In our respectful submission, the Act directs itself more widely to the relationship and the hypothesis in section 272 and section 95 in Division 6 concerning the calculation of taxable income. As it must, this captures the notion of a person holding an officer deriving income and incurring losses not only by the deployment of property, but also by the carrying on of a business and by other means. Trusts, for instance, regularly earn their income by the carrying on of a business. There may not be so much trust property attached in a case like that.
We thought, as did those who have preceded us, that it would be useful for the Court to look simply by way of analogy to the cases in cognate areas such as the cases on stamp duty dealing with resettlement. That is because, when one does go to those cases, they talk about a new settlement as arising where there is a completely new set of trusts. So what they say about it when you have a resettlement is equivalent here, in our respectful submission, and - - -
GLEESON CJ: The significance of the resettlement being that it attracted ad valorem duty.
MR BLOOM: Yes, your Honour. So of course the cases are concerned with particular provisions in various stamp duties legislation, but nonetheless there are statements in the cases about when one has a resettlement when one has completely new trusts. If I could take your Honours to Wedge [1941] HCA 1; 64 CLR 75. At page 79 in the judgment of Acting Chief Justice Rich at about point 7 of the page:
No inclusive and exclusive definition can be given of what constitutes a settlement. The question must be determined by construing the particular instrument, which, of course, includes the transaction set forth in that instrument and examining its legal effect. The subject instrument contains no disposition or agreement to dispose of property belonging to the appellant but is merely an acknowledgment or recognition that he is not the absolute owner of the property comprised in the instrument and preserves other trusts or rights affecting it. No new beneficial interest is created in favour of the appellant or anybody else, and the property remains subject to the same trusts as it did before the instrument was executed.
We say that is not the situation here. Justice Starke at page 80, second full paragraph:
In my opinion, the document does not resettle or create any new trusts -
there is the equivalence, it is a resettlement if it creates new trusts. That is why the cases on resettlement and cognate areas, your Honours, are, with respect, of assistance. We have given your Honours a reference to the other cases. I will not take your Honours to them. The passages are referred to there.
There is a cognate area involving similar questions under the United Kingdom Finance Act. Under that Act, as we point out in paragraph 33 of our written submissions, the trustees of a settlement were treated as a single and continuing body of persons. A liability to capital gains tax arose upon property ceasing to be settled property of the settlement. In such circumstances, property was deemed to be disposed of by the trustees of the old settlement and acquired by trustees of the new settlement for capital gains tax purposes. There was no definition of "settlement".
Helpfully, Lord Wilberforce said in Roome v Edwards that whether there is a new settlement is always going to be a judgmental matter in the light of all the circumstances and all the indicia, but there is a little assistance in that part of his Lordship's reasons that we have extracted at paragraph 43 of our submissions:
Since "settlement" and "trusts" are legal terms, which are also used by business men or laymen in a business or practical sense, I think that the question whether a particular set of facts amounts to a settlement should be approached by asking what a person, with knowledge of the legal context of the word under established doctrine and applying this knowledge in a practical and common-sense manner to the facts under examination, would conclude.....On the other hand, there may be a power to appoint and appropriate a part or portion of the trust property to beneficiaries and to settle it for their benefit. If such a power is exercised, the natural conclusion might be that a separate settlement was created, all the more so if a complete new set of trusts were declared as to the appropriated property, and if it could be said that the trusts of the original settlement ceased to apply to it.
We say that is what has happened here. Indeed, if one takes the example of Pilkington's Case, which is well known, of course, to your Honours, there there is a resettlement from one trust to another of part of the existing trust property. The resettlement is plainly within power, being pursuant to the power of advancement, I think there the statutory power of advancement. So we have a resettlement within power and part of the original trust property, but right throughout their Lordships' judgment in Pilkington, one is speaking of the old settlement and the new settlement.
It is quite clear that a new settlement is created, notwithstanding that the exercise of the power is in accordance with the deed, because one looks to see not whether the power is described as an amendment, but what does it do, what does the exercise of the power effect? In this case, it effected a complete replacement of trusts and creation of new beneficial interests. To the same effect are the judgments that we set out of the Lord Justices in Bond v Pickford at paragraphs 39 and 41 and - - -
GLEESON CJ: What do you say is the test to be applied? If this is a question of degree, how do you tell whether an amendment to a superannuation trust deed has created a new fund?
MR BLOOM: Well, your Honour, one answer to that, and it may not be a suitable answer, is that this is a case where it clearly is on the other side of the line. Your Honour is, of course, asking me where the line is.
GLEESON CJ: I thought you were going to say that, but that is not very helpful to decide the next case.
MR BLOOM: Your Honour, of course, Lord Wilberforce said, judgmental in the light of all these circumstances and indicia, if the conclusion would be that there is such a change that in effect these are completely new trusts, then it would be on the side of the line for which we argue. There may be halfway houses where there are changes which can be described more as an amendment than as a revocation or deletion and replacement.
GLEESON CJ: But if it is a question of degree and judgment, what exactly is the question?
MR BLOOM: Is the change so fundamental, we would say, with respect, that one has, in effect, a new trust and no old trust. Is there any need to go back to the old deed, for instance? In this case there is not; the old deed is in the garbage tin, there is no need to have reference to it at all. If it can be said of it that it has effected a change of that degree, then it will not be the same taxpayer. If all of the beneficiaries have gone, effectively, in terms of the ways in which they held and there is such a new holding of the beneficial interests in the trust, then it would be on the other side of the line. It would be wrong for me to attempt, with respect, your Honour, and for the Court to attempt, to say where the dividing line is, but this is clearly a case, with respect, where, wherever the dividing line is, it is way over.
GLEESON CJ: I understand that it may be both appropriate and inevitable that you say it is a question of degree and judgment, but the important thing then is to identify the question.
MR BLOOM: Well, the question is that, at the end of Lord Wilberforce's reasons in the passage at least that we have extracted at paragraph 43 is:
the natural conclusion might be that a separate settlement was created -
And that natural conclusion will be reached -
all the more so if a complete new set of trusts were declared as to the appropriated property, and if it could be said that the trusts of the original settlement ceased to apply to it.
GLEESON CJ: Now how can you, at the one time, contend even as an alternative, that there are two trusts, one a new one and one an old one, and at the same time say that that test has been satisfied? Your alternative argument is fundamentally inconsistent with your principal argument, is it not?
MR BLOOM: It is very alternative, your Honour, yes, and I do not mean by that to imply that it cannot have legs; it really depends upon whether the conclusions that the Court comes to are more the conclusions which the Full Court came to, in which case we would argue for the two funds or if, as we urge the Court to find, there is a complete resettlement, then we have no need to rely upon that alternative argument.
McHUGH J: Yes, but in this case there is a trustee and you throw all the weight of your argument on these notions, but what Part IX was dealing with, and I know you push it to one side, but it is dealing with an eligible entity and so it is referring to a fund; a fund that continues and provides benefit for members from time to time. Why should not we rather look at the fund, try and make a judgment as to what the fund is?
MR BLOOM: The fund is a trust estate. The trustee is made - - -
McHUGH J: It does not have to have a trustee, does it?
MR BLOOM: In those very rare circumstances where one does not, and one leaves aside publicly constituted funds - statutorily constituted funds - or funds where for some reason there has been a lapse the Act actually says in that case the person managing it will be treated as the trustee or the trust estate so the Tax Act can work. Your Honour, one is here trying to take advantage of the loss provisions of the Tax Act and the trust provisions of the Tax Act apply to any superannuation fund which is a trust. Most superannuation funds, if not all of them, will be trusts, the exceptions being those I have mentioned and if there is no person liable to pay tax in respect of the income of the fund as a trustee the manager is made the putative trustee for that purpose.
So, Part IX being in the Tax Act itself, we do not get out of there - and, in particular, in the concept of eligible entity, there is no creation of what my learned friends would call "a unit". There is no legal personality given to a superannuation fund. It is still a trust estate for the purposes of the Tax Act.
McHUGH J: Well, you mean for the purpose of assessment.
MR BLOOM: Assessment and payment of tax, yes.
McHUGH J: Yes, that is so and that is one of the things that troubles me about this case. I am not so sure that for the purpose of Part IX it is - I know in the end you apply the Union-Fidelity approach but I am not sure for the purpose of this question whether it is either relevant or helpful to talk about trusts and resettlements. I mean, Mr McMahon thought that resettlement - well, he said resettlement was a concept that was not mentioned anywhere and in fact he thought that it had no relevance whatever.
MR BLOOM: We, of course, do not put it as governing. We put it as helpful in terms of enabling your Honours to come to the conclusion about the question. The question arises under 79E and 80, namely, whether the taxpayer which is seeking in the income years to take advantage of the losses incurred in the loss years is the same taxpayer as it was in those loss years.
GAUDRON J: Does that come down to whether he or she or it is subject to the same or substantially the same trust obligations?
MR BLOOM: Yes, your Honour. Yes, it does.
GAUDRON J: With respect to the same or substantially the same property? Do you add that?
MR BLOOM: With respect to at least some of the original property, your Honour, perhaps, because property could be augmented, substantially. If, for instance, there had been a substantial addition of property to the old fund we would not suggest for a moment that that was a different trust for the purposes of the Act.
GLEESON CJ: You could have a substantial change or increase in membership.
MR BLOOM: You could.
GLEESON CJ: That company might take over a large group.
MR BLOOM: Yes, your Honour, and that would not cause a change of the kind that we complain about here.
McHUGH J: Does it mean that if a fund went from a defined benefits fund to an accumulated-type fund that you could never comply with section 80(2) or section 79E?
MR BLOOM: No, your Honour, because although the nature of the rights of the beneficiaries on termination or upon their entitlements might change, their rights remain. It is a change in the nature of them but the rights themselves remain.
McHUGH J: On that hypothesis, did not the category A and B rights continue although the nature of them changed?
MR BLOOM: No, they changed in the sense that category A and B became new category A; category B were a completely new category; category C were a completely new category; and those changes were so substantial as to not be mere changes in the nature of the sorts of benefits because they were now sharing the trust property, if you like, with Cs, who were not there before, and Bs, who were not there before. If there had just been an addition of the Bs, who were new Miden employees, it might have been a bit different, but it is the addition of the Cs, those persons - - -
McHUGH J: I know I have said this to you on previous occasions, but most of these tax cases seem to be just pure questions of fact. Very rarely is there some great point of principle involved in them.
MR BLOOM: And I keep trying to persuade your Honour to the contrary.
GLEESON CJ: Yes, because that has a little element of concern in it for you here. If it is just a question of fact and degree, you have concurrent findings of fact against you.
MR BLOOM: Yes, your Honour.
GLEESON CJ: Unless you can show that they are vitiated by some error of approach.
MR BLOOM: We say they are because of the failure to take into account the fact that this was not a mere amendment but a complete deletion and replacement. The fact that they did not take into account in the Full Court that the deed was immediately operative because there were already C class beneficiaries and new Bs and new As to come in, and the fact that they confined their attention to the property, and said as long as the amendment is in accordance with the deed, without focusing on the fact that it was an amendment of the replacement and deletion kind, therefore, they made a number of errors of law which would mean that whatever findings of fact were dependent upon that approach, were not correct, with respect.
GLEESON CJ: What was Mahony's Case about?
MR BLOOM: Mahony's Case was the case of whether there was a complying superannuation fund under section 23(j), namely, carried on for the benefit of employees. We only have cited it so that your Honours will see that there is a reference to beneficial interests. Of course, all these deeds must depend upon their own terms and we accept that at once, but it is 41 ALJR 232, and the headnote, if I may go to that, on the left-hand column about point 5 of the page, about point 6, it is in parentheses:
(these provisions gave rights, with respect to allocated amounts, characteristic of a superannuation fund and also related to the position where a member retired or was dismissed or died before reaching the retiring age) and generally upon and subject to the trusts therein contained.
Then if one goes over to 234, left-hand column, second full paragraph:
It is true that all the employees for the time being had beneficial interests in the fund under the provisions for a winding up - - -
and in Constable [1952] HCA 64; 86 CLR 402 at 418, again dealing with the particular fund that their Honours were concerned with, in the joint judgment of Chief Justice Dixon, Justices McTiernan, Williams and Fullagar, the first full paragraph on 418:
It appears to us that the taxpayer became entitled to a payment out of the fund by reason of a contingency (viz.: an alteration of the regulations curtailing the rights of members) which occurred in that year enabling him to call for the amount shown by his account. It was a contingent right that became absolute. The happening of the event which made it absolute did not, and could not, amount to an allowing giving or granting to him of any allowance, gratuity, compensation, benefit, bonus or premium -
that being a section which brought such things to tax.
The fund existed as one to a share in which he had a contractual, if not a proprietary, title.
GLEESON CJ: Those cases involved the question, did they not, about whether or not the employer was entitled to deductions for contributions to a fund where there was an issue as to whether the fund was really for the benefit of employees?
MR BLOOM: Mahony's Case did. Constable's Case involved the question of whether, upon the event in question, Mr Constable was assessable under the, I think then, section 26(e) which was the fringe benefit assessment provision of the Income Tax Assessment Act. So that what the Commissioner argued was that when a change was made to the deed which entitled him to call for his amount, he was assessable on that as some sort of bonus allowed to him, and the Court said no, he already had rights under the deed and what was paid to him was in exchange for those rights.
GLEESON CJ: Did the continuity arguments about sales of shares in companies with tax losses and their right to carry forward the tax losses, did those arguments result in any "bright line" test for determining whether there was continuity?
MR BLOOM: The statute itself provided the test, your Honour will recall. It was a 51 per cent change in beneficial ownership of shares entitling one to voting capital and dividends and there was a power for the Commissioner to trace through trusts, so nothing is much provided in terms of the guideline there.
McHUGH J: Was that always the case? Was there always that statutory criterion?
MR BLOOM: For companies, yes, your Honour.
McHUGH J: There was, was there?
MR BLOOM: Yes. Your Honour, as long as I have been practising, certainly section 80A or some equivalent to it has been in the Act.
GLEESON CJ: But that is the problem. Time does go back before then.
MR BLOOM: Thank your Honour for reminding me.
GLEESON CJ: Those tests became more and more elaborate and complex because of a problem similar to the very problem that has arisen in this case.
MR BLOOM: They did.
McHUGH J: My recollection is that there was a common law - well, not a common law test, but a judge-made test, but I may be wrong.
MR BLOOM: There were cases in England that dealt with the question of when - - -
McHUGH J: They talked about the same business.
MR BLOOM: Same business was a different test. Section 80E is the alternative to section 80A and section 80E deals with continuity of business and there have been cases on that which say that merely because you take a pause to reconstruct the business does not mean you are not carrying on the same business, although if you change from Fords to Toyotas you may be.
GLEESON CJ: You may find it difficult to imagine, but there was a time when judges used to throw their hands up in horror and say this is contrary to public policy to allow people to trade in tax losses.
MR BLOOM: I remember those times, your Honour. In fact, in the companies list before Chief Justice Street, I think, that was a common claim.
McHUGH J: There is a dictum in our judgment in the goodwill cases which was about - - -
MR BLOOM: Murry?
McHUGH J: No, no, not Murry.
MR BLOOM: Hepples?
McHUGH J: No, the recent one about the taxi driver.
MR BLOOM: That was Murry, your Honour, yes. The taxi driver, yes.
McHUGH J: Yes.
GLEESON CJ: The expression that used to be used to manifest disapproval of this was "trafficking in".
MR BLOOM: Yes, your Honour.
GLEESON CJ: Trafficking in tax losses.
MR BLOOM: Yes, your Honour, and I am sure my client would like to voice that disapproval here but I have not done so yet. Your Honour, to the same effect is a judgment of Justice Gummow in Cabache v Ramsay [1993] FCA 611; 119 ALR 215. That was the Alan Bond superannuation fund. The relevant passage in Justice Gummow's judgment, with whom the others agreed, begins at line 45 on page 229 going over to page 230 at about line 15. Importantly, his Honour says at about line 7 or 8:
Upon the constitution of the fund Mr Bond obtained an equitable proprietary interest in the fund, albeit one which did not carry an immediate right to payment.
We accept that these all depend upon the particular funds in question but they nonetheless demonstrate that the beneficiaries have an interest in funds. The Canadian Supreme Court has stressed that pension funds should be regarded not as purpose funds but as funds for persons. That is in Schmidt v Air Products of Canada Ltd 115 DLR 631. In the judgment of Justice Cory, who was one of the majority, at page 655 under the heading "Purpose or `true' trust?":
Air Products has suggested that the Catalytic pension fund -
I am not suggesting that that is a description of anyone who was a member of it, your Honours, but it was the name apparently of that fund -
was not subject to an express trust but instead to a trust for a purpose. Relying on dicta of the British Columbia Court of Appeal in Hockin.....the company argues that a trust set up as part of a pension plan constitutes a trust whose sole purpose is to provide defined benefits to members. Once those benefits have been provided the purpose is fulfilled, the trust expires and the terms of the pension plan alone determine entitlement to any remaining fund surplus. I cannot accept this proposition.
Trusts for a purpose are a rare species. They constitute an exception to the general rule that trusts for a purpose are void. The pension trust is much more akin to the classic trust than to the trust for a purpose. I agree with the following comments of the Pension Commission of Ontario in Arrowhead Metals.....
Purpose trusts are trusts for which there is no beneficiary; that is, they are trusts where no person has an equitable entitlement.....
People are clearly direct beneficiaries of pension trusts. Pension trusts are established not to effect some purpose, such as building a recreation centre, but to provide money on a regular basis to retired employees.
GLEESON CJ: How do you make that relevant to this case?
McHUGH J: I was just going to say that. What do you cite this for?
MR BLOOM: To show that the Full Court was wrong when it said that the rights of the beneficiaries were merely rights to administer. We say that pension funds, super funds, are funds for persons, the persons have equitable interests in them. We have demonstrated what we think are the equitable interests of the old and of the new here.
GLEESON CJ: Where did the Full Court say that?
MR BLOOM: Paragraph [41], your Honour. This is one of the errors that we - - -
McHUGH J: It said it did not create new beneficial interests, did it not?
MR BLOOM:
Under the old rules, a member had:
the right to -
do this, the right to do that, and:
an entitlement, subject to the matters referred to made below, to whatever benefits the rules provided.....
no entitlement to any specific property.
[42] Entitlement to a benefit did not relate to the benefits set out in the rules at the time of joining, or at any time other than the time.....Until that time, the member's entitlement could be changed in accordance with amendments -
We took them to be saying that there was something less than a beneficial interest. If they are not saying that, we are content, but if they are, then, with respect, we say they are wrong. They set out the general rights under the amending deed at paragraph [44] and say at [45] that the rights are the same.
GAUDRON J: Why would variation in the beneficial interests impinge on the answer to the question posed by this case?
MR BLOOM: If it is such a variation as to create a completely new trust, if that is the impression that one would have of it, then - - -
GAUDRON J: Again, that just takes us around in a circle, does it not, in a sense? One can imagine superannuation funds in which beneficial interests would vary in respect of individuals from year to year.
MR BLOOM: Quite, your Honour. People come and people go; there is no question about that.
GAUDRON J: So one has got to be looking at something more than a mere variation in that area, does one not?
MR BLOOM: Yes, one does, and when one finds that the old deed had certain defined benefits with a gift-over of the surplus to the employers, and the employees are a narrow class of people associated with the Miden Group, when one comes to the new deed, the gift-over is gone and the property of the trust now belongs in a limited fashion to those old persons and to a substantial new class of persons.
GAUDRON J: Well, belongs?
MR BLOOM: In a beneficial sense. On a winding up, their rights to have things paid to them on a winding up and we say that it is so fundamental - they are the tests that come out of the English cases on capital gains tax, the Australian cases on stamp duty, for when do you have a new settlement? And the answer is, when you have a completely new set of trusts, and one of the guides in that area is do you need to have reference at all to the old trust deed?
GAUDRON J: Yes, that is a different question from changes in beneficial interest.
MR BLOOM: Changes in beneficial interest envisaged by the original deed and coming about by the ordinary influx and efflux of members, are not changes in beneficial interests upon which we would fasten. If that was all there was in this case, we would not be here, with respect, your Honour.
McHUGH J: And the case is rather artificial, in a sense, because the trustee is very much a notional person. The fact that the trustee changes from time to time does not effect, on your concession, the availability of section 80 or section 79E.
MR BLOOM: It just gives you the person who gets the assessment and is liable to pay it from time to time, but the fiction is necessary, as I said earlier, your Honour, to avoid amalgamation of trust income with either the trustee's personal income or the income of any other trust fund of which he/she or it is a trustee.
Your Honours, the alternative argument is, if the Full Court is correct in its conclusions that there is not here a completely new trust as a result of the significant changes to the trust obligations, that this deed established, in effect, from one trust, two trusts, under the auspices of the same trustee.
GLEESON CJ: So they should lodge separate income tax returns?
MR BLOOM: Yes, your Honour, the trustee should lodge separate income tax returns for each one of them. We rely upon the decision of this Court in Driclad [1968] HCA 91; 121 CLR 45, and in the judgment of Justice Taylor at first instance at page 57. He refers to the two different sections of the fund there as being separate and distinct and that decision is approved by Chief Justice Barwick and Justice Kitto in the first full paragraph on page 65. If your Honours please, those are our submissions.
GLEESON CJ: Thank you, Mr Bloom. Yes, Mr Jucovic.
MR JUCOVIC: The context in which this case has to be decided is in the context that is set forth in the - of superannuation funds which are governed by the relevant legislation. At the relevant time in 1995, it was the Superannuation Industry (Supervision) Act which will give context to concepts of continuity in relation to this question.
If I just take your Honour shortly to volume 4 at page 739 in the judgment of the Full Court. At 739, at about line 44:
It is relevant to note that the Act expressly recognises the legislative regime governing superannuation, and takes that as it finds it. If any concept of continuity is implicit in the relevant provisions of the Act -
that is the Income Tax Assessment Act -
it more naturally relates to continuity under the separate provisions.
That is the legislative regime relating to superannuation.
There is, in fact, no definition that tells you what a superannuation fund is when I take your Honours to the SIS legislation, but could I just take your Honours to page 710 and just remind your Honours of what fell from Justice Windeyer in Scott v The Federal Commissioner of Taxation which is not reported in the CLRs. Your Honours, the issue there involved whether a particular fund fell within the old description in section 23J of "a provident, benefit or superannuation fund established for the benefit of employees". At page 312, he said:
I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefit (or benefits having monetary value) upon the reaching of a prescribed age. In this connection "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition but rather as a general description.
Can I take your Honours to the provisions of the Superannuation Industry (Supervision) legislation. It is found in a volume that we provided to your Honours. The legislation as at 30 June 1995, your Honours, is found commencing under tab 1 and your Honours will see that in section 3:
The object of this Act is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Insurance and Superannuation Commissioner.
Your Honour will see that the "basis of supervision" is set out, as far as Commonwealth powers are concerned, and at section 3(2):
In return, the supervised funds and trusts may become eligible for concessional taxation treatment.
Then your Honours will find that there are some definitions. Before you get to the definitions, at section 5, there is an "Outline of Key Concepts". At the page number at the top, your Honour, is 61,154, there are what is referred to as entities:
5(1) Entities. The following superannuation entities are involved:
complying superannuation fund
complying approved deposit - - -
GLEESON CJ: Where are you reading from?
MR JUCOVIC: Section 5, your Honour, top left-hand corner, 61,154.
GLEESON CJ: Thank you.
MR JUCOVIC: There are various entities involved in this Act.
GLEESON CJ: That is a subsection, is it?
MR JUCOVIC: Yes, that is so, your Honour.
GLEESON CJ: You are lucky Justice Gummow is not sitting on this case.
MR JUCOVIC: We are concerned, your Honour, with a complying superannuation fund, but eligible entities also include complying superannuation funds, complying approved deposit funds and pooled superannuation trusts. In subsection (2):
The complying superannuation funds requirements maybe summarised as follows -
It is very hard to read this to your Honours.
GLEESON CJ: I like that "basically" down in the bottom right-hand - - -
MR JUCOVIC: You comply with the Act by basically - I think you start from the bottom, your Honour. If I could start from the bottom left-hand - "election to be subject to Act"; you have a "trustee" that is a "constitutional corporation"; the "fund is a superannuation fund"; it is a "regulated superannuation fund" and it has to comply with the Act. The box at the right-hand bottom corner tells you that that involves:
* operating standards
* governing rules
* borrowing rules
* lending rules
* in-house asset rules
* equal representation rules
* accounting requirements
* trustee, investment manager, actuary and auditor standards
* public offer requirements
GLEESON CJ: So, if you basically do those things you comply with the Act and if, in addition, you are a regulated superannuation fund then you qualify for concessional tax treatment.
MR JUCOVIC: Yes, you become a complying superannuation fund and a complying superannuation fund is - the Income Tax Assessment Act defines a "complying superannuation fund" in the Income Tax Assessment Act by reference to it being to its status under this Act. It has to comply with - - -
GLEESON CJ: Does that mean that what we have to decide is whether this is basically the same fund?
MR JUCOVIC: We have used the word "unit", your Honour, as a sort of means of identification of the problem, that is, that this Act, the Income Tax Assessment Act, treats something which does not have legal personality - they say "entity" here, and we have used the word "unit" - as existing from income tax year to year and having some form of continuity. Nowhere does the Act say, either the Income Tax Assessment Act or this legislation, when the unit that is contemplated as continuing from year to year ceases to be no longer be able to be described as such a unit. That is why we posed the question, your Honour, as a question as to what is the connection between this unit in the 1989-90 income tax year and this unit in the 1995 income tax year and see what criteria or indicia the Act selects for that description.
It is accepted that the Income Tax Assessment Act provides no express criterion. It will take the superannuation fund unit as it finds it and this Act, and the preceding legislation, treats it as something that continues from year to year, notwithstanding amendments, notwithstanding changes and beneficial entitlement, not withstanding changes in the trustee, notwithstanding changes in the rules. So that you are looking at a fund of money set aside for particular purposes to which an ambulatory set of fiduciary obligations apply or can apply and this Act and the Income Tax Assessment Act does not contemplate anything different, your Honour, as a matter of construction, so it becomes a - - -
GLEESON CJ: Do you get anything like the same problem in relation to partnerships?
MR JUCOVIC: Under the tax loss provisions, your Honour?
GLEESON CJ: Yes.
MR JUCOVIC: I simply cannot answer that question. I just do not know. Your Honour, if I can just take your Honours on to some of the other provisions.
McHUGH J: Your argument is, it is like a common law conspiracy. People can come in and join, and they are in there for part of the time, and they are out, and it is still the one conspiracy. It has new members, even, in one sense, you could say there is a fresh conspiracy every time you get a new member in because there is a new agreement, so to speak, but, nevertheless, the courts treat it just as an ongoing - - -
MR JUCOVIC: In the absence of a specific statutory criteria which could give rise to a question of law then, in a sense, it is really just a question of fact, and I have the benefit of findings below as to that fact. At the end of the day, what separates us from the appellant as to why we would say it is the same unit, if I can use that expression, and not a new unit, may turn upon a question of construction of the old trust deed as to whether the old trust deed anticipated that people who were not part of the Miden Group of companies could become employers.
GLEESON CJ: This does not affect your argument, but now that you have drawn our attention to section 5 of the Superannuation Industry (Supervision) Act, why would we not use the statutory expression, "entity"?
MR JUCOVIC: Precisely, your Honour, you could use that.
McHUGH J: That is what I put to Mr Bloom early in the argument but he said the Income Tax Act talks about it in terms of trusts, trustees, therefore, you have to look at it from that point of view.
MR JUCOVIC: Your Honour, I will come to the construction of Part IX, but we are dealing with the construction of Part IX. There are two crucial provisions in Part IX, 272 and 278(1) and (2) which we have set forth in our written submission.
GLEESON CJ: It is not only the beneficiaries who can come and go in relation to these entities, trustees can come and go.
MR JUCOVIC: Come and go.
McHUGH J: The subject matter of the fund comes and goes. I mean, in a standard trust, one has trust property, but here contributions can change, money can be repatriated - - -
MR JUCOVIC: That is so, your Honour - the entity. But the question is, what is the connection between that entity in that year and that entity in this year. If the trustee of a completely different trust, who was the trustee of this trust in 1989/1990, purported to seek a deduction for another trust, well, it is a question of fact that it is not the same entity.
McHUGH J: Well, you say you still live in the same house even though the furnishing gets changed every - - -
MR JUCOVIC: That is so, your Honour, yes.
GAUDRON J: But, in truth, the only continuity is the tax loss - continuing features of the tax loss, and the identity of the A members with those who were previously A and B members. Is that not right?
MR JUCOVIC: No, your Honour.
GAUDRON J: The trustees changed?
MR JUCOVIC: The trust deed and its amendment, its legitimacy is dependent upon the fact that there was a trust deed established and that it established this fund. So the trust deed itself - the entity, when established, has the ability to amend its trust deed from time to time. If it did not we would not be here. We would be in a different position.
CALLINAN J: It was always a complying entity or fund, even though it contained the provision which might have dramatically altered its structure in some ways.
MR JUCOVIC: Yes, and there are various standards and, if I may say, complying funds were intended to obtain a concessional tax rate of 15 per cent. Before then there was no income tax. They were intended, according to the explanatory memoranda which we have set out in our written submission, to be taxed the same as persons. They there, if there is to be discerned a statutory purpose, it is to provide superannuation benefits to members at concessional rates.
GLEESON CJ: Does this legislation require that the funds be invested in a certain way in order to comply?
MR JUCOVIC: Your Honour, can I take your Honour to section 52 of the SIS Act. Your Honour will find it under tab 6 of these statutory materials. This may not be a complete answer to your Honour's question but section 52(1) inserted into the governing rules by statutory force certain covenants in subsection (2) if they did not already contain such covenants.
GLEESON CJ: The only reason I asked the question was this: not only can the trustee change from time to time and the beneficiaries change from time to time, but also the trust property changes from time to time.
MR JUCOVIC: That is so, your Honour.
GLEESON CJ: A typical superannuation fund invests at least part of its property in shares in public listed companies and changes its investments from time to time.
MR JUCOVIC: That is so, your Honour. So you never have to have the original property. You just have to identify property that has come out of the activities of the fund. The reason I take your Honour to whether it has any - can I just draw your Honour's attention to 52(2)(f) and (g). One of the obligations is:
to formulate and give effect to an investment strategy -
and (g):
to formulate and to give effect to a strategy for their prudential management -
Now, the tax loss in this fund is just as much an asset of this fund as anything else because it affects the rate upon which income tax is paid. The trustees under these covenants had an obligation, your Honour, to turn to account and formulate a strategy about all their assets, including that asset. So it is just part of the ordinary course of business.
CALLINAN J: Mr Jucovic, you said you had concurrent findings of fact.
MR JUCOVIC: Yes.
CALLINAN J: There are not any factual matters in dispute, are there?
MR JUCOVIC: Your Honour, may I put it a different way. May I put it this way. There has to be inherent in Mr Bloom's argument a statutory criteria that says that when there is a change in beneficial interests in relation to the asset of a fund in respect of people who are not employees of Miden or Miden Group companies, prior to that fact, there is some statutory criteria that says that is a relevant fact and a failure to take that into account is an error of law, otherwise he cannot identify - it is not just that the facts are found, your Honour. He has to identify an error of law and he has to do that by finding in some place in the legislation itself that criteria, otherwise the connection between what I should now call the entity in 1989 and 1990 and 1995 has been found as a relevant connection for my purposes. I do not like to use the word "same", your Honour, because what one slips into - but it becomes the same. I will come to this, your Honours.
CALLINAN J: You are really dealing with an issue now of whether there is a question of law involved, are you not?
MR JUCOVIC: Yes.
CALLINAN J: But the basic facts to which legal propositions have to be applied are not in dispute, are they? That is to say that the only factual matters are the matters in relation to when, in a sense, the new trust - and you know the sense I use it - began to operate and who became beneficiaries under the fund after that time or at about that time. They are the only factual components at all, are they not, or are there others that I have missed?
MR JUCOVIC: Probably not, your Honour.
GLEESON CJ: Well, one way of looking at it would be to say the fact in issue is whether this is the same entity as the entity that incurred the losses. The facts relevant to the fact in issue, the primary facts, do not admit of any dispute.
MR JUCOVIC: There may be a distinction between what facts were found by the tribunal and what facts are in the evidence, but I think that is correct, your Honour. There was an argument in the Full Court which I do not think is put here about the purposes and whether there has been a finding about purpose, or should have been a finding about purpose, that this was some sort of purpose alien to the original purpose, but that is not put here. What is put here is there is simply a change in benefit.
CALLINAN J: But if there were any change in purpose, we would have to glean that from the documents, would we not? We could not look outside the documents.
MR JUCOVIC: That is so, your Honour.
CALLINAN J: On any view, the ultimate issue is not one purely of fact though, is it? It is an issue of at least mixed law and fact, is it not?
MR JUCOVIC: One first has to sort of frame what the criteria are. Once one has framed the criteria, that is certainly a question of law.
CALLINAN J: Yes, and to that extent it is a question of law.
MR JUCOVIC: That is right, your Honour. I am addressing what the criteria are.
GLEESON CJ: There used to be arguments about whether there was the same business in disputes about tax loss carry forward cases, were there not?
MR JUCOVIC: Yes, as I understand it, your Honour.
GLEESON CJ: What is the leading case on that?
MR JUCOVIC: Your Honour will have to ask Mr Bloom.
GLEESON CJ: Mr Burges will know. Anyway, you can tell us later.
MR JUCOVIC: Yes. As Mr Bloom pointed out, there was a statutory criterion, your Honour.
GLEESON CJ: There is now but I thought - - -
McHUGH J: But not for same business, was it?
MR JUCOVIC: At least going back to 1964, it is Mr Burges' recollection that there was always a statutory criterion relating to the carrying on of business. There is a definition in section 10 at page 61,301 behind tab 1 of "superannuation fund". It means:
(a) a fund that:
(i) is an indefinitely continuing fund; and
(ii) is a provident, benefit, superannuation or retirement fund; or
(b) a public sector superannuation scheme -
If I could just take your Honours to the next page:
"trustee", in relation to a fund, scheme or trust, means:
(a) if there is a trustee (within the ordinary meaning of that expression) of the fund, scheme or trust - the trustee; or
(b) in any other case - the person who manages the fund, scheme or trust -
That fits in with the provisions of Part IX which contains section 268, a provision that says if there is not a trustee, the trustee for the purposes of Part IX is the person who manages it.
GLEESON CJ: But one of your arguments, which was accepted, as I understand it, is that the fact that the fund as it exists at present can show as its route of title the original trust deed means there is continuity, but a question like this could never arise, could it, unless the fund as it exists at present could show the original trust deed as its route of title?
MR JUCOVIC: That is so, your Honour.
GLEESON CJ: Well then, if that is sufficient, this problem does not exist.
MR JUCOVIC: That is so, your Honour. We do not have any other express criteria, your Honour. There is no one denying that this fund continued to function as a superannuation fund. This money was not put in someone's pocket that they claim in 1995 to be a superannuation fund when they were not; they always have to be a complying superannuation fund.
GLEESON CJ: Well does your argument amount to the proposition that what the Commissioner is trying to do in this case is to raise what ought to be a non issue, that once you have demonstrated that the entity, as it exists at present, originated in the deed of trust that operated when the losses were incurred, the entity, as it exists at present, is entitled to the benefit of those losses.
MR JUCOVIC: Yes, your Honour.
GLEESON CJ: Is that the long and short of it?
MR JUCOVIC: That is the long and short of it, because there is an absence of express criteria otherwise, your Honour.
CALLINAN J: Mr Jucovic, can I ask you a question? I see at page 61,201 of the SIS Act there is a definition of "amend" and I just wondered for what purpose that definition is there. Is there a reference to amendment of a fund or amendment of a deed in the SIS Act? You may not be able to answer it now, but - - -
MR JUCOVIC: Your Honour, there are provisions relating to amendment, which I was going to take your Honour to; I should do that now. I have taken your Honour to the definition of "superannuation fund" and "trustee", I just move on. Can I just take your Honour to Part VI at tab 6. I have already referred your Honours to section 52. The whole object of the Part is to set out rules about the content of the governing rules of superannuation entities. That is section 51. Then, your Honour, at page 61,829, section 60, deals with the "Amendment of Governing Rules" and section 60 says:
The governing rules of a superannuation entity other than an excluded fund must not permit those rules to be amended unless:
And there are various provisions, but could I just direct your Honours' attention, relevantly, to section 60(1)(b)(iii) and I will take your Honour to a regulation shortly:
the circumstances in which the amendment was made are covered by regulations made for the purposes of this subparagraph;
Then I should also direct your Honours' attention to section 58 on page 61,802, which provides for:
the governing rules of a superannuation entity other than an excluded fund must not permit the trustee to be subject, in the exercise of any of the trustee's powers under those rules, to direction by any other person.
Then there are exceptions. Then if I just ask your Honours to look at section 62 under tab 7. Section 61 says that:
The object of this Part is to set out special rules which apply only to regulated superannuation funds.
.....The trustee of a regulated superannuation fund must ensure that the fund is maintained solely: -
for a number of core and ancillary purposes, your Honour -
for one or more of the following purposes (the "core purposes"):
(i) the provision of benefits for each member of the fund -
and it is a similar effect, the ancillary purposes, your Honour. If I ask your Honours to go to tab 11, page 63,941, Regulation 4.05(1) - it is the foot of the right-hand column:
For the purposes of subparagraph 60(1)(b)(iii) of the Act, the circumstances in which the governing rules.....may be amended are -
they set out a number of circumstances relating to solvency. Could I direct your Honour's attention now to 4.05(2):
An amendment qualifies -
then (b):
whether or not paragraph (a) applies - the amendment relates solely to one or more of the following:
(i) the admission of new members to the fund; or
(ii) the category of members into which a new member or existing member is to be placed; or
(iii) allowing a person to become an employer-sponsor of the fund; or
(iv) the termination of the fund; or
(v) the appointment of a trustee -
So all the elements that we are speaking of here on the change are anticipated as amendments which are permissible amendments, your Honour.
GLEESON CJ: Is it an over-simplification to say this? That your proposition is that the question we have to decide is whether there should be introduced into the scheme of the part of the Assessment Act dealing with superannuation funds, any requirement of continuity going beyond the existence of an instrument of trust which governs the fund, which is the same instrument as originally applied or which results from an amendment of the original instrument or the original instrument as amended.
MR JUCOVIC: Yes, your Honour, together with - I would accept that proposition.
GLEESON CJ: Together with anything else?
MR JUCOVIC: You have to have property, your Honour, to which the instrument attaches.
GLEESON CJ: When you say "the property", the property is going to change all the time, is it not, or can?
MR JUCOVIC: Yes, but property from time to time to which the fiduciary obligations that are set out in the instrument attach.
GAUDRON J: Now, when you say "amend", do you include in that substitution? Do you say the trust continues if there is substituted a new set of trust obligations, in accordance with authority in the old deed?
MR JUCOVIC: Yes, your Honour.
GAUDRON J: So, what one is looking for ultimately is a chain of authority and not more?
MR JUCOVIC: An ability to identify what is happening now with what went before, your Honour, bearing in mind we are always speaking of something that meets the description in each relevant point of time of being an eligible entity, namely a complying superannuation fund.
GLEESON CJ: Quite, but no matter what changes there might be to the identity of the trustee, no matter what changes there might be to the identity of the beneficiaries, no matter what changes there might be to the identity of the rules, no matter what changes there might be to the items of property, the subject of the trust - shares, for example, being bought and sold - so long as the trust instrument continues to be the original trust instrument or directly or indirectly an amendment of the original trust instrument, you have all the continuity you need to satisfy the Assessment Act and, for that matter, the Supervision Act.
MR JUCOVIC: Yes.
GLEESON CJ: Is that what the Full Court held?
MR JUCOVIC: In the passage that I read to your Honours, although they dealt with it in other ways, at page 739, that is what they held, your Honour, at line 50:
If that be the test, it is satisfied here.
GLEESON CJ: This is paragraph 57. Is that right?
MR JUCOVIC: It is paragraph 57, your Honour. The amendments have to comply with what is required by the legislation, your Honour. That is assumed in my answer to your Honour's question.
GLEESON CJ: Failure to comply with the legislation, if by the legislation you mean the Supervision Act, just takes away from you the advantages that the Act confers.
MR JUCOVIC: Certainly, your Honour. Then you might become a non-complying fund, your Honour.
GLEESON CJ: Yes.
MR JUCOVIC: And you would have to establish criteria.
GLEESON CJ: So what I put to you amounts to the same thing as what the Full Court meant by "the regime regulating the fund"?
MR JUCOVIC: That is so, your Honour.
GLEESON CJ: Which is the trust instrument?
MR JUCOVIC: That is so, your Honour. Amendments were always contemplated, your Honour, one would have thought as a matter of commerce. I should just draw your Honour's attention to what the relevant amendment powers were prior to the SIS regulations.
GLEESON CJ: Just before you go to that, I think it is paragraph 56 that makes it clear what you said was an accurate account of the reasoning of the Full Court.
MR JUCOVIC: That is so, your Honour. Your Honour, at tab 12 we have the regulations that existed at the time of the amendment, and at page 1090 there is an inhibition on amendment in much narrower compass in paragraph (d):
except with the written approval of the Commissioner or of all of the members of a superannuation fund:
(i) the trust deed of the fund shall not be amended so as to reduce any benefits that have accrued to any of its members, or affect the basis for calculating the amount of retirement benefits of any of its members in a way that reduces that amount with respect to the period of membership before the date of the alternation of the deed -
So, amendments were permissible, your Honour, but they could not reduce benefits, as set forth in that regulation.
GLEESON CJ: So, the argument comes down to this, that given the continuity identified by the Full Court, there is nothing else required by the Act, nor is there anything else to which the Act could attach a requirement of continuity, bearing in mind that the trustees change, the assets change and the members change?
MR JUCOVIC: Yes, that is so, your Honour.
GLEESON CJ: In fact, some of these superannuation funds last for - they could turn out to be the new statute of mortmain problem for our society.
MR JUCOVIC: The new banks, your Honour, now, in effect. Savings have been channelled not into banks, but into large public superannuation funds. Before I take your Honours to the provisions of the Income Tax Assessment Act, there are some provisions as to portability of benefits which I should take your Honours to in the original trust deed. It is in volume 1, your Honour.
GLEESON CJ: What is the point you are making about this? How do you use this?
MR JUCOVIC: I just want to take your Honour - I use it for showing that in the context of this Act, in this context, the accretion of property was not intended to change any identity of entity, your Honour. There are portability provisions, your Honour, which are seen to be part of the general structure of what a fund is and those portability provisions - I will find them later, your Honour - anticipate - it is 1.42, your Honours, at page 63 of the appeal book.
GLEESON CJ: What page is that?
MR JUCOVIC: Page 63, your Honour. There are two types of portability anticipated by this particular trust deed at page 63, that is, this fund can, in respect of members, take assets from other funds and they will become part of the general assets of the fund, your Honour, much like what had happened in the facts of Caboche v Ramsay. It is not intended, we would say, your Honour, that that would have any relevant effect on the identity of the entity. This is part of the normal incident of a superannuation fund, that it obtains funds. It is not intended, relevantly, even though a new trust is established or might be established by the accretion of that fund to treat this as anything other than the same seal or entity fee for the purposes of assessment.
And 1.43.1 deals with transfers whilst in employment to other funds. That is the approach that is established in Truesdale's Case [1970] HCA 27; 120 CLR 353. Can I just take your Honours shortly to that.
KIRBY J: What I understand to be the argument is that you cannot have an amendment if you kill off the whole of the trust deed and that by that provision in the new trust deed on page 240 you have killed it off, you cannot breathe life into it, it is not an amendment. Now, what is your answer to that?
MR JUCOVIC: Well, your Honour, it is simply a drafting device.
KIRBY J: You may say that but that, it seems to me, is the thing we have to focus on.
MR JUCOVIC: It really depends what you mean by "kill off", your Honour.
KIRBY J: I am looking at paragraph 2 in the operative provisions on page 240. You delete "Parts 1, 2 and 3 of the Trust Deed". That is the whole of the trust deed, and you insert "rules".
MR JUCOVIC: Yes.
KIRBY J: What is left? You have really got a shell and you have really terminated the effective provisions of the trust deed, so, is that amendment - - -
MR JUCOVIC: Your Honour, the trust is not terminated by the distribution of the fund for different purposes. The fund continues and there is an amendment which changes the nature of the fiduciary obligations that attach to the fund but when you describe the nature of the fiduciary obligations which are attached to the fund it is still described as a superannuation fund for the benefit of the members, from time to time, albeit with different benefits. For instance, if there is a change from a defined benefits to an accrued benefit scheme it was not said by the commissioner before the Administrative Appeals Tribunal that that would be a relevant fact.
Rules to give effect to that relevant fact would not be a relevant fact because they are a different means of effecting the same purposes, that is, the provision of superannuation benefits to the existing members, your Honour, and new members who will come into the fund, whether simultaneously with the execution of the trust deed or later on.
The execution of the trust deed did not create in new people beneficial interests until they were capable of being described as having joined, whether they joined before or after, your Honour. That is how we - can I ask your Honours to look at what Mr Justice Menzies said in Truesdale, in relation to the words "created a trust" at page 362 over to 363. The statutory words were "created a trust" and his Honour said:
There is an obvious difference between creating a trust in respect of property, on the one hand, and, on the other, transferring property to a trustee to hold upon the terms of an established trust. To read the section as if it applied to such a transfer would be, in the absence of a context, to expand it. Such a reading would be tantamount to saying that the transfer to the trustee of property to be held as part of the assets of an already constituted trust would be to create a second trust, whereas, from the point of view of both the trustee and of the beneficiary, there would be but one trust and the property transferred would be nothing more than an addition to the property subject to the trust.
And his Honour refers to authority at 363 in Tucker and there are other cases which are referred to in Caboche v Ramsay, where the transfer by a third party to a trustee of property could strictly be described as creating a new trust on the terms of the trust deed. But that was not what was intended, your Honour, by the statute and we use that by way of analogy here. What did this statute intend?
GLEESON CJ: Mr Jucovic, what is the year of income with which we are concerned?
MR JUCOVIC: , your Honour.
GLEESON CJ: Right. I am just looking at volume 4 page 593 and thereafter, picking up the usage of "exit" as a transitive verb, I notice that a whole lot of people exited the trust during the year ended 30 June 1993. Mr Davies, for example, exited with $164,000 and Mr Skinner exited; Mr Hewitt existed with $292,000. I suspect they were white-collar workers. Now, by the year of income, with which we are concerned, had all the category A members exited?
MR JUCOVIC: No, your Honour, there were still category A members. There is a finding about that in the - - -
GLEESON CJ: Where do we see them referred to? The finding might be a convenient place.
MR JUCOVIC: There is a finding about how many there were in the AAT's findings, your Honour, which I think Mr Bloom took the Court to.
GAUDRON J: But they were new category A members. They were not the same category A members as they were before, were they? To use an adjective, if you say category A, it means one thing under the old document and another thing under the new, does it not?
MR JUCOVIC: The category A members were members of the old fund as at - - -
GAUDRON J: But they could have been either A or B.
MR JUCOVIC: I think the facts were as follows, your Honour. The category A members were Australian employees of Miden Group companies as at 1 July 1992.
GLEESON CJ: But I thought we were told that the Miden companies went into liquidation at some stage.
MR JUCOVIC: Some did and some did not, your Honour.
GLEESON CJ: I see, so during the year of income, were the category A employees Miden Group employees?
MR JUCOVIC: There is no evidence of who their employer was during the year of income. Some of the Miden companies had gone into liquidation, some had not, and the evidence did not address who their employer was. I think the evidence would say that a substantial number of them ceased to have as an employer a Miden company.
GLEESON CJ: Were the category B employees American Miden employees?
MR JUCOVIC: Yes. There were some category B employees prior to the amendment who were members or capable of being members of this fund, your Honour. The category B members as referred to under the amendment are really members who joined with an employer called Miden or a Miden Group company between 1 July 1992 and the date of the amendment of the deed.
GLEESON CJ: I am not intending to suggest by this question that continuity of membership is necessary, but it is an interesting fact. Would you mind checking up over the luncheon adjournment, as to what degree of continuity there was between members of the fund at the time of the repatriation, the losses, and members of the fund during the year of income, the subject of this assessment?
MR JUCOVIC: Yes.
GLEESON CJ: I take it that such continuity as there was, would have been within categories A and B.
MR JUCOVIC: Yes, I will check it - - -
GLEESON CJ: I take it that all the category C members in the year of income, or people who had not been Miden Group employees - - -
MR JUCOVIC: There was a distinct difference between category A, and category B, and category C members. The category C members were employees whose employers were not Miden Group companies or related to Miden Group companies.
GLEESON CJ: Were they people employed by Midas?
MR JUCOVIC: That was just a sort of trade name for the category C membership. They were employed by whoever their employer was, who joined this fund as a sponsoring employer for those employees.
GLEESON CJ: Does that mean that, in commercial terms, what happened was that this fund was offered to other employers as a place where they could locate their employees for superannuation arrangements?
MR JUCOVIC: That is so, your Honour. It is in our written submissions, your Honour, but the SIS legislation contemplates what are called public offer funds where people set up a structure which employers can come to and make provision for their employees.
GLEESON CJ: Particularly, I suppose, this would be employees of small businesses.
MR JUCOVIC: That is so, your Honour, because there is a benefit to them in the administrative burden of having their own superannuation and there is also a benefit to their members in having a greater pool of money that reduces the administrative costs, your Honour. So there are benefits to past and existing members as people come in and out.
GLEESON CJ: Just to pursue that a little further, I am just interested in the consequences of the issue that arises in this case. What is the test of continuity that would apply in relation to those public offer funds?
MR JUCOVIC: It would be no different, your Honour. There would be a fund established. Members would come in and would come out. I do not know of any express statutory provision that makes the public offer fund different from the circumstances of this fund, bearing in mind that the statute talks of the concept of an eligible entity - in assessing the Income Tax Assessment Act 1936 - talks about eligible entity of which this fund is a subset and, I will check this over lunch, these public offer funds will probably be such eligible entities for the purpose of the Income Tax Assessment Act, your Honour, otherwise they would not get the concessional benefits that are provided by Part IX.
As we would say, one has to look at the construction of Part IX not just by reference to the fact that some of these funds would have a trustee but some will not have a trustee and they are all sorts of different types of entities which have a fluidity about them which is simply contemplated by the world of commerce, your Honour, and upon which the Income Tax Assessment Act takes it as it finds it.
Can I just take your Honours briefly to the provisions of the Income Tax Assessment Act. If your Honours have our written submissions, at - - -
GLEESON CJ: I am looking at your Statutory and Other Materials. Do we find these in here?
MR JUCOVIC: No, your Honours will not find that in there. Your Honours will find it in the appellant's Statutory and Other Materials. The provisions of Part IX as at 30 June 1995 are found at tab 24. Relevantly, could I take your Honours to 272 and 278. Section 272 is found at 28,718. There is an assumption to be made in calculating taxable income and it says that:
The taxable income of an eligible entity shall be calculated as if the trustee were a taxpayer -
Then 278 is found at page 28,784 behind tab 24. Your Honours will see in 278(2):
Except as provided by Division 11A of Part III -
which we are not concerned with -
the income of a complying superannuation fund of the year of income is not subject to tax except as provided by this Part.
Section 278(1) says that:
The trustee of a complying superannuation fund is liable to pay tax on the taxable income of the fund -
So the section is concerned with the calculation of the taxable income of the fund itself and that is to be calculated as if the trustee were the taxpayer. Taxable income, your Honour will see from the submissions, is whatever is assessable income minus allowable deductions.
GLEESON CJ: What is the significance of the word "eligible" in the expression "eligible entity"? Eligible for what?
MR JUCOVIC: That is the statutory expression found - just simply describe the - eligible for taxation benefits, your Honour. If your Honour were to look at 28697.
GLEESON CJ: Right, the most significant of which, I suppose, is that somebody gets a tax deduction for making a contribution to it.
MR JUCOVIC: No, your Honour, I cannot take it that far, on reflection. It is just simply a statutory description. The reason I cannot take it that far is that if your Honour will just - the definition so works that if you are a complying fund you have a taxation concession, if you are not a complying superannuation fund you do not have a taxation concession.
GLEESON CJ: Perhaps you could tell us at 2.15 what is the nature of the eligibility that is contracted by the concept of an eligible fund.
MR JUCOVIC: Yes, thank you, your Honour.
GLEESON CJ: We will adjourn until 2.15.
AT 12.46 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.17 PM:
GLEESON CJ: Yes, Mr Jucovic.
MR JUCOVIC: Your Honour asked me before lunch about the identity of the members of the trust of the fund in the years of loss. There is no identification individually as there is for the subsequent years that we are concerned with. But at volume 2 of the appeal book, 326, there is the earlier set of accounts and in note 2 at 326, it said that "The Fund was established" in 1987 "to provide benefits for the employees of Control Data Australia" - that changed its name to Miden - and in the third paragraph there is a recommendation as to the contribution of member's salaries, so that they are employees of the Miden Group of companies.
At 330 in note 9, there is a reference to a "Control Data Executive Retirement Plan", which seems to be a different plan:
was wound up, and the remaining members were transferred to the Control Data Australia Employee Benefit Fund. Contributions made by these members are now paid into the Control Data Australia Employee Benefit Fund. The financial accounts reflect the transfer of funds from the Control Data Executive Retirement Plan.
That seems to be the only material in relation to the years of loss.
The position from 1992 onwards, your Honour has been taken to it, and there is an actual identification of the members at page 583, 584 and 585 in volume 4 of the appeal book.
GLEESON CJ: So during the year the subject of the assessment, there were still some A and B members who are survivors of the old Miden Group?
MR JUCOVIC: Yes. There was a finding about this in volume 4, in the reasons of Mr McMahon, at page 702 paragraph 14. He says:
As at 30 June 1995, there were 28 category A, and 37 category B (that is 65 M employees) and 133 category C members.
GLEESON CJ: Now, if your argument is correct, am I right in thinking that the presence of those category A and category B members is irrelevant?
MR JUCOVIC: There will come a time, your Honour, where there may be no category A or B members, yes.
GLEESON CJ: I am saying what difference would that make.
MR JUCOVIC: No, it would not make a difference, your Honour.
GLEESON CJ: It would make no difference.
MR JUCOVIC: No, it would not.
GLEESON CJ: Well, the result of the case, on your submission, would be the same if, as at 30 June 1995, there only existed the 133 category C members.
MR JUCOVIC: Category C members, yes, your Honour.
GLEESON CJ: And it would be no different if there were 1,333 category C members?
MR JUCOVIC: Yes, your Honour. There is an overlap at certain points of time but that overlap will cease to exist. Your Honour also asked me about "eligible", what the context of the use of the word "eligible" was in eligible entity. May I take your Honours to the appellant's statutory materials under tab 24. Your Honours, there are three kinds of eligible entities and then they divide themselves into five categories of case. At page 28,697 there is a definition of "eligible entity" and an:
"eligible entity", in relation to a year of income, means:
(a) a fund that is an eligible ADF -
that is an approved deposit fund -
in relation to the year of income;
(b) a fund that is an eligible superannuation fund in relation to the year of income; or
(c) a unit trust is a -
pooled superannuation trust -
in relation to the year of income -
They are concepts which are then found in the SIS legislation. Each of those - and your Honours will find that there are different tax consequences for each. Sections 278 and 286 deal with complying and non-complying superannuation funds. Sections 289 and 294 deal with complying and non-complying ADFs and 296 deals with pooled superannuation funds. So each has a separate division.
Section 272 deals with the calculation. In effect, your Honour, a superannuation fund is either a complying superannuation fund or it is not a complying superannuation fund, or an ADF is a complying superannuation fund or not a complying superannuation fund, and they make up what is an eligible entity. Your Honour will find the definition, for instance, of "eligible ADF" at page 28,697. An eligible ADF is either:
a complying ADF, or a non-complying ADF.
At the top of 28,698, an:
"eligible superannuation fund", in relation to the year of income, means a fund that is a complying superannuation fund, or a non-complying superannuation fund, in relation to the year of income -
Your Honour finds definitions of "complying" and "non-complying", firstly, by 28,683. So far as complying ADFs and complying superannuation fund, a:
"complying ADF" has the meaning given to "complying approved deposit fund" by section 47 of the SIS Act -
and -
"complying superannuation fund" has the meaning given by section 45 of the SIS Act -
If your Honours would go to 28,698, at the foot of 28,698, a:
"non-complying ADF", in relation to a year of income, means a fund that, at all times during the year of income when the fund is in existence, is an approved deposit fund within the meaning of the SIS Act, but does not include a fund that is a complying ADF in relation to the year of income - - -
GLEESON CJ: But what is an eligible entity eligible for?
MR JUCOVIC: Treatment under Part IX. Some have concessional tax rates and some do not have concessional tax rates. I think I said before lunch to your Honours that eligibility was to concession but it is really to the treatment under Part IX. At the top of page 28,699:
"non-complying superannuation", in relation to a year of income, means a fund that, at all times during the year of income when the fund is in existence, is a provident, benefit, superannuation or retirement fund, but does not include a fund that is a complying superannuation fund in relation to the year of income -
The term "eligible entity" is picked up at 272 at 28,718 as covering all those entities and they are concerned with the taxable income of those entities.
If your Honours would turn briefly to tab 9 of the applicant's statutory materials, your Honours would see section 17 which levies income derived by a person, so the Act uses language relating to a legal person. At tab 10 your Honours will see that section 25, assessable income is the assessable income of a taxpayer, and the taxpayer is defined as the person who derives the income. Then at tab 11, section 48:
In calculating the taxable income of a taxpayer, the total assessable income derived.....shall be taken as a basis, and from it there shall be deducted all allowable deductions.
So the Act uses the terminology "of a taxpayer" as a legal person. Your Honours have already been taken to section 79E, which is at tab 12, which uses the same language in subsection (1) and similarly section 80, which is found at tab 16.
In determining what is taxable income, that is taxable income minus allowable deductions, the other parts of the Act speak in terms of a legal person. Your Honours, the construction put on 272 by the Full Court - it is not apparently challenged. That is found in volume 4 of the appeal book at paragraph 15 at page 728. After reciting the provisions at 278(1) and 278(2) which are concerned with the taxable income of the fund, they say:
The effect of those provisions is that the taxable income of a complying superannuation fund is to be calculated as if the trustee of the fund were a person deriving that income.
So that, in order to apply other provisions of the Act that deal with persons which are legal entities you treat the taxpayer as a person. The effect of that, your Honour, was dealt with - if I may take your Honours to - is similar legislation in Union-Fidelity [1969] HCA 36; (1969) 119 CLR 177. This dealt with a trust estate, your Honours, and the taxation of trust estates. At page 180 at about mid-point there is a reference to the relevant provision:
`the net income of a trust estate' means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income,.....'
In slightly different language, at page 181, Chief Justice Barwick sets out "The effect" of that, in the first full paragraph:
The effect of the definition of the net income of the trust estate in s. 95 is that the provisions of the Act are to be applied to the actual income of the trust estate as if it were the income of an individual deriving it. From the actual income of the trust estate there are abstracted all sums which can be seen to be assessable income. For the purpose of this abstraction or computation the only fact which is relevantly known is that the trustee, as a taxpayer, has derived the income.
So we just simply create a fiction, your Honour, that in this calculation you just simply treat the trustee as a person deriving the income. You are not concerned there with anything about the sameness, or otherwise, the identity, or otherwise, of the trustee. It is irrelevant for the purposes of the application of 79E and section 80. Your Honour, it was approached, we would respectfully submit, in the same way by Justice Kitto at 187. Your Honour, at 187, in the second full paragraph, Justice Kitto says:
In the light of the definition of "taxpayer" the expression "calculated under this Act as if the trustee were a taxpayer in respect of that income" may be expanded to read "calculated under this Act as if the trustee were a person deriving that income". But the "as if" shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by "a person" must be that it was derived not by the trustee but by a hypothetical person -
we would underline "hypothetical person" -
to whom none of the facts is postulated which would make him a "resident" -
So, for the purpose of calculation of what section 278 and 272 refer to as the taxable income of a fund which is not a legal entity, you just simply assume that there is a hypothetical person in existence. The consequence of that, if we could just read your Honours a passage which is of some assistance in a decision involving a deeming clause in the House of Lords, East End Dwellings Co Ltd v Finsbury Borough Council (1952) AC 109. This is the only judgment in the House of Lords that relevantly discusses this provision in this way. At page 132 in the judgment of Lord Asquith - can I just take your Honours to the first sentence in the second full paragraph at 132:
In assessing the compensation for an expropriated interest in land the section bids the assessing authority to imagine, contrary to the fact, that the damage had been made good before the acquiring authority served notice to treat.
And at the foot of the page:
If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.
So we are bidden by section 272 to think of as real that there is an individual who actually derived the income. Section 278(2) in effect says that there is no tax payable except under that section. Section 278(1) says that the trustee is personally liable and 272 is the assumption provision. It creates no need or requirement to look at anything about the personality of the person looked at for the purpose of application of section 79E and section 80, you just simply apply the fiction and assume that there is a person rather than a fund. So that one is left back with what criteria is there?
Sections 25, 48, 79E or 80 are not concerned with, in relation to the process of assessment of individuals in the calculation of their taxable income, changes in their nature. A person will be an individual or a corporation, he will be alive or dead, he will be existing or non-existing; you do not pick up anything from those provisions in relation to continuity at all, your Honours.
Your Honours, that is confirmed, in our submission, by what is in the Treasurer's explanatory memorandum. We have set out two extracts from that.
GLEESON CJ: Just before you go to that, section 272 tells you how you calculate the taxable income of an eligible entity. Which is the section that brings it to tax?
MR JUCOVIC: Section 278(2), your Honour:
Except as provided by Division 11A of Part III, the income of a complying superannuation fund of the year of income is not subject to tax except as provided by this Part.
Section 278(1):
The trustee of a complying superannuation fund is liable to pay tax on the taxable income of the fund of the year of income.
GLEESON CJ: We can ignore Division 11A of Part III, can we?
MR JUCOVIC: You can ignore that Division, your Honour. Your Honours, we have set out in our written submissions at paragraph 13, if I could just take your Honours briefly to those, the explanatory memorandum - the Treasurer, which we say confirms our construction, your Honour.
"Clause 9 inserts Part IX in the principal Act. The new part contains an exclusive legislative regime for determining the taxable income of complying and non-complying superannuation funds, complying and non-complying approved deposit funds and pooled superannuation trusts. These entities are collectively termed `eligible entities' for the purposes of Part IX".
"All of the complying funds listed above are to be taxed on their income under the new Part IX of the Income Tax Assessment Act at the rate of 15%. While generally the taxable income of these funds will be determined in the same way as for other taxpayers, there will be some differences in the treatment of funds' assessable income and allowable deductions..."
and that is specifically catered for, but otherwise they will be determined in the same way as for other taxpayers, hence section 272, the creation of the fiction of a notional person.
GLEESON CJ: Is it still the case that the legislation contains no continuity requirements?
MR JUCOVIC: Your Honour, the legislation contains no continuity requirements so far as superannuation funds are concerned. Your Honours, so far as other trusts, non-superannuation trusts, are concerned, there is legislation involving trust losses and other deductions which we referred to in footnote 20 to our written submissions. It is the Taxation Laws Amendment (Trust Loss and other Deductions) Act 1998 . There was a test of continuity of ownership control to be met to entitle losses of previous years to be allowed as a deduction in calculating the net income of the trust estate and complying superannuation funds, your Honour, are specifically excluded from these provisions.
GLEESON CJ: So to this day there is nothing in the legislation that adds any requirement of continuity to whatever requirement exists in line with the arguments that have been put against you in this case?
MR JUCOVIC: That is so, your Honour. Your Honour, we submit that there is no requirement of continuity that emerges out of the application of sections 79E and 80 by reason of the statutory fiction but a requirement of continuity simply exists as a basis of identification of what goes later to what went before and in that regard there is no criteria of the type that is submitted by the appellant which relevantly breaks the connection between the fund in the year of loss and the fund in the year of income.
Your Honour, the appellant seeks to call in aid three categories of cases by way of analogy. May I just deal with those. The first category of cases are the stamp duty or settlement cases. The context, your Honour, is the meaning to be attributed to settlement in stamp duty legislation. The relevant taxing Act is a document which creates rights and obligations and it is necessary in that context to discern whether something is or is not a settlement.
As the Administrative Appeals Tribunal pointed out the word "settlement" was not used in the context of this legislation at all and rightly so, your Honour, because the context of the legislation is one where amendments and modifications are quite normal and common. Can I just take your Honour to what the Administrative Appeals Tribunal said about that in volume 4 page 711 at paragraph 38 when the Tribunal found this fact:
Amendments and modifications of the constituent documents of superannuation funds are normal; and are in accordance with common practice in the industry. Amendments are required by some superannuation laws and are considered desirable to meet the requirements of other taxation laws. Section 60(1) of the Superannuation Industry (Supervision) Act recognises this fact and limits the extent to which rules may be amended unless certain conditions relating to consents have been met. Regulation 4.05 of the Superannuation Industry (Supervision) Regulations sets out the types of subjects which amendments commonly address. Amendments - even far-reaching amendments - are therefore not only usual but are accepted and expected in the indefinitely continuing life of the fund.
Your Honours, there was some evidence about the change from a defined benefit fund to an accumulation fund has been brought about by changes in the commercial environment. Can I just ask your Honours to go to volume 2 at page 167. In paragraph 9, Mr Hall was an executive director of the trustee company.
McHUGH J: What page is that, Mr Jucovic?
MR JUCOVIC: Page 167, your Honour, of volume 2. Mr Hall says in paragraph 9:
At the time of the Amending Deed, the superannuation industry was undergoing a period of significant change and a number of funds were converting from defined benefit funds to accumulation funds. A major reason for this as the complexities associated with the administration of such funds and the associated problems caused by the introduction of the Superannuation Guarantee Charge from 1 July 1992.
He exhibits an article called, "The death of defined benefits?" from:
the November 1996 issue of "Superfunds", the journal of the Association of Superannuation funds of Australia.
Your Honours will find a copy of that commencing at page 317, "The death of defined benefits?". At 318 there is a discussion of it and some statistics in the article, your Honours. So that the Tribunal, your Honours, characterised the change from accumulation to defined benefits in page 712 of volume 4, paragraph 41, where the tribunal said:
The change from a defined benefit fund to an accumulation fund also does not break the continuity. It merely reflects a different manifestation of the same purpose, namely, to provide superannuation benefits for employees. The content of those benefits may change but the purpose remains constant. A narrow view should not be taken -
and I will take your Honours in due course to what Justice Meagher said in Kearns v Hill in relation to the construction of amendment powers.
Your Honours, another way in which you can describe a settlement is that someone transfers or agrees to transfer property. One of the cases cited in the appellant's written submissions is Commissioner of Stamp Duties v Hopkins [1945] HCA 14; (1945) 71 CLR 351 at 378, another stamp duties case, and that would be a criteria for a new settlement. But, your Honour, in most superannuation funds, as we have pointed out in our submissions, the employer agrees to transfer contributions regularly to the trustee to be held upon the terms of the trust. New employees come in and I have shown your Honours clause 1.42. This trust deed contemplated the addition to it, prior to its amendment, of funds from employers of the new employees coming in, and what the tribunal said about this is found at page 712, your Honours, paragraph 39:
Having regard to these principles, one must then ask what is it that points to the continuity.....Certainly, changes of membership can have no effect. By their very nature, the identity of members (or beneficiaries in trust terms) is constantly changing. New members come, old members retire or die and indeed, new employers undertake obligations to make contributions on behalf of new members. The identity of settlors and beneficiaries (in trust terms) is constantly changing. This change alone can not support a contention that a fund that is otherwise required to be an indefinitely continuing fund, is constantly discontinuing and reforming.
.....The fact is that the facility to accept employees outside the M Group was available before the deed of amendment, and continued to be available after the deed of amendment. The manner of inducting new sponsoring employers was modified, but only to accommodate the new scheme of administration. Before the deed of amendment, the purpose of the fund was to provide superannuation benefits to employees of the M Group and to employees of any other associated company. The same purpose has been preserved since the deed of amendment. The fact that there are now more non-M employees who are members than former M employees is not to the point, in my view.
Both the tribunal and the Full Court found that as a matter of the proper construction of the original trust deed, it was possible that persons who were not Miden employers to become employers. In other words, companies not associated with Miden, it was contemplated that there was a facility under the old trust deed for those persons to come into the new trust deed. I will just find where the Full Court discusses that.
GLEESON CJ: Just before you pass from paragraph 40 on page 712, do you accept the approach adopted there by Mr McMahon:
In my view, the hallmark of continuity lies in the purpose of the fund - - -
MR JUCOVIC: I do not deny that this is a fund which has beneficiaries. It is not a purpose trust.
GLEESON CJ: Even so, he says:
the purpose of the fund was to provide superannuation benefits to employees of the M Group and employees of any other associated company.
It looks as though he would not have agreed with your proposition earlier that it would have made no relevant difference if category A and category B people had disappeared from this altogether.
MR JUCOVIC: Yes.
GLEESON CJ: Mr McMahon did not seem to accept that approach.
MR JUCOVIC: It was not necessary to put that proposition, your Honour, to Mr McMahon. It was dealt with on a slightly less generalised basis, your Honour. I accept that the logic of what we are putting leads to that proposition. It follows from the concept which is found in the definition of "superannuation fund" itself in section 10 of the SIS Act of "an indefinitely continuing fund". That is where one gets the concept of continuity from. It is actually in the statutory words, "indefinitely continuing fund". That provides the criteria.
CALLINAN J: What about section 62 of the Superannuation Act. Does it also define the criteria?
MR JUCOVIC: Yes, the core and ancillary purposes. The core and ancillary purposes provide superannuation benefits to employees who are members.
CALLINAN J: But sections 62 and 10 really out all of the necessary, if you like, criteria for it to be a fund within the SIS Act and you say that if it is a fund within that, it satisfies those criteria and then it satisfies Part IX of the Tax Act to qualify for tax under that division and for deductions also.
MR JUCOVIC: Yes, that is so and that is our submission, your Honour. We have given your Honours a reference in our written submission to what Lord Wilberforce said in a different context to the use of generalised terms, they have to be put into their context, and the context here is these type of entities which the legislation looks at as being continuing, indefinitely continuing, and that is part of what they have to do. But they will never be the same as the concept of a person who is the same for the purpose of 79E and section 80 of the Income Tax Assessment Act, your Honour.
In our written submissions we have noted that the - again, one of the stamp duty cases, in paragraph 33 of our written submissions, Buzza v Comptroller of Stamps [1951] HCA 16; (1981) 83 CLR 286 at 300. I will not take your Honours to that case, it is cited by my friends. It suggests that one criteria of a settlement is the creation of new equitable interests in property. Our submission, your Honour, is that that has no meaningful relevance of criteria under a superannuation fund where you have members coming in, bringing new members who will obtain benefits to the trust fund under whatever the applicable rules are.
Your Honour, the Full Court is criticised by the appellants in relation to what it said at page 735 in paragraph 41. At paragraph 41 they say:
The Amending Deed did not, of itself, create new beneficial interests. It merely created the potential for such interests in the event that Category "C" membership was taken up. A comparison of the rights and prospective entitlements of members under the old and new arrangements indicates that they are essentially the same.
We rely on that. The Full Court was simply saying that without a category C member, your Honour, the amending deed itself did not create any new beneficial interests. It appears that some people were entered in the records of this fund as being members prior to the actual document being executed. Let us assume for a moment that there was no such category of people. When they came in there would be the creation of some new equitable interest. Because some arrangement had been made for them to be in before there was an actual execution, presumably they would be treated as being in from the time of execution, but the deed itself did not create anything and it is not something that is within the normal incidence of an operation of a superannuation fund gathering in members from time to time.
Your Honours, what the Full Court said about the construction of the old trust deed, which I was going to take your Honours to, is found at page 730. It is the same construction found by the Tribunal. The relevant provisions are set out in - it is found at paragraph 20 and 21:
Under the terms of the Original Trust Deed, benefits, as specified in the Original Trust Deed, were to be paid to employees of the Principal Employer and Associated Employers upon the events there specified. The benefits were defined, being calculated chiefly by reference to final salary and years of service. The term "Associated Employer" was defined in the Original Trust Deed as meaning:
"any person which has been admitted to participation in the Fund as an Associated Employer as provided in the deed..."
The arrangements for the admission of Associated Employers were covered by clause 1.14 as follows:
"The Trustees and the Principal Employer may enter into an agreement in a manner and form acceptable to the Trustees and the Principal Employer with any person -
we underline "any person", your Honours -
which the Principal Employer deems it is desirable and convenient to include in the Fund as an Associated Employer.
And they find in 21:
There was no limitation on the categories of persons with whom the Principal Employer could enter into an agreement under clause 1.14. Therefore, at least in theory, any employer in the world could become an Associated Employer, if that employer was prepared to do so and the Principal Employer was prepared to enter into an agreement with that person in a manner and form acceptable to the then trustees.
I did not take your Honours to - there are public offer funds in the SIS Act, we have referred to in our written submissions, the same concept dealing with the same subject matter, employers making arrangements for pooling of funds, your Honours.
Could I say something, shortly, about something that has been referred to in the appellant's written submissions, but which the appellant has not taken your Honours to. There are a number of cases about amendments which it uses in its written submissions by way of analogy. Those cases, in our submission, show that one looks at this question very broadly and not in the particular way in which the appellant would wish to provide the criteria here. The first is Kearns v Hill (1990) 21 NSWLR 107, a decision of the New South Wales Court of Appeal. There is a variation of a discretionary trust deed at page 110F. There is a reference to:
a number of authorities in which various courts have been able to read down powers of variation which have been granted in apparently unlimited terms. Such cases certainly exist.
And he refers to them, particularly Re Dyer:
and it was cited with approval by Justice Megarry, as he then was, in Re Ball's Settlement Tusts; Ball v Ball.....In the Duke of Bedford's Case it was held that, in determining the ambit of a variation clause it is legitimate to consider its scope and evident purpose, but that consideration is not of much use when the evident purpose of the power is to ensure maximum flexibility. In Re Dyer it was held that the power of variation contained in a particular trust deed did not extend to varying the trust in a way which would destroy its "substratum". That, again, is not really helpful in the present context, where either it is impossible to locate any substratum at all, or alternatively, the relevant substratum is the benefit of the descendants of a named person, and the interests of that class are being actively promoted rather than diminished by the 1988 deed poll. I put to one side the obvious consideration that each deed must be considered in its own particular context, so that no other deed executed in different circumstances and in different language can decide the fate of a given deed. I also put to one side the equally obvious consideration that the conditions which existed in England in 1850 are not necessarily the same as those which existed in New South Wales in 1970. On the other hand, it is impossible to discern in the deed of trust any intention that the list of beneficiaries contained in clause 1 should remain perpetually inviolate.
So, your Honours, it is a question of construction. There is a short passage in the judgment of Sir Justice Waddell in the equity division in Lock v Westpac Banking Corporation (1991) 25 NSWLR 593, which I wish to take your Honours to. Two passages, your Honour, at page 602B to C his Honour refers with approval to what was said in Mettoy Pension Trustees Ltd v Evans:
`...the court's approach to the construction of documents relating to a pension scheme should be practical and purposive, rather than detached and literal -
and then at F:
It is true that in some cases a power to vary a trust deed may be held not to extend to a variation which would alter the substratum of the trust: see, eg, Re Dyer.....But, in the present case, the recital to which the plaintiff points cannot be regarded as outlining the substratum of the trust. It is necessary, in my opinion, to construe the deed as a whole in order to determine whether clause 35 authorised the variation -
and at the bottom of page 606 to the top of page 607:
One way the argument was put by the plaintiff was to say that if there would be no resulting trust for the Bank of the fund remaining after distribution pursuant to clause 23(3), it could not be said in any sense to be a beneficiary under the deed. Accordingly, to provide for a return of surplus would be to introduce an additional beneficiary which would destroy the substratum of the trust and, hence, be invalid. In my opinion, what is the substratum is to be determined as a matter of construction of the deed and having regard to the circumstances. If the amendment is as a matter of construction within power, it cannot be an infringement of the substratum.
There was a recent decision cited by the appellant Cachia v Westpac Financial Services Limited [2000] FCA 161; 170 ALR 65. It is a decision of Justice Hely. He says at paragraph [68] on page 82 where he discusses the scope of the amendment power:
The power of variation conferred by this clause is apparently unconfined. There are, however, some authorities which suggest that a power to vary a trust deed may be held not to extend to a variation which would alter the substratum of the trust: see, for example, Re Dyer.....Re Ball's.....Blocksidge.....Kearns v Hill.....Lock v Westpac.....This may be no more than an application of the equitable doctrine of fraud on the power, referred to in [74] of these reasons.
[69] In Re Ball's Settlement Trusts at 905, Megarry J said:
If an arrangement changes the whole substratum of the trust, then it may well be that it cannot be regarded merely as varying that trust. But if an arrangement, while leaving the substratum, effectuates the purpose of the original trust by other means, it may still be possible to regard that arrangement as merely varying the original trust, even though the means employed are wholly different and even though the form is completely changed.
The identification of some unexpressed "substratum" in the case of a public unit trust such as the present may not be without its problems. Clause 10 of the Growth Trust deed specifies its investment policy as being primarily:
the purchase of, development and investment in real estate and property associated therewith and in shares in property companies with a view to maximising and preserving capital appreciation over a term of years.
Although, as earlier indicated, both the trust deed of the Growth Trust and the prospectus contemplated that distributions of income could be made to unitholders, if it was thought to be in their best interests.
[70] The proposals outlined in the Information Memorandum were designed to bring about a fundamental reorganisation of the trust, including the "merger" of the Growth Trust and the Property Trust, to be effected by placing the Growth Trust underneath the Property Trust, and the issuing of units in the Property Trust to persons who formerly held units in the Growth Trust.
[71] But the rationale for the reorganisation was a change in external circumstances, and a desire to effectuate the original purpose of the trust in so far as was practicable having regard to the change in circumstances.
This sentence is reflected in the judgments below, your Honours.
Both before and after the alteration the trust was a property trust and the unitholders continued to have an interest in the properties held by the Growth Trust, although that interest was diluted by the interest which unitholders in the Property Trust acquired in those investments. That dilution was compensated for by the fact that, as members of the Property Trust, former unitholders in the Growth Trust acquired an interest in the properties held by the Property Trust.
[72] Even if there is some principle that a power of variation does not extend to an arrangement which changes the whole substratum of the trust, a fundamental reorganisation of the trust does not of itself necessarily involve destruction of the substratum of the trust. If there is a substratum underlying this trust it is that of a property trust in which units are issued to the public. That substratum was not destroyed by the amendments in question. If there is a principle of the type to which I have referred, the fourth amending trust deed does not fall foul of it.
Your Honours, if one wants to use analogy, the aspect here is to be found in the statutory definition of "indefinitely continuing fund".
There is one other case which is not on our list of which I have some copies which deals with questions under the Variation of Trusts Act in England, a decision of Mr Justice Megarry. There is one passage that I would like to read to your Honours dealing with the questions. It is Re Holt's Settlement [1968] 1 All ER 470. The passage which I would like to read to your Honours is at page 477.
Finally, before turning to the second main point, I should mention that in this case, the arrangement carries out its purpose by revoking all the existing trusts and establishing a new set of trusts. That being so, it is said that some difficulty arises on the wording of s 1(1) of the Act of 1958. This merely empowers the court to approve an arrangement "varying or revoking all or any of the trusts", and so, it is said, the court cannot approve an arrangement which, instead of merely "revoking" or merely "varying", proceeds to revoke and then to set up new trusts, thereby producing an effect equivalent to the process of settlement and resettlement. The section, it is argued, says nothing of establishing new trusts for old. As a matter of principle, however, I do not really think that there is anything in this point, at all events in this case. Here the new trusts are in many respects similar to the old. In my judgment, the old trusts may fairly be said to have been varied by the arrangement whether the variation is effected directly by leaving some of the old words standing and altering others, or indirectly, by removing all the old words and then setting up new trusts partly, though not wholly, in the likeness of the old. One must not confuse machinery with substance; and it is the substance that matters. Comparing the position before and after the arrangement takes effect, I am satisfied that the result is a variation of the old trusts, even though effected by the machinery of revocation and resettlement.
So, in our submission, your Honours, those cases take a fairly broad view but they are each in their own statutory context and they have to be understood in their own context in relation to construction of an amendment provision.
There were three cases relating to the English Finance Act which was cited by way of analogy: Roome v Edwards, Bond v Pickford and Swires v Renton. We deal with those cases in paragraph 40 of our written submissions.
Your Honours, these cases are about the construction of the provisions of section 25(3) of the UK Finance Act and section 54 of the Capital Gains Tax Act 1979. We have given your Honours a reference to those in footnote 34 of our written submissions, and where the text of those is found.
Your Honours, the effect of the legislation there is as set out in page 12 of our submissions in paragraph (b) that the UK Capital Gains Tax legislation creates a deemed disposal when a person becomes absolutely entitled to trust property as against the trustee. Where the trustee exercises a power to alter beneficial interest, an issue arises under the English legislation as to whether the trustee of a newly created beneficial interest has become absolutely entitled as against himself as trustee of the original settlement.
Your Honours, when one looks at these cases - and we have given your Honours the references in the footnotes - you will see that you have in these cases the creation of new beneficial interests. But whether or not it is an old or a new settlement, or they become absolutely entitled under the resettlement or the original settlement, the creation of new beneficial interests is not decisive. What appears to be decisive is whether the trustees of the original settlement have duties to perform in regard to the relevant assets in their capacity as trustees.
There is a passage in Swires v Renton 64 TC 315 which supports that proposition. It is a decision of Justice Hoffman. Your Honours, under powers which the trustees were entitled to exercise, they created new beneficial interests. Your Honours, what they did is found at page 327. There was an "exercise of a power of appointment under a settlement" and they did two things: one, they gave some assets to a person absolutely and there was no issue that that created a capital gains tax problem. Your Honours will see at 327C to D:
The power to apply capital was exercised by a deed of appointment dated 16 June 1981 which was expressed to be supplemental to the settlement. It divided the trust fund into two parts by reference to a schedule of assets. One part was declared to be held on trust for Isabelle absolutely. The other part (called the appointed fund) was to be held to pay the income to Isabelle during her life or for the remainder of the income trust period, whichever was shorter, with power to pay or apply capital to or for her benefit "freed and discharged from the trusts affecting the same under the Settlement and this deed". Subject to the income trust, the capital was to be held for Mark and Anthony in equal shares absolutely.
The terms of section 54 of the Capital Gains Tax Act are set out at 327. I need not take your Honours to them.
Your Honours, there is a substantive beneficial change, but the real issue was whether administrative powers remain to be exercised under what was called the original settlement and, if that was so, there was no deemed disposal. So, a change in beneficial interest, of itself, was not relevant for the purposes of the application of this Act, and that is found at page 330C to F, your Honours, the discussion of that.
So, you can change beneficial interest substantially under a power of appointment. If there was some administrative provisions still to be applied under the old settlement, it would be treated as not creating a new settlement for tax purposes. I need not take your Honours to the detail of this. We are just simply saying you just cannot get much of an analogy from legislation in other contexts, your Honours. It has to be determined by the particular context that we are dealing with here.
The problem, your Honours, is that there is no logical stopping point in the criteria asserted by the appellant which allows you to assess this issue. The appellant would have to concede that operations in the ordinary - what it refers to in paragraph 15 of its submissions of reply dated 11 December, of the contemplated ordinary operation of a fund about - fund rules about membership and contributions, are on one side of the line, and something that is not a contemplated ordinary operation is on the other side of the line. But there is no statutory criteria, your Honours, that divides what happened here. The only relevant statutory criteria is that there is an indefinitely continuing fund.
GLEESON CJ: What do you say about the argument that there are two funds?
MR JUCOVIC: That is found against the appellant in the finding at paragraph 51 at page 716. Perhaps I should take your Honours to paragraph 50 first:
The ambulatory nature of the assets of the fund continues. The purpose for which the trustee is to apply those funds continues, the accrued rights of employees under the original deed are preserved. Although provision is made for the establishment of a new category of membership, this does no more than articulate what was always possible under the original deed.
I will take your Honours to what the Full Court said about that.
All the assets of the fund are available to meet claims of all members, no matter to which category they belong. The change from a defined benefit to an accumulation fund (which is the principal amendment effected by the deed) is no more than a modification made having regard to contemporary experience in the superannuation industry and legislation governing the supervision of superannuation funds - - -
GLEESON CJ: Where are you reading from?
MR JUCOVIC: At line 20, your Honour.
GLEESON CJ: Which paragraph?
MR JUCOVIC: Paragraph 50, page 716, volume 4 of the appeal books.
All of these factors were contemplated in the original deed as justifiable cause for amendment. The amending deed does no more than realise the expectation or possibility recorded in the original deed.
51. In my view, the original fund has not been terminated and therefore continues as the same fund. There is nothing to substantiate the suggestion that somehow, a collateral second fund was created which co-exists with the first fund. This is not borne out by any of the objective evidence, by the documents, by the accounts, by the trustees' minutes or by the actions of members. To hold that there was a second fund somehow created would be to support a fiction. In the light of the general principles of construction, which urge a practical approach to give effect to the terms of superannuation deeds, this would be an impermissible course.
So we rely upon the finding in paragraph 51, your Honours, by the Administrative Appeals Tribunal.
McHUGH J: If there was a second fund, a trustee would have to get a new approval, I suppose.
MR JUCOVIC: That is so, your Honour. May I finally say something shortly about error of law. To find an error of law is insufficient. The appeal is on a question of law. For there to be an appeal on a question of law, the appellant has to establish that the criteria which it alleges are the relevant criteria is somehow found as a necessary fact in the construction of the statute. We would respectfully submit that - and there is no express criteria. The relevant criteria is simply found in the idea that there will be an indefinitely continuing fund. Those are our respectful submissions.
GLEESON CJ: Thank you. Yes, Mr Allsop.
MR ALLSOP: Your Honours, may I begin with answering a question, I think your Honour the Chief Justice raised before lunch and refer your Honours to two cases in the context of carry forward losses on businesses. Those cases are, first of all, Avondale Motors v Commissioner of Taxation.
McHUGH J: Justice Gibbs took the view in Avondale that it had to be identical; not similar, but identical.
MR ALLSOP: Yes, your Honour; no, that is correct, your Honour.
McHUGH J: So that if you had different franchises, you did not have the same business; if you were selling Fords and then you changed to selling Holdens, then he apparently took the view that it was a different business.
MR ALLSOP: Yes, your Honour. It is a different question - - -
McHUGH J: Yes it was.
MR ALLSOP: It is [1971] HCA 17; 124 CLR 97 and the relevant passages are at page 105. That was in the context of section 80E. In the context of section 51(1) in AGC Advances v Federal Commissioner of Taxation (1974-5) 32 CLR 175, Mr Justice Mason dealt with the question of whether or not a business had, in effect, recommenced for the purposes of section 51(1)(i) whether it was the same business. The passages which are relevant in that respect are found at pages 198-199. His Honour was agreed with by his Honour the Chief Justice. Mr Justice Gibbs was in dissent and his dissent is found at page 194 relevantly. What we say is here, however, the question is one which arises fundamentally out of the proper understanding and construction of section 272, for the purposes of Part IX and section 95 for the purposes of Part III, and I will come back to that in a moment.
My learned friend relies heavily on the content of the superannuation legislation as it is recognised in Part IX, of course. Part IX itself, when introduced, was the subject of an explanatory memorandum, a relevant passage of which is referred to in paragraph 6 of our submissions in reply. In section 268 of Part IX there is a contemplation that there may be a fund without a trustee. What was said about that by the Treasurer is found recorded in paragraph 6 of our reply and it was there envisaged that this might well occur in contexts such as public sector funds, which are otherwise defined in the superannuation legislation.
Now, it is only to be expected that superannuation funds would almost always be carried on by the structure of a trust relationship because of their very nature someone, T, is holding property given to him or her or it by others solely for other individuals to obtain benefits pursuant to a superannuation regime set out in the trust deed. Of itself and of its nature that will almost certainly give rise to a trust.
Now, if one has statutory creations, one can see that they may be emanations of this purpose which would not necessarily have the structure of the trust and, indeed, for instance, this Court dealt with a statutory creation providing provident benefits in Fouche's Case 88 CLR without necessarily creating a trust. But if one attempts to effect this purpose by a private arrangement it is almost certainly going to be a trust. A perusal of the Occupational Superannuation Act and the SIS Act, as it has been referred to, reflects that statutory regulation of a trust regime central to each of them is the office of the trust, the trustee.
Once one recognises that and goes to each of those Acts, one sees that they are statutes dealing with operating standards and supervision of behaviours thought to be important for the savings of the community. What they do not do is create entities in the legal personality sense to run those purposes and provide those benefits. They pick up and overlay trust relationships and in some senses modify them and add to duties and responsibilities as well as provide for proper standards and supervision.
If one goes to the legislation, one finds different types of funds embodied within the legislation. For instance, in the regulations under the old Occupational Superannuation regime, in tab 12 in the respondent's submissions, there is a definition of "defined benefit" funds. They find their existence reflected in the superannuation regime as do accumulation funds referred to in the definitions in the SIS regulations in tab 10. Indeed, my learned friend took your Honours to Regulation 4.05 of the SIS regulations dealing with amendments, and those two types of funds are dealt with differently in the regulations.
There are other types of funds in the SIS Act in tab 1 of the respondent's submissions. There are employer sponsored funds. There are standard employer sponsored funds, public offer funds, or public sector funds or private funds. They all fulfil a role, in one sense or other, in the supervisory or regulatory context in which SIS Acts and the Occupational Superannuation Act acted. But none of them answered a question about how each of the trusts is constituted if it is a trust in a private capacity. My learned friend took your Honours to section 52 of the SIS Act. That simply contains covenants on the trustee using the notion of trust obligations as a paradigm. They will resonate to any one familiar with the obligations at law on trustees.
Section 60, my learned friend took your Honours to, provides for restrictions on amendments for the protection of members. Regulation 4.05 sets out the circumstances in which rules of a superannuation entity may be amended. But what they do not do is provide for the consequences of their effectuation, that is, if one chooses to act in a permitted way, to do certain things to an existing trust arrangement, the consequences of that have to be looked at when they are effected. The answer is not given by saying it was statutorily permitted under SIS or OSA or, indeed, the deed.
The Superannuation Act is not intended to exclude the operation of the law about trusts or any other law, unless it is inconsistent, directly, and that is recognised. If I can give your Honours a reference to section 350 - it is not in the statutory material but we can provide it, if needs be - which recognises the continued existence of State and Territory laws. If set up as a trust, as this super fund was, the consequences of actions by trustees, unless governed by some particular piece of provision of the superannuation legislation, will be governed by the law of trusts.
My learned friend took your Honours to Union-Fidelity. Our submissions in relation to that are set out in-chief in writing and my learned friend, Mr Bloom, took you to those. Much does now appear to turn upon the proper application of section 272 and - - -
GLEESON CJ: And 278.
MR ALLSOP: Section 272 and 278, and necessarily following section 95 for Part III. Now, your Honours, what we say about each of section 272 and 95 is this that first of all, as recognised by Mr Justice Kitto, the trustee, of course, does derive the income and incur the deductions, but what the hypothesis does, in a sense, is to disembody or take the trustee away from his particular identity and existence, but what it does not do is eliminate the fact that the hypothetical person who is the taxpayer is a trustee because one of the important purpose of the hypothesis is to eliminate the trustee from his identity as a natural person or corporation in his, her or its own right, as well as isolate that person in his, her or its capacity as a trustee of another trust.
GLEESON CJ: But in the case of a superannuation fund the Commissioner does not suggest, does he, that a change of trustee makes it impossible to carry forward losses?
MR ALLSOP: No, because of the hypothesis; because what 272 does is eliminate the relevance of the particular identity of the trustee. (a) may hold the office in year one; (b) may hold the office in year two.
GLEESON CJ: But if it does not matter if the trustee changes and it obviously does not matter if the assets of the trust change because superannuation funds buy and sell shares and it does not matter if the beneficiaries change because employees come and employees go, what is it that determines whether you have the necessary continuity?
MR ALLSOP: The relationship that one can identify to enable you to call the person from time to time the trustee of that trust. That is, the taxpayer is the office holder as trustee of that trust from time to time.
McHUGH J: But why do you not look at the purpose? It is not an unknown area. Club law, for example, there is a well known Chancery case - I think it reached the English Court of Appeal - where the rules of the club provided for a club in the country for polo and pigeon shooting, I think it was, and a motion was passed to discontinue pigeon shooting. It was said that was well within the power of amendment. It did not alter the nature or purpose of the club, which was for recreation. There are a number of those cases.
MR ALLSOP: If I may respectfully put this, that that is the next question, if I may come to that in a moment. The first question is: what is the effect and operation of 272 and 95? Does the hypothesis merely take away from the relevant analysis all aspects of the trustee save that he, she or it has a legal identity, as my learned friend submits? We submit what it does is takes away from the actual trustee who derived the income and incurred the losses, his, her or its particular identity, leaving one with the hypothesised trustee being the office holder of that trust from time to time as the taxpayer. You need to do that to distinguish that trustee from his position as another trustee of another office, that is of another trust relationship, and from his or her or its own position in his or her or its own right.
If one does that, one has embedded within the Tax Act, within section 272, your criterion. It is not a search for some unexpressed criteria of continuity under the superannuation legislation. One is given the discrimen in section 272.
McHUGH J: But it is still a trust for certain objects. There may be an argument as to at what level of generality you define those objects. But, having regard to what we are dealing with in Part IX, why is it not sufficient to say that the objects are providing superannuation benefits for employees and as long as you comply with the basics set out in section 62 of the SIS Act, that is the end of the matter.
MR ALLSOP: Even if one exercises a power, in effect, of revocation and complete replacement, it does.
McHUGH J: But this legislation probably assumes these funds will go on for generations.
MR ALLSOP: It assumes funds, or it assumes that superannuation benefits can be provided for generations. What occurred here was, and what could occur in any other trust if a power was sufficiently wide as the so-called power of amendment was here, was that you continued to deliver, as it were, the services, if I may use that expression. You may continue to obtain certificates from the Insurance Commissioner or the relevant authority, as it is now called, that you are complying with the Act but you do so by changing entirely and replacing the trust relationship.
Now, in some circumstances what is done in a variation power may simply be analysed by saying that it is a mere variation, that certain changes were made to comply with this Act or that Act or this change in commercial context or that change in commercial context, but what was done here was, in terms and in fact, the complete deletion of the terms of the trust and the standing possessed thereafter under a new declaration of trust under completely new terms.
Now, it is not just a matter of drafting. It was no doubt done, as is reflected in the substance of it, because there was a substantial change made to the whole fabric of the relationship. No longer were defined benefits one of the kinds of funds reflected by the legislation to be in existence. A defined benefit fund was to be put an end to.
CALLINAN J: But the Commissioner, under the SIS Act, treated the fund as the same fund, did he not?
MR ALLSOP: The Insurance Commissioner did.
CALLINAN J: The Commissioner under the SIS Act. There was a Commissioner at one stage, was it not? Was that the regulator?
MR ALLSOP: That is the regulator. It was initially the Insurance and Superannuation Commission. It later became the Australian Prudential Regulatory Authority.
CALLINAN J: Well, in the relevant year was it the Commissioner or was it some other body? It does not matter.
MR ALLSOP: In 1995 it was APRA, I think.
CALLINAN J: I am looking at section 45 of the SIS Act.
MR ALLSOP: Yes, your Honour.
CALLINAN J: Section 6 of the Income Tax Assessment Act says that a fund, for the purposes, I think, of Division 9, or a superannuation fund is a fund as defined by the SIS Act. Is that not right?
MR ALLSOP: Yes, your Honour. That is right.
CALLINAN J: So that that is one criterion, the definition in the SIS Act, one criterion for the Tax Act. Then, under section 45 of the SIS Act, which refers in terms to the Income Tax Assessment Act another criterion would be, and perhaps the only other criterion, that:
the Commissioner -
as the regulator -
has given a notice to the trustee.....stating that the fund is a complying -
fund for that year.
MR ALLSOP: Yes, your Honour.
CALLINAN J: Now, the Commissioner did not give a separate notice in respect of say the C class members.
MR ALLSOP: No, your Honour, he did not.
CALLINAN J: The Commissioner treated this as the same fund. Is that not right?
MR ALLSOP: The Insurance and Superannuation Commissioner?
CALLINAN J: Yes.
MR ALLSOP: No, he treated the fund he had before him as satisfying the regulatory and supervisory criteria that he need to have regard to - - -
CALLINAN J: And is that not therefore sufficient? He treated it as one fund, not as more than one fund as you would submit it should be treated. He treated it as one fund and he said it complied in all respects. Why should not we then just simply apply section 6 of the Income Tax Assessment Act and say that because it is a superannuation fund for the SIS? Act, a complying fund for the SIS Act in all respects and only one fund for the purposes of that Act, we should so treat it for the purposes of the Income Tax Assessment Act?
MR ALLSOP: That inquiry mandates the Commissioner of Taxation to assess the income of the fund as calculated at a rate that is more favourable than is the position if it is a non-complying fund.
CALLINAN J: For Division 9 purposes.
MR ALLSOP: But it does not necessarily answer the question as to whether the taxpayer under section 79E and 80 is the same relationship. If one accepts, that what section 272 tells you is that it is to be the office holder of the same trust.
GLEESON CJ: What was the date on which you say the change occurred? In other words, leave aside the question whether two funds - leave that alternative possibility to one side. Your argument is that up to a certain time there was a fund and after that time there was a different fund.
MR ALLSOP: Well, it certainly had occurred by the year of income but - - -
GLEESON CJ: Yes, but it must have occurred at a precise time, on your argument.
McHUGH J: Was it 1 November 1993 when the new - - -
MR ALLSOP: When the changes were operative on the people who existed.
McHUGH J: Was that 1 November, when the new deed - - -
MR ALLSOP: Yes, when the deed was executed.
GLEESON CJ: Now, was there any difference between the assets the subject of the fund as between 31 October and 2 November?
MR ALLSOP: Yes, in this sense, that they became impressed with a different trust.
GLEESON CJ: I know that, but did the "they" change?
MR ALLSOP: I do not think the - - -
GLEESON CJ: Let us suppose they were a thousand shares in BHP.
MR ALLSOP: I do not think the evidence identifies that, but for the purposes of debate, your Honour, it is assumed they did not.
GLEESON CJ: So, so far as we know, the assets in question, if I can use that expression, were identical before and after the change.
MR ALLSOP: Make that assumption.
GLEESON CJ: The trustee was identical?
MR ALLSOP: No. The trustee?
GLEESON CJ: The trustee.
MR ALLSOP: No, it was not, your Honour. A new trustee was made trustee of the trust by the deed of 1 November.
GLEESON CJ: Right. So, at the time of the change, you had the trust assets, which I have said were a thousand shares in BHP, for all we know, and the change consisted of a change in the holder of the thousand shares in BHP. Right?
MR ALLSOP: Yes, your Honour, sorry.
GLEESON CJ: That was presumably accompanied by some entry on the share register of BHP, and the change in the trusts on which the thousand shares in BHP were held?
MR ALLSOP: A complete change of trust after, in effect, a revocation of the earlier trusts.
GLEESON CJ: Well it make a difference to your argument if it was a less than complete change?
MR ALLSOP: It would not be as clear, but we are dealing with a revocation in terms. One would have to analyse what the deed did, if the deed did something else.
GLEESON CJ: Well, suppose there was a substantial modification of the trusts. What, if any, significance would that have?
MR ALLSOP: It would depend on what those modifications were.
GLEESON CJ: I see. So it would be a question of fact and degree?
MR ALLSOP: A question of legal analysis and degree.
GLEESON CJ: Legal analysis engaged in for the purpose of answering what question?
MR ALLSOP: Whether or not one had substantially the same trust relationship tending the assets and the beneficiaries and trustees rights and obligations thereon.
GLEESON CJ: Now how does this apply in the case of one of these open public funds that were mentioned in argument? I am not sure I know how they work, but they are presumably intended to last indefinitely or for a long time?
MR ALLSOP: One sees all these trusts are intended to last indefinitely.
GLEESON CJ: Yes, but presumably trusts of this kind or funds of this kind are intended to be there for different employees or different employers to join as suits them, so that not only do employees come and go in the sense that employees join and leave the employment of a particular employer, but these funds are open to different employment enterprises, the attraction being their size and the administrative convenience and - - -
MR ALLSOP: That is right, your Honour. And it may be that the more public and open the trust is in its terms unaltered, that the more difficult it is to identify the end of that trust relationship short of precisely what happened here, and that is - - -
GLEESON CJ: Did what happen here amount to anything more than turning a private fund into an open fund?
MR ALLSOP: What happened here was the revocation of a trust.
GLEESON CJ: But was that what the revocation of the trusts were intended to achieve, to turn a private fund into an open fund?
MR ALLSOP: Partly, and also partly to terminate forever the defined benefit relationship and the rights of the principal employer and the associated employers to share in the assets of the fund.
GLEESON CJ: That would be part and parcel of turning a private fund into an open fund, would it not?
MR ALLSOP: Yes, your Honour. I will come to it later, but that is one of the matters that we submit about the old regime, that whatever might be the theoretical construction of one of the terms of it, it is quite plain, on its proper construction and how it was dealt with, that it was for the Miden Group and as it was so operated.
GLEESON CJ: You had better not come to it much later.
MR ALLSOP: No. I promise I will not, your Honour. There is only a couple of more points I want to make. But, in one sense, if I may very briefly go back to the answer I gave your Honour Justice Callinan, the satisfaction of the insurance regulator, or the superannuation regulator, gets you, if I may use the expression, a ticket into concessional treatment under the Tax Act, and the Commissioner of Taxation has to live with that regulator's decision about that. But it does not answer the question as to whether or not, for instance, a public offer fund which, by a commercial arrangement, properly entered, completely revoked all its terms of its operations.
KIRBY J: You continue to latch on to that and I do understand the argument but if, for example, the drafter had taken a different drafting technique and instead of, as it were, saying, "Look we are going to clean the slate and we are going to start in a different way", assume that they had kept common provisions, of which there are some, and had drafted it by textual amendment, you would not be in as good a forensic position but is it really not, as Mr Jucovic has said, a drafting question?
MR ALLSOP: No, it is more than a drafting - it was in fact done and one cannot simply say - - -
KIRBY J: It was, but the new deed did start by saying "Recitals":
A. By trust deed dated 11 March 1988.....
B The Trust Deed has been amended from time to time.
I mean, historically, the deeds are connected. There is a reference from each to each. I would just be concerned if this case ultimately turned on the way the drafter decided to go about it by redrafting and cleaning the slate and - - -
McHUGH J: Could I just add, supposing instead of deleting Parts 1, 2 and 3 that the drafter had left them in, created new categories, new benefits and gave the category A and B employees options to transfer across. What would you say then?
MR ALLSOP: Your Honour, what we would say is that if the deed had created a substantial change, that the new trust relationship was sufficiently and substantially different, then even if it is undertaken by that drafting technique, then as a matter of substance - if as a matter of substance the trusts are substantially different, then that underlies the question, but it is made easier, I suppose, in one sense, if the technique reflects the substance, and that is - - -
KIRBY J: You accept that the criterion is the substance. That is what the authorities we were read suggests. But our search is for substance, not simply form.
MR ALLSOP: Your Honours' search is for substance, and the substance of the Act that was done is to end the first trust. It can be labelled a matter of form, and I will deal with Re Holt now. That was, as Justice Megarry indicated in the later case of Ball's Settlement Trusts, which we have referred to - - -
CALLINAN J: I know you say all of that, but in the end it is really a question of statutory construction, is it not?
MR ALLSOP: Yes, your Honour.
CALLINAN J: In a sense, your client has abdicated - I am not putting this very well - the right almost, as it were, to decide who is the taxpayer by embracing in section 6 of the Income Tax Assessment Act the definition and the criteria of and for a fund as set out in the SIS Act.
McHUGH J: The whole weight of your argument is on the trust concept of obligations of a trustee, but in the context of this Act, why is not the proper approach to look at these funds as a commercial or investment unit or vehicle?
MR ALLSOP: Because it is the effectuation of a human activity, given some recognised public importance by a legal structure, one well known, and that is in a trust, and while it is supervised and regulated and the statute requires an affirmation of compliance, as it were, to fall within the category of entitlement to concession, it does not answer the question, in my respectful submission, as to what, if anything, has happened. While in year one there was a compliance by whatever was there in year two, there was a compliance with whatever was there, it does not answer the question as to what has happened to that well-known legal structure by voluntary acts.
CALLINAN J: But the Income Tax Assessment Act, it seems to me, does not ask that question. You say in paragraph 19 of your written submissions that:
There must be a relevant identity between the taxpayer in the loss year and in the income year.
MR ALLSOP: Yes, your Honour.
CALLINAN J: Accepting that, that relevant identification is provided by compliance with the SIS Act in respect of one fund during the relevant years.
MR ALLSOP: With respect, no, your Honour. The taxpayer is the person deriving the income, section 6. The taxpayer for section 79E and 80, whether it is a trust or a superannuation fund, is identified by 272 and 95, and that is the office holder of that trust. The fact that that office holder of one trust in year one did comply with the legislation and that office holder, after a revocation of a trust and its replacement, did comply with the supervisory regulations in year two, does not answer the question of what the effect of that change was.
GLEESON CJ: Mr Allsop, the revocation, as I understand it, is to be found on your argument in what appears on page 240 in operative provision 4; is that right?
MR ALLSOP: Clause 2 and clause 4 and clause 10.2.
GLEESON CJ: Well, can I ask you this about clause 4?
MR ALLSOP: Yes, your Honour.
GLEESON CJ: What difference would it make if it was not there? What does clause 4 do except state the obvious?
MR ALLSOP: In one sense that is perhaps right, if I may respectfully say so.
GLEESON CJ: Because, by the exercise of the power of amendment, the consequence was produced that the new rules were those which the trustee was bound to apply.
MR ALLSOP: By the exercise of the power - - -
GLEESON CJ: The power of amendment. By the exercise of the power of amendment contained in the old deed, the consequence was produced that the new rules, following the amendment, were the rules that the trustee was bound to apply in holding the assets of the fund.
MR ALLSOP: May I just say by the exercise of the power to amend, the power to delete, the power to replace.
GLEESON CJ: Yes. In other words, by the exercise of the power exercised in operative provision 2. What I want to suggest for your comment is that operative provision 4 is otiose.
MR ALLSOP: Except that it makes plain that the instrument which one now needs to examine to understand the basis upon which the property is held is this instrument and nothing else. Just as in the power of appointment case - and I will not take your Honours to it due to the time but we have referred to Briscoe v Hart, which was an illustration of a power of appointment within an instrument. Muir's Case says that if one is seeking to find with a special power of appointment where the date on which a power might be said to relate back to, of course one goes back to the original deed, but that does not deny the proposition that if the break and the exercise of the power is so clear and self-contained, that it does not create new trusts.
In In re Dyer the Chief Justice and Mr Justice Gavan Duffy, reflecting upon the word "variation", commented that as a matter of English, "variation" of course can involve revocation and resettlement. Here it is express and there is no question here. We do not put here that what was done was outside of power because, if it was done outside of power, arguably the same trust must still be there.
If one is taxing partnerships, of course, Division 5, and trusts, Part III, and here one goes to Part IX but perhaps I would just be repeating myself in the exchange I had with your Honour Justice Callinan to say that what the authority says about compliance does not, in our respectful submission, answer the effect of an act in the world for the purposes of section 272.
CALLINAN J: What do you say you get, exactly, out of section 272?
MR ALLSOP: This way, your Honour, that - - -
McHUGH J: You say that eliminates the importance of the identity of the trustee, do you not?
MR ALLSOP: Yes, but you do not hypothesise that he is not a trustee. He is a person who has derived the income but the necessity for trustees in section 95 and here is to distance or divide, quarantine him or her or it from the other capacities in which he, she or it might have been acting, that is, his or her own or in another trust.
GLEESON CJ: I suppose some of these trust funds have names, or soon will have, and you could fill in a tax return, quite appropriately, by identifying the taxpayer as the trustee for the time being of the Phoenix Superannuation Fund, or whatever the case may be.
MR ALLSOP: Yes.
McHUGH J: The Fidelity Fund.
MR ALLSOP: Perhaps it is not the most important point but, of course, the class C members got given another name here, the Midas Fund, under the new deed.
GLEESON CJ: It is like.....
MR ALLSOP: Yes. Very briefly - I will not take your Honours to them, but we deal with the variation cases. The purpose of our submissions in relation to those was not to say that the substratum - we do not have to say that some substratum was breached, whatever a substratum in these contexts is, but what one sees when one reads Re T Settlement Trust, of Mr Justice Wilberforce in the early 1960s and then the next case was Re Holt Settlement Trust with Mr Justice Megarry and then Re Ball Settlement Trust, again with Mr Justice Megarry, you see a developing width of the meaning of variation within a beneficial statute.
What one sees, certainly in Re Holt and Re Ball, is the recognition that while a power might be exercised such that it could not be said to be overreached, it could nevertheless create completely new trusts and that is what happened in Re Ball. What the Court of Appeal and Mr Justice Meagher was dealing with in Kearns v Hill was the question as to whether the power had been overreached. Here the power has not been overreached. They had a power to revoke and replace and they exercised it.
Your Honours, we have put in paragraph 52 of our submissions in-chief, which I do not need to go to, that is where we deal with the question as to whether, on the proper construction of the old deed, bearing in mind some of the definitions, there really could have been any employer brought into the old fund under the associated employer definition. Whether or not that is right, the fact is that it never was exercised in that way under the old deed and you did have a superannuation fund for a group of companies changed into, revoked and replaced by one for the public, in effect. If your Honour pleases, they are our submissions.
GLEESON CJ: Thank you, Mr Allsop. We will reserve our decision in this matter.
AT 4.13 PM THE MATTER WAS ADJOURNED
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