|
|
Home
| Databases
| WorldLII
| Search
| Feedback
High Court of Australia Transcripts |
Last Updated: 2 March 2010
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S310 of 2009
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
PHILLIP BAMFORD
First Respondent
DAVINA BAMFORD
Second Respondent
P & D BAMFORD ENTERPRISES PTY LTD
Third Respondent
Office of the Registry
Sydney No S311 of 2009
B e t w e e n -
PHILLIP BAMFORD
First Appellant
DAVINA BAMFORD
Second Appellant
and
COMMISSIONER OF TAXATION
First Respondent
P & D BAMFORD ENTERPRISES PTY LTD
Second Respondent
FRENCH CJ
GUMMOW J
HAYNE J
HEYDON
J
CRENNAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 2 MARCH 2010, AT 10.15 AM
Copyright in the High Court of Australia
__________________
MR J.T. GLEESON, SC: May it please the Court, I appear with MR T.P. MURPHY, SC and MS K.J. DEARDS for the Commissioner of Taxation who is the appellant in S310 of 2009 and the first respondent in S311 of 2009. (instructed by Australian Government Solicitor)
MR A.H. SLATER, QC: If the Court pleases, I appear with my learned friends, MS R.L. SEIDEN and MR I.S. YOUNG, for the appellants in S311 of 2009 and for the third respondent in S310 of 2009. (instructed by Robert Richards & Associates)
FRENCH CJ: Thank you.
MR SLATER: If it is convenient to your Honours, we had thought that I would open the appeals generally and address on the 2000 year appeal, that my friend would respond on the 2000 year appeal and present his appeal in the 2002 year.
FRENCH CJ: Yes, very well, Mr Slater.
MR SLATER: Your Honours, there are two appeals. Both concern section 97 of the Income Tax Assessment Act 1936 and Division 6 generally. In the 2000 year the taxpayers are the beneficiaries of the relevant trust estate and were assessed on the basis of applying section 97. In the 2002 years the trustee is the taxpayer respondent and it was assessed on the basis that that section 97 did not apply to the income of that year.
There is much in common between the appeals and with your Honours’ leave I begin by taking your Honours to the statute. Your Honours should have three bundles of statutory materials - one bundle of authorities and an appeal book and the written submissions of the parties. As usual, your Honours, we rely on what is in the written submissions, but will not touch upon everything that is in there.
Could I take your Honours to tab 1 of the bundle of statutory materials? It contains section 95 of the 1936 Act, as it was in the years in question. Your Honours will see that there is a definition of “net income” in relation to a trust estate as meaning:
the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions –
with some exceptions. The exceptions are not material, but by way of background, your Honours, Division 16C concerns income equalisation deposits, Schedule 2G concerns farm management deposits and Division 36 concerns losses of past years. There is also a definition of “exempt income” meaning:
Exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident –
Under tab 2 on the third page is an amendment which was made in 2006 which added a definition of “non-assessable non-exempt income” and that is not relevant to the years in question nor to the matters in dispute but is of some assistance in dealing with the context of the provisions. Your Honours, also under tab 1 is the terms of section 95A which provides that:
Where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary.
That was a response in 1979 to some observations of the Chief Justice in the Union Fidelity Case 119 CLR 77, to which we will come back. Under tab 4 your Honours will find section 96 which provides that:
Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.
There has been no change to that provision, your Honours. Under tab 5 your Honours will find the text of section 97, the provision centrally at issue, and the words which cause difficulty are those in the chapeau to subsection (1):
where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate –
Then, by paragraph (a), the exempt income of the beneficiary shall include, materially, that share of the net income of the trust estate and, under paragraph (b), the exempt income of the beneficiary shall include, materially, the individual interest of the beneficiary in the exempt income of the trust estate.
In 2007, there was an addition to that section again, under tab 2 on the third page, a provision in paragraph (c) that the non-assessable non-exempt income of the beneficiary includes, materially, the individual interest of the beneficiary in the non-assessable non-exempt income of the trust. Your Honours, also material by way of context are the provisions of section 98, which are not in the bundle but are reproduced on the third page of annexure A to our written submissions. Materially, section 98 provides that:
Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of –
materially, that share of the net income of the trust estate. Under tab 8, your Honours, is section 99. Your Honours will see in subsection (1) that the section, since 1981, applies only if section 99A does not. Where it does apply, it provides in subsection (2) that:
Where there is no part of the net income of a resident trust estate –
(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia,
the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual -
Then subsections (3) and (4) deal with related cases. Section 99A, your Honours, is under tab 9. There are to be no material amendments to either section 99 or section 99A. Section 99A(2) sets out the circumstances in which it applies, or rather in which it does not apply. It does not apply to a trust estate that results from a will, a codicil, an intestacy, a bankruptcy or a bankruptcy administration:
if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.
FRENCH CJ: Mr Slater, is it right that if we look at either the 2000 or the 2002 reprints of the Act, we will be looking at identical provisions for the purposes of this appeal?
MR SLATER: Yes, your Honour. The operative part of section 99A is in subsection (4) and following. Could I take your Honours only to subsection (4) which deals with a case where the net income is wholly within section 99A. The subsequent provisions deal with cases where it is partly within – and in the case of a non-resident trust estate. In subsection (4):
Where there is no part of the net income of a resident trust estate:
(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
(c) that represents income to which a beneficiary –
who is non-resident is presently entitled where the income has an external source, then the trustee is liable to be assessed and pay tax –
at the rate declared by the Parliament for the purposes of this section.
That rate, as your Honours would be aware, is a special rate. It is the maximum personal rate of income tax. Your Honours, again of contextual but not immediate relevance, are the provisions of sections 100 and 101. They are not in the bundle, but they are included in appendix A to our written submissions. Section 100 provides that the assessable income of a beneficiary under a disability, or who is deemed to be entitled by section 95A and –
(b) is a beneficiary in more than one trust estate or derives income from any other source;
shall include:
(c) so much of the individual interest of the beneficiary in the net income of the trust estate . . . as is attributable to a period when the beneficiary was a resident; and –
in effect, provides for the income through the trust estate to be accumulated with income from other sources for the purpose of fixing the rate of tax. Section 101 provides that –
where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour –
that discretion is exercised is taken to be presently entitled to the amount so paid or applied.
GUMMOW J: Is this expression “trust estate” defined?
MR SLATER: No, your Honour. There is a definition of “entity” in section 960.100 of the 1997 Act which defines “entity” to include “a trust” as if a trust were a person, but there is no definition of “trust estate”. If I could take your Honours back to tab 5 and section 97, the problem which gives rise to these appeals is that - - -
GUMMOW J: So the statute seems to turn relationships between trustees and beneficiaries into a creature of itself. There is no such thing as the income of a trust estate. The trustee might derive something and might then hold it on trust for somebody.
MR SLATER: Yes, your Honour.
GUMMOW J: So the statute in a way - - -
MR SLATER: It is a shorthand expression, I think, your Honour.
GUMMOW J: Just a minute. The statute in a way assumes or creates something that is fictional in character which is then picked up in the definition of “net income” when it says “as if the trustee were the taxpayer”.
MR SLATER: Yes, your Honour.
GUMMOW J: So from the very beginning there is some special relationship or detachment from ordinary trust law, if I can put it that way, for the purpose of some special situation created by the statute for its own purposes.
MR SLATER: Yes, your Honour. It appears to proceed on the basis that what is referred to as the income of a trust estate is a way of describing income which is derived by a trustee to be held upon the trusts in a trust somehow constituted.
FRENCH CJ: When did that term “trust estate” enter the legislation? Did that come in the earlier - - -
MR SLATER: At least in 1918, your Honour, and possibly earlier.
FRENCH CJ: The 1915 version.
MR SLATER: In 1915, the relevant portions of which are under tab 23, it was provided in section 14 that the income of a person should include – on page 143, paragraph (c):
beneficial interests in income derived under any will, settlement, deed of gift or instrument of trust - - -
GUMMOW J: Are you looking at the 1915 Act?
MR SLATER: I am, your Honour, yes.
GUMMOW J: Section 26 makes sense.
MR SLATER: Yes.
Any person who derives income as a trustee shall be assessed and liable -
If your Honours go over to the next tab your Honours will see that the wording which we now have appeared in the legislation in the opening part of section 26(1).
A trustee shall not be liable to pay tax as trustee, except as provided by this Act, but each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate -
That is the origin of the statutory expression.
HAYNE J: But the origin reveals, does it not, that the hinge about which the earlier provisions turned was “trustee”? “Trustee” is a term defined in the 1936 Act and “trust estate”, insofar as it can be identified as having a particular meaning, derives that meaning, does it not, from the notion of trustee?
MR SLATER: Yes, your Honour, but not, I think, from the statutory definition, which is extensive - - -
HAYNE J: I understand that, but while we begin in numerical sequence with section 95, section 96 might be seen as the central provision of Division 6, may it not, trustee not liable?
MR SLATER: I hesitate to accept that, your Honour, because I do not think that section 96 is more significant in the structure than the other provisions. It is a scheme which is designed to impose the burden upon the beneficiaries rather than upon the trustee and in that sense it is certainly part of the central core, but section 97 and section 98 appear to be as fundamental to that scheme as section 96 itself.
GUMMOW J: Is there any report before the 1918 Act?
MR SLATER: No, your Honour. There was a conference of the commissioners of taxation. That is not, I think, in the materials we have supplied to the Court but we can arrange to supply it to the Court at the end of the day, if that is convenient?
FRENCH CJ: Well, that resolved that, inter alia, the beneficiary in a trust estate should be assessed on his income from all sources including the share to which he is entitled and they talked of eliminating the principle of primary and secondary taxpayers, but the concept of somebody being a beneficiary in a trust estate seems to have emerged at that stage at least.
MR SLATER: Yes. Your Honour asked me about the conference. In appendix B to our written submissions, which is on page 10 of the appendix materials, we have reproduced what was said by the Treasurer at the time that the legislation was introduced and a summary, although not the full text, of what was said in the report of the proceedings of the conference of commissioners in paragraph 4 of that material.
Your Honours, the problem which gives rise to these appeals is that the concept of net income of the trust estate as defined in section 95 may yield a different amount from the amount which is referred to as “the income of the trust estate” in the opening words of section 97(1). That is because some outlays are made non-deductible by the Act, some amounts are made assessable by the Act which are not received in objective terms by the trustee.
If I could take your Honours to the factual context of the two appeals. They illustrate some of the circumstances in which the difference may arise. The facts are largely common to the two appeals. The company was the trustee of a family trust. Your Honours will find the trust deed at page 134 of the appeal book. We see at the top of page 134 that settlement was made on 9 February 1995 and that the second respondent in appeal 311 was constituted as the trustee, although the text having been taken from a precedent it is referred to as the “Trustees” in the plural.
On page 135 there is a definition of “Eligible Beneficiaries”, the first subparagraph of which is “the Parent”. Your Honours will find the parent in paragraph g) at about line 40 on that page means the appellant, Phillip Bamford. Returning to list of eligible beneficiaries, Mrs Bamford is included, children, grandchildren and the like. In paragraph vii):
such other persons . . . or charities as the Trustees shall before the Closing date appoint to be Beneficiaries –
Then the trust is declared in clause 2 on page 136 at about line 41.
The settlor hereby declares and directs that the Trustees shall and the Trustees hereby declare that they will hold the Trust Fund upon the trusts –
et cetera. Clause 3 provides a direction which was not invoked in this case. Clause 4 provides that:
In default of and subject to any such determination under Clause 3 hereof the Trustees shall stand possessed of the Trust Fund and the income arising therefrom upon the following trusts:-
and I should have perhaps told your Honours that the trust period is the period from “Settlement to the Closing Date”. Your Honours will find that on page 136 at about line 25 -
Such appointments were made in both of the years in question. I will take your Honours to those shortly. One other provision of the deed which is material, if your Honours would go to page 140 at line 40, clause 7:
In addition to all the powers vested in trustees by law or statute the Trustees without the consent of any Beneficiary shall have and may exercise from time to time all or any of the following powers –
The one which is presently material, your Honours, is to be found over on page 144 at about line 13, paragraph (n):
To determine in their absolute discretion whether any receipt, profit or gain or payment, loss or outgoing or any sum of money or investment is or is not to be treated as being on income or capital account - - -
FRENCH CJ: That is relevant to the 2002 matter, is it not?
MR SLATER: It is, your Honour, yes.
FRENCH CJ: There was in fact no determination made by the trustees. It seems to have been implied by the way the accounts were prepared.
MR SLATER: And by the course taken by the trustees in making an appointment which was declared to be an appointment of the income including the capital gain. It has been accepted below that that was not, in practical terms or in substance, an invocation of the power in - - -
FRENCH CJ: That is a finding by the AAT, in effect.
MR SLATER: Yes, your Honour, and has not been in contest below. Your Honours, no other provision of the deed appears to us to be in issue. Could I then take your Honours to the circumstances of the 2000 year. Your Honours will find the accounts of the trustee for the year beginning at page 156 and, materially, at page 160 which records the trustee’s reckoning of its income and expenses for that year. At about lines 27 and 28 your Honours will see that there are two items for “Interest Paid” and the “International Retirement Plan”. Part of the first item and the whole of the second item were disallowed as deductions by the Commissioner and that disallowance ultimately was not challenged. So that the net profit of $187,528, which was rounded up to $530, was augmented by an amount of $191,701 to arrive at a section 95 - - -
FRENCH CJ: That is the 175 plus the $16,000 interest, is that right?
MR SLATER: Yes, 16,701 of the interest expense. Your Honours will find those adjustments recorded at pages 6 and 7 of the appeal book. I will not take your Honours to it. So that there was a section 95 net income of $379,231. Your Honours, I noticed this morning that there was an error in our written submissions on page 3 at the foot of the page in footnote 4. The number shown there is 379,061. It should be 379,231. I apologise for that. Your Honours, the consequence of the disallowance of the two deductions I have identified was that the section 95 net income was greater and each of the appellants, as beneficiaries, was assessed on an amount calculated as 18.062 per cent of the adjustment. Your Honours will see the amended assessment for Mrs Bamford - - -
FRENCH CJ: When you say 18.06 of the adjustment, do you mean 18.06 per cent of the distributable income?
MR SLATER: Of the $191,701, your Honour.
FRENCH CJ: I see.
MR SLATER: Your Honours will see the adjustment which was made in the amended assessment at the foot of page 11 of the appeal book. The first adjustment referred to there of $31,608 is that percentage of the $175,000.
GUMMOW J: What percentage?
MR SLATER: The 18.062 per cent, your Honour. The second amount is the same percentage of the interest disallowed of $16,701. There is a corresponding adjustment to Mr Bamford’s assessment on page 52, which I will not take your Honours to. Your Honours, the way in which that percentage was arrived at is this. If I take your Honours to page 194 of the appeal book, your Honours will find there the resolution of the trustees made in advance of the settling of the trust accounts. The trustee resolved that the income be allocated in the following way – I should say “in the following proportion”, in the words used – first, as to $643 each, to JH and HJ Bamford, who are the children of the individual taxpayers, second, to Narconon Anzo Inc as to $12,500. That is a drug rehabilitation charity. The evidence for that, your Honours, is on page 130 in paragraph 16. I will not take your Honours to it. The next, as to the Church of Scientology, an amount of $106,000. The next, as to the two individual appellants, $68,000 shared equally between them and, finally, as to the Church of Scientology, the balance.
In the event, your Honours, an amount was crediting the accounts to the two children, the amounts of $12,500 and $106,000 were paid to the charity and to the church. The balance of the income derived by the trustee, putting aside the tax consequences for the 2000 year, was insufficient to pay the full amount of $68,000 to the two individual beneficiaries.
If I could take your Honours back to page 161, your Honours will see the way in which the amount was distributed, and the amounts which were distributed to the two individual appellants were $33,872 each, so there was a shortfall on the $34,000 that they would have been entitled to had there been enough income actually derived. The Church of Scientology received its $106,000, but nothing by way of balance. Although it is not directly relevant, the trust tax return is at page 165 and the distribution statement returning those amounts as income, is on page 170, immediately above and below line 30.
Your Honours, the beneficiaries whose appeal is in issue in this appeal are the two individuals to whom there was appointed a fixed sum. It is not the church to whom the balance was appointed, and that becomes material in relation to the way in which the discrepancy between the net income and the, pace your Honours’ comments, the income of the trust estate, is dealt with.
Your Honours, if it is convenient, I will take your Honours quickly to the 2002 year as well, while your Honours have the appeal books to hand. The result for that year is shown at page 176 as part of the accounts of the trustee for that year. Your Honours will see that the income for that year included interest of $400-odd, a profit on sale of assets of $58,454 and rent received of $52,474. There is a deduction amount of $4,748. That is not actually an amount which was deducted from the rent received, but it is an amount which by section 17-5 of the 1997 Act is excluded from the assessable income attributable to the rent received.
Your Honours will see that there, as well as in the resolution, the profit was treated as income. The distribution of the income for the year was the subject of a resolution which your Honours will find at page 196 of the appeal book. There are two pages printed there - it is the left-hand one that is relevant. The minutes of the trust for 2002:
RESOLVED that the net income for the year ended 30 June, 2002 be distributed as follows -
to the two individuals, “the first $60,000 including capital gain, shared equally” and to the Church of Scientology “the balance”.
Now, your Honours, the $60,000 in fact exceeded both the amount of the capital gain and the net profit for the year after the deduction of the expenses shown on page 176. The trust return for the 2002 year, your Honours will find at page 185 of the appeal book, and the relevant portions are over the page on pages 186 and 187.
As your Honours may have noticed, the style of preparing tax returns has become increasingly Delphic. At about line 22, your Honours will see a label H, a white letter in a square black block, “47, 726”, that is the rent excluding the GST by reason of section 17-5 that I mentioned to your Honours. At letter O at about line 43, the expenses of 50,928 are shown. At the very foot of the page, your Honours will see item 10: “Gross interest”, $423, the last number on the page. Then over on page 187, at line 20, “Capital gains”.
Now, if your Honours go back to page 176, your Honours will see that the capital gain returned as a “Profit on sale of assets”, was $58,454. One-half of that is $29,227. The reason why it is one-half is that it is a discount capital gain pursuant to Division 115 of the 1997 Act, that is to say, one-half of the capital gain is excluded from assessable income. So that is the amount which is included at label A at line 20 on page 187. Then at about line 32 “Tax losses deducted” from previous years $26,448 leaving a net income of zero for the year for tax purposes. Now, on assessment, your Honours, the Commissioner reduced the loss carried forward by an amount of $16,100 and your Honours will find that - - -
FRENCH CJ: That again represents this interest.
MR SLATER: Yes, it represents an amount attributable. It is not the same amount, but it is attributable to it, your Honour. Your Honours will find that at page 92 of the appeal book at about line 30. Your Honours will see in the second paragraph under the heading “Prior Year Losses”:
As a result of the adjustment made to the net income of the employer –
The word “employer” is used to mean the trustee company and I give your Honours a reference for that. That is page 90 of the appeal book, line 29 –
for the year ended 30 June 2001, losses carried forward of $16,100 are not available for recoupment by the employer in the year ended 30 June 2002.
That resulted in an assessment to the trustee under section 99A, which is reproduced at page 96 of the appeal book and also, I might tell your Honours, at page 206 of the appeal book. Now, the Commissioner’s reasons for making the assessment on the trustee were, in summary, these. The only amount included in the net income resulting from the disallowance of that part of the carry forward losses was the capital gain made by the trustee during the year and the Commissioner reasons that section 97 does not apply to the capital gain because it is not included in the net income of the trust estate so that it is not included in the amount to which any beneficiary is presently entitled as a share of the income of the trust estate. When your Honours look at the transcript my friend tells me that I have put the net in the wrong place. If I have, I apologise.
HAYNE J: Well, what is the proposition, Mr Slater? Can I just understand the proposition you want to advance? You say the Commissioner reasoned as follows, section 97 does not apply to the capital gains tax because?
MR SLATER: Because the amount of the capital gain, which was included in the net income of the trust estate, is not an amount which is included in the income of the trust estate to a share of which any beneficiary may be presently entitled. On the Commissioner’s view, because the amount revealed by disallowing the deduction was an amount of capital gain, it is not included in the income of the trust estate and there was no income of the trust estate to which any beneficiary could be presently entitled.
CRENNAN J: That is irrespective of how the amount is treated under the trust instrument?
MR SLATER: On the Commissioner’s view, yes, your Honour.
CRENNAN J: On the Commissioner’s view.
MR SLATER: I am trespassing on my friend’s ground by telling your Honours that is his case, but that is what we understand it to be. Your Honours, the expressions at issue in these appeals, the word “share” and the words “income of the trust estate”, in the context of the phrase “presently entitled to a share of the income of the trust estate” are, first, not defined anywhere in the Act and, second, susceptible to attribution of more than one meaning. On the submissions of both parties, which meaning should - - -
GUMMOW J: Could you just say that again, Mr Slater?
MR SLATER: Yes, your Honour. The word “share” and the words “income of the trust estate” in the context of the expression “presently entitled to a share of the income of the trust estate” in the opening words of subsection (1) are not defined and are susceptible to attribution of more than one meaning. It is the submission of each party that which meaning should be attributed to them is a matter of determining which meaning best carries into effect the legislative scheme rather than a matter of following or interpreting any particular authority or choosing between dictionary or statutory definitions. So that this is a case where the meaning of those words is to be ascertained less from the individual words than from the context in which they appear and, in particular, the legislative scheme as revealed by that context. For that reason, with the Court’s permission - - -
FRENCH CJ: The words are not a sort of Rorschach blot, are they?
MR SLATER: Not quite, your Honour.
FRENCH CJ: There are parameters of meaning.
MR SLATER: The parameters of meaning, in our submission, are fixed by the legislative scheme, which is not as clear as it could be.
CRENNAN J: You could add to what you have just put, I suspect, that neither of the meanings put forward necessarily achieves a just result in every conceivable circumstance.
MR SLATER: I think both parties would agree with that, your Honour. It is an inevitable consequence of the difference between net income on the one hand and what the Act calls income of the trust estate on the other. But there will be circumstances in which there is an amount upon which tax is imposed which is not either received by any beneficiary or held by the trustee. So somebody is going to have pay tax on a non-existent amount. The problem which has vexed courts and commentators for at least the last 20 to 30 years is who should bear that burden and how does one interpret the Act to achieve a construction of its provisions which makes consistent sense across all the circumstances which might arise under Division 6 and is consistent with what can be seen to be the scheme of the Act. Identifying the scheme of the Act is not a simple matter in itself.
If your Honours will indulge me, what I would propose to do is to take your Honours to the matter in this way; first take your Honours to the legislative history and what we see as the mischief which the legislation was addressing; second, take your Honours to what there is in the way of authority – there is no authority directly in point on this appeal and little that is indirectly in point – then go to some contextual considerations and, finally, to the alternative constructions which are advanced.
FRENCH CJ: It may be, I suppose, the scheme of the Act is at a level of generality that simply does not address the sorts of problems that have arisen in this appeal and they were problems that were not contemplated at the time these provisions were devised.
MR SLATER: Your Honours will see in our written submissions that we have made that suggestion having regard to the types of trusts which were prevalent at the time this legislation was first enacted. I was not proposing to revisit that material.
FRENCH CJ: No, but you do not necessarily offer a scheme that provides a clear answer.
MR SLATER: I would dearly love to, your Honour, but I am afraid I am not able to. If I can briefly go through the legislative history. As our friend’s submissions show, the State Acts imposed tax on the derivation of income by beneficiaries. Two examples of that are under tabs 32 and 33. I was not going to take your Honours to them but just tell your Honours where they are. Section 8 of the 1896 Victorian Act under tab 33 and section 15 of the 1895 New South Wales Act under tab 32 imposed a liability on beneficiaries on income derived.
Both Acts also included provisions which imposed an obligation on trustees to file returns and to pay tax. Your Honours will find those under tab 33 in section 12 and under tab 32 in the New South Wales Act, in section 18(iii) and section 19. In the written submissions of both parties there are references to problems which were encountered in administering the State Acts. They are mentioned in appendix B to our submissions in appeal S311 and in paragraph 49 of our friend’s submissions in appeal S310. Again I was not proposing to take your Honours to them orally unless there is some question I can answer on them.
The 1915 Commonwealth Act took the course of taxing both the beneficiary under section 14(c), which I took your Honours to earlier, and the trustee under section 26 as originally enacted and then rebating the tax payable by the trustee under section 26 to the extent of the proportion of the income distributed by the trustee, the underlying theory appearing to be that the proportion distributed was taxed to beneficiaries and so should be excluded from the amount on which the trustee was taxed.
Your Honours will see that in section 27(2). Your Honours, in appendix B to our written submissions we have set out the observations which were made in 1918 that this course attracted some resistance from the community because it had the consequence that all the income of the trust was aggregated for the purpose of fixing the rate of tax, and in consequence beneficiaries to whom income was not distributed were taxed effectively at a higher rate.
Your Honours will see a reference to that under tab 25 on page 4258 in the paragraph at the top of the right-hand column in the debate on the amending bill. I will not read that to your Honours, but I draw your Honours’ attention to that because the scheme of the 1918 amendments has not changed. So what is shown there is that the mischief to which the amendment was directed was this difficulty of the tax being imposed on the trustee at a higher rate.
FRENCH CJ: In the Conference of Commissioners there was a reference in the record to primary and secondary taxpayers and statement of the principle of primary and secondary taxpayers with regard to incomes from partnerships and trust estates be eliminated from income taxation. That is presumably what that is directed to, is that right?
MR SLATER: That appears to be so, your Honour, yes. That the trustee was primarily liable, the beneficiary secondarily and – I am not sure if that is what they had in mind as primary and secondary or not. But the consequence was that in 1918 there was an amendment, and your Honours will find the text of the amendment under tab 24, section 26. I take your Honours to this because this is the origin of the present scheme. So the opening words of section 26(1):
A trustee shall not be liable to pay tax as trustee –
now finds expression in section 96 of the Act. Then in the next line:
each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate –
and that now finds expression in the opening words of section 97(1) –
shall be assessed in his individual capacity in respect of –
(a) his individual interest –
and that now finds expression in section 97(1)(a) –
in the income of the trust estate, which if the trustee were liable to pay tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after allowing all the deductions under this Act, except the deduction under section nineteen –
The deduction under section 19 was the threshold deduction, the general exemption for individuals.
FRENCH CJ: So that element of paragraph (a) really is, if you like, the seed of net income.
MR SLATER: Yes, your Honour, which was the point I was about to make, thank you, your Honour.
HAYNE J: But interrupting the history at this point, can I just understand what may be discerned from it. Before the amendments of 1918 a trustee derived income, the trustee would be liable to pay tax on that income, the amount of taxation payable would be determined in the ordinary fashion.
MR SLATER: On the total income of the trust estate, yes, your Honour.
HAYNE J: Just so. The change made in 1918 - - -
MR SLATER: May I interrupt your Honour just to add a qualification to that because your Honour stopped slightly short. The trustee was liable to pay tax on the total income of the trust estate, but the liability was reduced proportionately to the proportion of the income which had been distributed to beneficiaries.
HAYNE J: But it was the trustee that was deriving income. The trustee was a taxpayer. There were rebates allowed.
MR SLATER: It was taxed on the retained income and the beneficiaries were taxed on the distributed income.
HAYNE J: The change made in 1918 is a change which, if you like, divides the burden. The burden falls in part upon beneficiaries presently entitled, calculated in a particular way.
MR SLATER: Yes, your Honour.
HAYNE J: They have not derived the income, but the burden falls upon them. The trustee picks up the balance, is that right, of the tax obligation?
MR SLATER: Yes, in two or more different manners. The trustee is taxed on the income to which a beneficiary under disability is presently entitled on behalf of that beneficiary and as to any amount to which nobody is presently entitled, the trustee is separately assessed.
HAYNE J: But taxation under both pre-1918 and post-1918 legislation is determined, generally speaking, in the ordinary fashion. By that I mean, income is derived, assessable income is calculated in a manner ordinarily calculated in accordance with the Act. Pre-1918 it was the trustee who would first be assessed subject to rebates, etcetera. Post-1918 beneficiaries presently entitled are assessed, are they not?
MR SLATER: Yes, your Honour.
HAYNE J: Assessed substantially in accordance with the ordinary manner of calculation of assessable income, is that right?
MR SLATER: It is, your Honour, although I am not sure that it would be fair to say that there is quite the change that I think your Honour has in mind between pre and post this amendment.
HAYNE J: Yes. There may not be much change in economic consequence.
MR SLATER: Or in the operation of the Act, your Honour.
HAYNE J: But there is not the assessment to the trustee at the highest rate because of the aggregation of - - -
MR SLATER: That certainly is correct, your Honour.
HAYNE J: Yes, and that was the economic consequence that was seen as a mischief to be dealt with in the 1918 legislation.
MR SLATER: Yes, your Honour.
HAYNE J: What I am grappling with, Mr Slater, is the premise that underpins the argument advanced, I suspect, by both sides that there is a sharp divide between net income as defined in section 95 and the expression in section 97:
so much of that share of the net income of the trust estate as is attributable –
et cetera. I just want to understand how that division comes about. You take us through the history. I just want to understand how this divide intrudes.
MR SLATER: How it improves?
HAYNE J: Intrudes.
MR SLATER: Intrudes, I am sorry, your Honour, yes.
HAYNE J: Emerges, if you prefer.
MR SLATER: Could I begin by taking your Honour back to the 1915 legislation under tab 23? I used the expression “rebate” as a convenient expression; the Act does not actually express it as a “rebate”. If your Honour goes to about the fifth page under tab 23. It is the page numbered 150 at the top. Section 27(2):
In the assessment of a trustee, there shall be deducted from the tax assessable to him so much of the total tax as bears to the total tax the proportion which that part (if any) of the whole income, which is distributed to the beneficiaries, bears to the whole income.
It is a deduction from tax. I have called it a “rebate”, perhaps it is not technically a “rebate”, but the other point that is material - - -
FRENCH CJ: That is on the basis that the beneficiaries were taxed under general provisions by - - -
MR SLATER: Yes, under section 14(c), which is on the second page under that tab. But the other difference between that provision and the 1918 provision is that that provision reduced the liability on the trustee by reference to what was distributed to the trustee. In 1918 the change was to what the beneficiary was presently entitled to, rather than what was distributed to the beneficiary.
HAYNE J: But when we look at the 1915 Act, are we to look at sections 26 and 27 as using the term “income” in both provisions in the sense in which the Tax Act uses the term?
MR SLATER: I believe so, your Honour, yes. I think that the words “Any person who derives income as a trustee” echo and correspond to the words at the beginning of section 14, for example, “The income of any person shall include”. So that the trustee was assessed as if the trustee were another individual liable under the scheme of the legislation. Does that answer your Honour’s question?
HAYNE J: Yes.
MR SLATER: Thank you. As we have said in our written submissions at the time trustees mostly, not entirely, derived income which was fairly readily recognisable as detached income.
FRENCH CJ: Incidentally, would the beneficial interests under 14(c) include a present entitlement?
MR SLATER: My understanding, your Honour, is that it was not treated as doing so. Such impression as I have gained from reading contemporary reports and discussions suggests that those provisions were treated as assessing what came in.
FRENCH CJ: Actual money?
MR SLATER: Actual money.
CRENNAN J: What was distributed.
MR SLATER: Yes. I cannot take your Honour to anything which says as much, and the point does not appear to have been litigated as such. There was some litigation about the case of a trustee who was non-resident.
HAYNE J: And it would turn on derivation, would it not – an income derived under the will?
MR SLATER: Yes. At that time the view was that what was derived was what came in.
HAYNE J: Just so.
MR SLATER: I was taking your Honours to the scheme of section 26. If I could briefly point out to your Honours that subsection (2) provided for separate assessment of the trustee. Paragraph (a) corresponded to what is now found in section 98; paragraph (b) corresponded to what is now found in section 99 and subsection (3) corresponds to what is now found in section 100. Your Honours, the 1915/1918 Act was re-enacted by a consolidating statute in 1922. That is reproduced under tab 26 of the materials. The section in question was section 31 and it was in the same language as section 26 as enacted in 1918.
Your Honours, there are two other things which might be said about this legislative scheme. One is that there appears to be an underlying assumption or policy that all of the income derived by a trustee should be taxed. By subsection (1) in respect of income to which a beneficiary is presently entitled who is not under a disability; by subsection (2)(a) in respect of the income to which a disabled beneficiary is presently entitled; and under subsection (2)(b) in respect of the income which did not fall into either of those categories. There was perhaps an overlap between subsection (1) and what was section 14(c) of the 1915/1918 Act. We do not have reproduced the equivalent provision for the 1922 Act.
FRENCH CJ: They were meant to be a kind of income jigsaw.
MR SLATER: Yes. Although there was apparently an overlap the income was not taxed twice. The second underlying assumption or policy of the legislation appears to be this, that the burden of liability to tax is cast on the person holding or entitled to the income, so that if a beneficiary is presently entitled to and can demand or receives the income the beneficiary pays tax, otherwise the trustee pays tax. In the written submissions we have advanced the argument that this assumption was a reasonable one to make at the time the legislation was enacted because of the types of trust estates which were then ordinarily encountered and the circumstance that ordinarily income was identifiable as being detached from the corpus and available to be paid to or applied for beneficiaries.
HEYDON J: This is paragraph 19 of your written submissions.
MR SLATER: Yes, I believe so, your Honour, paragraphs 18 and 19. Your Honours, the concern to match entitlement to income with a liability to tax was in our submission also manifest in an amendment which was made in 1930. Your Honours will find the amendment made under tab 27 in the bundle of materials. It is section 17 at about point 4 on the page. Section 31 was amended by inserting a qualification limiting deductions in this way:
where the beneficiary has no beneficial interest in the corpus of the estate, except the deduction under section twenty-six in respect of any loss which is required to be met out of the corpus.
The purpose of that was that losses which had been met from corpus were not available to be deducted from the income upon which the life tenant was assessed.
MR SLATER: Your Honours will find an explicit explanation of that in a rather poorly reproduced excerpt from the explanatory memorandum under tab 34 of the second and smaller bundle of materials. Clause 16, which is referred to at about point five on page 61 of the excerpt there, was enacted as section 17 of the 1930 Act. I will not read that to your Honours. Your Honours, at about the time of that amendment and in the following years there was a movement for development of a uniform State and Commonwealth set of income tax acts – this, of course, was before the 1942 change – and to that end a royal commission was instituted and a report which is referred to as the Ferguson Committee Report was provided. That resulted in the enactment of the 1936 Act and the recasting of the language in section 31 in the form, substantially in that in which it now appears, as it was enacted in 1936. Your Honours will find the language under tab 28. It was then free of additions referring to non-assessable non-exempt income and the elaborate provisions concerning non-resident beneficiaries and non-resident trustees.
HAYNE J: Just before you proceed further with the history sparked by what appears under tab 34 in reference to clause 16 of what became the 1930 amendment, the supposition which seems to underpin what appears particularly at the second sheet of that tab on page 62 where reference is made to a case where:
the life tenant escapes tax, although actually in receipt of income from the estate.
The supposition seems to be that what was, I think, 16(c) of the 1922 Act, which is that the assessable income of any person shall include (c):
beneficial interests in income derived under any will, settlement, deed of gift or instrument of trust –
would not have picked up that receipt and that taxation was to be determined by reference only to the combination of what is found in section 31, is that right?
MR SLATER: That appears to be correct, your Honour, yes. That was the assumption which the draftsman seems fairly clearly to make or the author of the explanatory memorandum seems fairly clearly to make and it is echoed in the drafting.
HAYNE J: Yet it is to be noted that section 31 of the 1922 Act, subsection (1)(b) and (c) do provide a degree of overlap with other derivation provisions in the Act, that is, 31(1)(a) deals with “individual interest in the income of the trust estate”, but (b) and (c) go on to say and, by the way, that individual is also to pay tax on other income derived separately and “individual interests in the income derived from any other source.”
MR SLATER: Yes.
HAYNE J: One wonders why 31(1)(a) was then treated as the exclusive repository of the legislation, in effect, to the exclusion of, what is it, 22(1)(c).
MR SLATER: The legislative scheme was this, your Honour. In the 1920 Act, as in the 1936 Act, taxable income was made up of two integers, assessable income and allowable deductions. Into assessable income, although it is not put in those terms in section 31 as it was in the 1936 Act, but into assessable income was brought the amount which it is said in section 31, the beneficiary shall be assessed in respect of. So that amount was brought into the beneficiary’s assessable income by section 31(1)(a). In addition, his wages were brought in by section 16 and so on and so forth. The total amount became his assessable income and from that he was allowed deductions. Paragraphs (b) and (c) appear to be saying, perhaps, by way of avoiding any doubt, that this is not to be assessed independently of and at a lower rate than the income from other sources. I cannot say with assurance that that was the legislative scheme, but that appears to be the structure.
Your Honours, going back to the 1936 amendments, the main concern which had been expressed in submissions to the Ferguson Committee was with the operation of section 31(2), the language of which had given rise to some difficulty. It is illustrated by the deliberations of this Court in Howey v the Federal Commissioner of Taxation [1930] HCA 45; (1930) 44 CLR 289, to which I will not take your Honours because it turns very largely on matters of grammar and expression.
Also a matter of concern was the taxation of income accruing to infant beneficiaries. Otherwise, the main concern of the Committee was to secure a uniform Act largely based on the Commonwealth model. The effect of the redrafting was that infant beneficiaries were dealt with now in a separate section, in section 98, and beneficiaries who were not under a disability and were presently entitled were dealt with in section 97. Present entitlement was brought in - I am sorry, I withdraw that.
FRENCH CJ: Present entitlement was already there.
MR SLATER: It was in the 1918 amendment; my apologies. There was, in the 1936 Act, a special provision dealing with exempt income, because the derivation of exempt income absorbed losses of past years, which were set off against exempt income after being set off against assessable income. That reduced the balance which was available to be carried forward into a following year. When one compares the language of section 31(1) with the language of section 97(1) and (2) as first introduced, one sees that in section 31 a beneficiary:
who is presently entitled to a share of the income of the trust estate shall be assessed in his individual capacity in respect of –
(a) his individual interest in the income of the trust estate –
that being the income which would have been taxed if the trustee were an individual. In section 97 the Act subdivides and expressly deals with the exempt income, so that where any beneficiary is presently:
entitled to a share of the income of a trust estate –
(a) the assessable income . . . shall include –
- (i) . . . that share of the net income of the trust estate –
That is the origin of the words “that share” which are causing us difficulty in the individual taxpayer’s appeal. In subsection (2) it goes on to say the exempt income of the beneficiary shall include his individual interest in the exempt income and that echoes the words “individual interest in the income of the trust estate”. It is carried forward from the opening words of section 31(1)(a). Your Honours, in support of our submission, which I will come to shortly - - -
GUMMOW J: Can we just look at the structure of the 1936 Act as it was laid out quite simply really under tab - - -
MR SLATER: Tab 28, your Honour, was the original version.
GUMMOW J: Yes. The controlling provision was 96, was it not?
MR SLATER: That was the proposition which Justice Hayne put to me earlier. It is so far as the trustee is concerned but not so far as the beneficiaries are concerned and Division 6 deals with both trustee and beneficiaries, so controlling provision as far as beneficiaries are concerned with sections 97 and 98. But yes, in relation to trustees, I agree.
GUMMOW J: In terms of liability, the controlling provision is 96:
Except as provided in this Act, a trustee shall not be liable –
and then 97 tells you how the beneficiary is measured. Then 98 and 99 are special cases where the trustee – it does come back to the trustee. Does that not throw light on the width of 97?
MR SLATER: It does in this respect, your Honour.
GUMMOW J: Section 97 is an exception to 96.
MR SLATER: It is more an exception to section 99, your Honour.
GUMMOW J: Yes, I am sorry. Yes, that is right.
MR SLATER: Section 96 says not except as in this division. So that excludes the rest of the Act as far as the trustee is concerned.
FRENCH CJ: But 97 just plugs the beneficiary into the general provisions of the Act. It just brings in what is to be counted as part of the beneficiary’s assessable income which might be from a variety of sources.
MR SLATER: Yes. So, so far as the beneficiary is concerned, 97(1) is the primary provision for assessment. So far as the trustee is concerned, the trustee is made liable to tax on the income of the trust estate, save so far - - -
GUMMOW J: What would be the perceived mischief that 96 was meant to be directed to?
MR SLATER: Well, that is why I expressed reservations about your Honours saying that it is the controlling provision. It seems to us that it is integral to a scheme which is found in the four provisions, 96, 97, 98 and 99, and supplemented by the further provisions which are not reproduced in this excerpt, in 100, 101 and 102.
GUMMOW J: The sections after 96 tell you what is contained by the phrase “Except as provided in this Act” in 96.
MR SLATER: Indeed, and it is an exception which is almost entire in the sense that everything received by the trustee is taxed under section 99 except to the extent that there is a beneficiary who is not under disability and who is presently entitled under section 97(1) or there is a beneficiary who is under disability and is presently entitled under section 98. If you take those two out, everything that is left, and that is what the opening words of section 99 say, everything that is left is taxed to the trustee. It is a scheme which imposes tax on the trustee under section 99 save so far as 97 and 98 exclude an amount and otherwise the trustee is not liable.
FRENCH CJ: The scheme is explained, albeit at a certain level of generality, is it not, by the report of the royal commission in the section headed “Trustees and Beneficiaries”?
MR SLATER: Yes.
FRENCH CJ: But nothing in there really drills down to the level of constructional detail with which we are faced here.
MR SLATER: No, it does not, your Honour. The relevant portions of the Ferguson Committee Report are not in the materials which have been provided to the Court. If it is of assistance to your Honours, I will have a copy made over lunch time and provided.
FRENCH CJ: There is nothing in it that helps you so far as you are concerned?
MR SLATER: I do not think there is anything in it that helps either party, your Honour.
GUMMOW J: It might help us though.
MR SLATER: I am respectfully not even sure of that, your Honour.
HAYNE J: Can I stay with the 1936 Act?
MR SLATER: Yes, your Honour.
HAYNE J: First, the provisions of Division 6 have to be understood against a background formed by the general provisions of the Act concerning liability to pay tax, do they not?
MR SLATER: Yes, your Honour.
HAYNE J: Section 96 can be understood as in part dealing with the fact that under other more general provisions of the Act it might readily be concluded that a trustee would be liable to pay income tax upon the income of the trust estate, is that right?
MR SLATER: Provisions like section 44, dealing with dividends or - - -
HAYNE J: Yes. Second, when looking at 97(1) as originally enacted, what does the expression “that share of the net income”, appearing in the second-last line of subsection (1), refer to? What is “that”?
MR SLATER: Syntactically, your Honour, it must be a reference back to “presently entitled to a share”, the penultimate word in the first line.
HAYNE J: Thus, when we come to the form of the Act with which are presently concerned which has “that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident”, are we to read “that share” in the same way, that is, as a reference back, or are we to read it as a reference forward to “as is attributable to a period”?
MR SLATER: Without the historical background, one could perhaps read it either way, but given the historical background and the manner in which the 1979 amendments came about, in our submission and we respectfully think it is reasonably clear that - - -
HAYNE J: You read it back.
MR SLATER: You read it back. So it is not “the share
which”, but rather “that share” referring back to a share to
which someone is presently entitled.
HAYNE J: Just again, if I
may delay you a moment on the 1936 Act as originally enacted. In
line 2 of 97(1), the expression “the income
of a trust estate”,
is the word “income” there used as a term of taxation law or as a
term whose content is to
be derived from the law of trusts?
MR SLATER: That is the question which is the essence of the appeal, the Commissioner’s appeal - - -
HAYNE J: I understand that, Mr Slater, but what do you say, why should one not read “income” in that collocation of words as a term of taxation law, a statutory term?
MR SLATER: Our submission, in essence, your Honour, is this – that the expression “presently entitled to a share of the income of the trust estate” defines a measure which is to be applied to the net income of the trust estate, to determine how much is assessable, and that it is a coherent or a single expression, not one which is broken up into simply a sequence of words. So it is to be read as a whole, and in that context, it is a reference to that which is the subject of present entitlement at trust law.
FRENCH CJ: That yields an amount. You say “presently entitled to a share of the income of a trust estate”, that yields a figure.
MR SLATER: It yields in actual operation, yes, your Honour. The ultimate consequence is that it yields a figure, but for the purpose of “share”, we say that it connotes the entitlement of the beneficiary under the terms of the trust, whatever that entitlement may be.
FRENCH CJ: So the words “that share of the net income of the trust estate”, are they to be read simply as that amount?
MR SLATER: In our submission, no, your Honour. They are to be read as that interest in the income of the trust estate, applied to something which is necessarily different, the net income of the trust estate. That is the essential point in our appeal that is the individual’s appeal in the other appeal. So we say that the amount is the ultimate consequence of working out the interest, but it is not in itself the share.
HAYNE J: Is a possible point of view about the meaning of 97(1) that the phrase “a share of the income of the trust estate” is a reference back to present entitlement in respect of an amount that is picked up in lines 2 and 3 of 95 by the references to “total assessable income” and “in respect of that income” and that the apportioning that is then to be done under 97(1) takes account of the deductions that are dealt with in 95(a) and (b)? Present entitlement is directing attention to present entitlement to, not necessarily the whole of, it may only be a part of, “presently entitled to a share of” what items that together go into the computation of the “total assessable income”.
MR SLATER: The answer to your Honour’s question in the first place is, is it possible? Yes, it is possible. Is it preferable? In our submission, not. Third, what your Honour has put is, in essence, the alternative view which finds expression in our friend’s submissions. In the written submissions we have contested the possibility of that alternative view being taken up. We did so on the basis of the written submissions as we had them at the time that we put in our submissions. Since then we have had the benefit of our friend’s reply and there is a view which might be taken which would make sense of that proposition. If I may, I would prefer to address that slightly more fully later.
HAYNE J: Of course.
MR SLATER: But the reason why we opposed it as a potential candidate for adoption is the reason which has been drawn attention to in various places but perhaps most cogently by the Full Court in Commissioner of Taxation v Pilnara Pty Ltd [1999] FCA 1805; (1995) 96 FCR 82, but I will come back to it, your Honour. The point which was put by the court there was there are amounts which are included in assessable income which are incapable of being the subject of present entitlement and two examples were given. One was given by Justice Hill in Davis and the other was given by the court Pilnara.
One is the case where there is included in assessable income the market value of an asset rather than what is received, so there is an amount included in assessable income which simply does not exist. The other is the amounts which are included in assessable income as what the Act calls attributable income, being amounts on which a taxpayer is taxed as if he were entitled to them, although he is not, referable to the income derived by companies in other countries. Because of those amounts, it seemed to us that it was impossible to say that anyone is presently entitled to those amounts so that when the Act says “presently entitled to a share of the income”, it entails a concept which cannot embrace the idea of assessable income as brought in under section 95. If I might come back to that at a later point.
GUMMOW J: What is the assumption in all of that as to the phrase “presently entitled”? What is meant to be conveyed by the notion of present entitlement?
MR SLATER: As this Court has construed it in a series of cases summarised in the judgment of the Full Court in - - -
GUMMOW J: Just tell me what it is; do not worry about cases.
MR SLATER: All right, it is this. A beneficiary is presently entitled to an amount which the beneficiary can call upon the trustee to have immediately paid to him. That is the essence of what was said as the uncontested law in Harmer v Commissioner - - -
GUMMOW J: What of the situation of a trustee that can impound this?
MR SLATER: If the trustee can impound the amount - - -
GUMMOW J: Because of some offsetting a liability?
MR SLATER: Then the beneficiary is not presently entitled, although there is some debate in the authorities about the distinction between being presently entitled to an asset held by the trustee on the one hand and presently entitled to receive a distribution of income, on the other.
GUMMOW J: Really when you talk about “present entitlement” you are talking to a process of accounting, are you not? I am not sure that is fully appreciated in all these cases. They seem to think there is some sort of debtor and creditor relationship going on. It is not quite as simple as that.
MR SLATER: I think the position is, your Honour, that at the time when all of this legislation was drafted nobody thought that there was such a distinction. Income was readily seen as being the interest which had come into the trustee’s hands, so that the money and the income were the same thing. As recently as the 1960s Sir Victor Windeyer talked in terms of the income of a trust being that which was in the bag of sovereigns.
GUMMOW J: That which was what?
MR SLATER: In the bag of sovereigns.
GUMMOW J: I am not sure that has ever been so.
MR SLATER: I cannot recall exactly where his Honour said that, but it is a simile which has stuck in my mind. What your Honour says is correct and it becomes more apparent as one ventures into the area where a trustee is carrying on a business so that certainly the gross income is subject to a charge, which the trustee can impose in order to meet expenses but whether - - -
GUMMOW J: You are quite right and there have been trading trusts long before there were corporations, actually.
MR SLATER: Yes, your Honour.
GUMMOW J: So this notion of present entitlement had all that baggage with it, even in 1936.
MR SLATER: Even in 1918, your Honour, yes.
GUMMOW J: Yes, that is right.
MR SLATER: But at that time it was - - -
GUMMOW J: They had it in 1818, actually.
MR SLATER: It was still relatively rare and even then, your Honour, where a trustee carried on a business, for example, as an executor, the course of authority was to the effect that the beneficiaries could only call upon the trustee to pay that income which was readily detached from the corpus, so that this notion of income as being represented by a discrete asset still seemed to be present. That appears to have informed the drafting, in the same way as the drafting of a 1930 amendment was informed by a notion that income, which had been charged, or losses which had been charged to corpus, might not need to be made up.
GUMMOW J: The reason why I am putting this to you is that I think on your side there may be some perhaps oversimplified view of what is involved in a trust situation. It is really quite complex. That consideration of complexity on the trust side of things may suggest the wisdom of construing these provisions if you talk about income in an income tax situation, which is complex too but at least it is rooted in this Act.
MR SLATER: Yes, your Honour, except that, as I said, assessable income is - - -
GUMMOW J: Bags of sovereigns are not going to help, I can tell you.
MR SLATER: No. They never really did, your Honour.
GUMMOW J: No.
HAYNE J: I do not know. It depended who owned them.
MR SLATER: Part of the problem, your Honour, as we have argued before, is that trust law worked pretty much on a single entry accounting basis and businesses work on a double entry accounting basis and the two concepts do not mesh readily. I had reached 1936. I was hoping to get a little past that. Can I do so at a gallop. Section 99A was introduced in 1964. That is under tabs 29 and 30. I do not think I need trouble your Honours with that because the introduction does not really bear on the issue before your Honours.
In 1979 there were some extensive amendments concerning foreign source income and non-resident beneficiaries. They produced that grammatical issue which your Honour Justice Hayne referred me to. Those were largely a result of the decision of this Court in Union Fidelity Trustee Company of Australia v The Commissioner of Taxation [1969] HCA 36; (1969) 119 CLR 177. I will not take your Honours to that immediately but simply point out that that is the origin of those provisions. In 1992 there were further extensive amendments which dealt with controlled non-resident trusts. They were part of the legislative scheme for taxing foreign income held in foreign controlled entities on an accruals basis. Again those provisions do not bear upon the issues which trouble your Honours in these appeals.
Your Honours, to the issues which do trouble the Court in these appeals, there is no authority in this Court which is directly relevant. There are five decisions which are indirectly relevant and they are to be found in the bundle of authorities which were sent up to your Honours.
GUMMOW J: Before you get to that, do we need to look at or know what the importance is of Division 6D dealing with closely held trusts? Section 97 is subject to Division 6D.
MR SLATER: No, your Honours. That is to do with ultimate beneficiary non-disclosure issues. It does not trouble your Honours in this context. Nor are your Honours concerned with Divisions 6A, 6B, 6C or 6D.
GUMMOW J: I am just pointing out that section 97(1) has as its opening words, “Subject to Division 6D”. You are inviting us to construe section 97 but to ignore the opening words. You may be right. Anyhow, do not stay now.
HAYNE J: While you are contemplating that, it might also be convenient at some later point to explain what, if any, significance attaches to the note to section 97(1), and:
If the trust estate’s net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 also affects the assessment.
Now, at some point - - -
MR SLATER: We do have something to say about Division 115. Both we do and our friends do, and if I may, I will come back to that.
HAYNE J: Of course.
MR SLATER: Division 6D comprises sections 102UA to 102UV and it is concerned with imposing tax in respect of what I called ultimate beneficiaries. The background to this, if I can very briefly take your Honours to it, is that the effect of section 97 is the trustee does not pay tax on income to which a beneficiary is presently entitled. If the beneficiary presently entitled is in turn the trustee of another trust, then that beneficiary qua trustee does not pay because Division 6 applies to it in turn. If the beneficiary in that second trust is a beneficiary in a third trust, and the beneficiary in the third trust is a beneficiary in a fourth trust there is no liability to tax until you reach a beneficiary who is not a trustee, and the reason for these provisions was that the revenue found that on occasion the chain of trust entitlements was too deep and too obscure for it to follow, so these provisions impose an obligation to disclose who the ultimate beneficiary is so the Commissioner may tax it, and if there is no such disclosure then a separate regime of taxation is imposed. But it does not bear upon the construction of the language with which your Honours are concerned. Does that potted summary answer your Honour’s question?
GUMMOW J: I hear what you say, yes.
MR SLATER: Your Honours, as I said, there are five authorities which are indirectly relevant. There are two Full Court of the Federal Court decisions which are indirectly relevant. Although none of the decisions are directly in point, they do provide some context for consideration of the issues and if it is convenient to the Court I will very briefly take your Honours to them before moving on to the argument.
The first of those cases is on the 1922 Act. It is referred to as Pearson’s Case, Executor Trustee and Agency Co of South Australia v The Federal Commissioner of Taxation [1932] HCA 25; (1932) 48 CLR 26. I do not propose to read any part of it to your Honours, but just briefly to summarise it. The facts were that the trustee of an estate received a lease premium and the premium was obtained with the authority of an order of the Supreme Court. The Supreme Court directed that the premium be distributed over the term of the lease among the beneficiaries as if it were rent in advance.
Under the Assessment Act, the premium was taxable in the year of receipt. In the events which happened, half of the estate was subject to life tenancies and the other half was vested in remainderman. The court held that the remainderman fell within the equivalent of what is now section 97(1)(a) – that is, the remainderman was presently entitled to half the income of the trust estate and in consequence the trustee company was not taxed on that half of the net income, which was calculated by reason of the inclusion of the capital premium in assessable income. Of the other half, the life tenants were presently entitled only to that part of the premium which was referable to the period between receipt and the end of the year of income. The balance, which was referable to later years of income, was held to be income to which no beneficiary was presently entitled and so was taxed under section 31(2).
I do not need to take your Honours to any particular passage. Much of the judgments and the argument turned on the construction of the particular wording of section 31. What is relevant about it is that the premium was not income according to ordinary concepts, and there is some discussion of that, particularly in the judgment of Sir Owen Dixon. But it was assessable by force of section 16(d) of the 1922 Act and, in consequence, it fell within the words in paragraph (a) of section 31(1) which equate to what is now the net income. In that context, the Court held that the premium amount was income to a share in which the remainder beneficiaries were presently entitled. It is a decision on a different Act and somewhat different wording, but the underlying principle seems to be that that which the beneficiaries were entitled to receive was what the words “presently entitled to the income of the trust estate” or to a share in the income of the trust estate were directed.
Your Honours, the next decision which is indirectly relevant is that of this Court in Federal Commissioner of Taxation v Whiting [1943] HCA 45; (1943) 68 CLR 199 and it is under tab 5 of the bundle.
HAYNE J: Just before you part from Pearson’s Case, I notice that Mr Justice Dixon, at pages 43 to 44 of 48 CLR, pays particular attention to whether the reading of the Act advanced would lead to double taxation in concluding that the provisions are to be read in a fashion that lead to taxation of the receipt once.
MR SLATER: Yes. In particular about point 1, point 2 on page 44.
HAYNE J: Yes. I interrupted you. You were taking us to?
MR SLATER: I was taking your Honours to Whiting’s Case. If I could summarise the facts of that, and I appreciate that I am doing this in a very truncated fashion. Whiting’s Case concerned a testamentary estate which was still in administration. The will provided for both annuities and life tenancies. The issue was whether the trustees were assessable under section 99, or the beneficiaries were assessable under section 97, was held in the circumstances that the trustees were liable. The decision is primarily concerned with the meaning of “present entitlement” and the Court concluded that it meant present right to demand payment.
FRENCH CJ: That depended upon the capacity to ascertain it, in this case, did it not?
MR SLATER: Yes. Because the estate was still under administration, no amount could be ascertained which the beneficiaries could call for and therefore they were not presently entitled. But if I could take your Honours to what is said at pages 214 to 215 of the report only because it may offer some guidance to the present issues. In the paragraph first beginning on page 214, the Chief Justice and Justice Williams in a joint judgment said:
The question to be determined upon this appeal is whether the Commissioner was right in assessing the executors under s. 99 . . . The answer to the question depends upon whether the beneficiaries during the year of income were presently entitled to the income –
Then their Honours refer to sections 96, 97 and 98 in each of the three succeeding paragraphs. They refer to the view taken by Justice Rich at first instance that present entitlement referred to a presently vested interest in possession and to the opposing contention – this is at the top of page 215:
that a beneficiary is presently entitled . . . only when he is entitled to immediate payment . . . This latter view is, we think, strongly supported by the provisions contained in s 98 . . . This provision, therefore, supports the view that when the Act speaks of a beneficiary being presently entitled to a share in income, it refers to the right of a beneficiary to obtain immediate payment, rather than to the fact that a beneficiary has a vested interest.
It is the balance of the page that may be of some assistance to your Honours. In the next paragraph they deal with section 101. Then in the paragraph after that:
In some cases no doubt, and they would include the present case, it will create a hardship for the beneficiaries that the whole income of the estate should be aggregated for the purposes of taxation, but in other cases where the beneficiaries have a substantial income from independent sources it might be a benefit for them . . . The main assumption underlying the Act would appear to be that the person who derives the income should be in a position to pay the tax out of the income.
That is an observation, it is not ratio, but we think it is a significant observation:
Any other construction of the Act would place beneficiaries in a difficult position. For instance, an annuity is payable from the date of death, so that, if all that is necessary to attract the provisions of s. 97 is that a beneficiary should be entitled to a vested interest in possession, Major Walker should have returned his annuity of £500 per annum as part of his income from property from the date of the testator’s death, although he has never been paid and may never be paid any part of it; and although, if he is paid anything eventually, it may be in the shape of a general pecuniary legacy and not of an annuity.
Then at the foot of the page and over onto the next page:
The words “presently entitled to a share of the income” refer to a right to income “presently” existing – i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee –
Then the next paragraph:
A beneficiary who has a vested right to income (as in this case) but who may never receive any payment by reason of such right, is entitled to income, but cannot be said to be “presently entitled” as distinct from merely “entitled”.
That is the passage I wanted to take your Honours to. One thing which emerges perhaps in that passage is that it is difficult to fit the concepts which the Chief Justice and Justice Williams were talking about there to the ideas which are embodied in assessable income as they contribute to the notion of net income in section 95, because while some of them were things like interest, dividends or rent clearly can be the subject of present entitlement, others are mere matters of calculation or are notional, and it is difficult to see how one can say that they are the subject of present entitlement. Their Honours seemed to be having in mind, although it is clear that no other possibility was put to them, that present entitlement refers to income in a trust law sense, rather than in a tax law sense.
GUMMOW J: On the other hand, Justice Rich at page 206 - - -
MR SLATER: I am sorry, your Honour, I did not refer to the other Judges of the Court. I should have done so.
GUMMOW J: Although he was overruled, but Justice Rich at 206 makes the point that it is all very well to talk about entitlement in the way the majority were going to talk about it, but at the instant of time when an executorship becomes a trusteeship is itself a very difficult question. Whichever interpretation was going to be applied, there were going to be practical, factual difficulties, I would have thought.
MR SLATER: Yes, although your Honour, the scheme of Division 6 which turns on including an assessable income, an amount, a share to which somebody is presently entitled, which must result in amount which can be put into assessable income, is only capable of sensible operation if the share is determined at the end of the year of income, because it is only then that you will know what both the income and net income of the trust estate are, and that may have the consequence of overcoming much, if not all, of the difficulty your Honour Justice Gummow identifies.
I did not mention to your Honours, and I should have, that Justice Starke agreed at about point 2 on page 219, but I will not read to your Honours that passage because I do not think anything in it particularly bears upon the resolution of the present appeals. The next decision of the Court which was - - -
GUMMOW J: This is before Livingston’s Case as well?
MR SLATER: Yes, your Honour, and what is said must be read in the light of that, and in the light of what your Honours said in CPT Custodian v Commissioner of State Revenue. The next case I was going to take your Honours to is Tindal v The Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608, and your Honours will find a copy of it under tab 7 in the folder.
The facts in brief were these. The taxpayer was a widow. She was a life tenant in her husband’s estate. The assets of the estate included a share in a pastoral partnership. There was a Howe v Lord Dartmouth order made, the effect of which was that there was to be an annual payment to her of 4.5 per cent of the capital value. The decision of the Supreme Court is in [1933] NSWStRp 59; 34 SR (NSW) 8, and it was regarded at the time as a leading decision because it adopted a higher percentage than had been common over the preceding century or so.
FRENCH CJ: This was really all about whether she should be assessed on an accruals basis or otherwise, was it not?
MR SLATER: Yes. What had happened, your Honour, was that in earlier years, there had been insufficient income or cash to pay her the entitlement under that order. She was entitled to be paid that 4.5 per cent if the income of the partnership was insufficient to provide for payment to her of an appropriate return. In earlier years, the income had been insufficient and she had been paid less than she was entitled to under the order of the court. In the tax year, that is, in the year which was the subject of the contest, she received more than the 4.5 per cent, and the payment to her was not allocated either to income or to corpus or to arrears. Also in that year of income, the trust income was larger than the amount which was paid to her.
What the Court held was that the 4.5 per cent annuity which was awarded to her under the Howe v Lord Dartmouth order was income derived on receipt regardless of the fund out of which the trustee paid it. Your Honours will see that – I will not take your Honours to it – at pages 624 to 625 in the judgment of Justice Starke, and page 632 in the judgment of Justice Williams. The argument which was advanced for the taxpayer was that she should not have been assessed in the year in which she received the money, but in the year to which she became entitled to it under section 97.
That was an endeavour to leverage section 97, not simply as an assessing provision but as a relieving provision. The Court held that section 97 did not go so far – Justices Rich and Starke so held – and Justice Dixon and Chief Justice Latham held that the taxpayer had not made out the factual basis for her case. What is potentially of use to your Honours in the present appeals are some observations made by the Chief Justice at pages 618 and 620. If I could take your Honours briefly to those. At page 618 in the penultimate paragraph on the page at about point 7, point 8 - - -
HEYDON J: Does it matter that he was dissenting?
MR SLATER: I do not think so, your Honour, not on this point, and whether he was dissenting is something of a moot point. He found that the taxpayer had not made out the case that she relied upon. So that the order that he would have made on page 622 was that the question should be answered by saying that the annuity amount is included in the assessable income but that the facts in a case do not show whether or not any further part should be included. Sir Owen Dixon made a differently expressed but similar finding. Justices Rich and Starke simply decided against the taxpayer. I was taking your Honours to what was said at page 618. His Honour the Chief Justice said:
As to the first question I am of opinion that, when s 97 applies, the result is that the assessable income of a beneficiary does include his share of the net income of the trust estate, whether or not that income is paid to him. Otherwise the section would produce no effect in relation to assessment or payment of tax. Sections 95-99 are designed, in my opinion, to secure payment of tax upon the whole of the net income of a trust estate, either from a beneficiary or the trustee, whether or not that income is paid over to or on account of the beneficiary.
Then he refers to the definition in section 95 and goes on in the last line of the page:
Subsequent sections, in my opinion, provide for the exaction of tax in respect of that net income where beneficiaries are presently entitled to it and where they are not so entitled—i.e., in all cases.
I think there is no contest between our friends and us that that is the scheme of the legislation and it is more or less the scheme which I was endeavouring to put to your Honour Justice Gummow earlier. The other passage which is relevant is on page 620. Perhaps I should begin in the paragraph first beginning on the page:
Thus, in my opinion, if the taxpayer in the present case was presently entitled to £1,844 as income of the trust estate in the years preceding 1940 (in which she was actually paid smaller sums by the trustee) the sum of £1,844 should have been included in her assessable income in each of those years, although that sum was not paid to her. The result of this view is that the excess of £2,858 over £1,844, namely £1,014, which she received in 1940, should (if it existed so that she could have a present right to it as income) have been returned by her as income in some one or more of the previous years, but not in 1940.
That is a view which I think did not find support with the rest of the Court:
The next question is whether the facts stated bring this case within s 97 . . . The condition of the operation of s 97 is that the beneficiary should be presently entitled to a share of the income of the trust estate and not be under any legal disability. If this condition is satisfied, the result is that there is to be included in the assessable income “that share of the net income of the trust estate”, a phrase which must mean the share of the “net income” to which the beneficiary is presently entitled, although the opening words of the section are “a share of the income”, not of “the net income”.
His Honour there was making an observation which is not inconsistent with what your Honour Justice Hayne put to me, but it is a comment which has not found support from any other member of the Court since. I do not think I need to take your Honours to any other part of that judgment.
GUMMOW J: Sir Owen Dixon was mindful of the importance of sections 17 and 19 and the notion of derivation, was he not? It may be one thing to treat the trustee as having derived income by applying section 19. To what extent does one carry over those notions of derivation by analogy to this concept of present entitlement when you are looking at the beneficiary vis-à-vis the trustee?
MR SLATER: Sir Owen Dixon’s judgment was given in the context that it was not apparent from the materials before the Court whether the amount which was paid to the taxpayer as arrears under the order was paid to her out of income or out of corpus or out of some arrears of income received by the trustee or what its source was. In that context his Honour concluded that it was an annuity paid to her by force of the order of the Court and it just fell into her hands as an annuity from an undetermined source. That appears to be the burden of his Honour’s reasoning in the bottom third of page 632.
HAYNE J: That is Justice Williams.
MR SLATER: I am sorry, your Honour.
HAYNE J: What are we to make of 628 in the middle of the page: “In the present case”?
MR SLATER: It seems to us, your Honour, that that is making the same point. The context in which these observations are made is that the taxpayer was relying almost entirely on the proposition that section 97 relieved her of liability to tax because she should have been taxed in an earlier year and should not be taxed twice. The Court said that the proposition that she should have been taxed in an earlier year was not made out so she fell to be taxed simply on the basis that she had received an annuity under the order of the Court.
HAYNE J: Are we to begin consideration of the way in which Division 6 operates from the premise that if there is net income of a trust estate as calculated in accordance with section 95, the subsequent sections allocate liability for payment of tax on that amount as between trustee and beneficiaries?
MR SLATER: In our submission, yes, your Honour. There was an ambiguity about the relationship between Division 6 and the provision which began as section 14(c) of the 1915 Act and became section 26(b) of the 1936 Act. We have said that a taxpayer was liable on the beneficial interest in the income of a trust estate. That ambiguity was brought to the fore, if I may put it that way, in the judgment of the Chief Justice in the Union Fidelity Case and in consequence of that decision, section 26(b) was amended in such a fashion as to effectively exclude everything upon which Division 6 operated. So that now without that element of uncertainty, Division 6 appears to operate as a code for the assessment of the amounts which fall within net income as defined in section 95. A consequence of that was that when the Treasurer ordered that all otiose provisions of the 1936 Act be repealed, 26(b) was among them. That happened after the years with which we are presently concerned, but it was done on the basis that the section or the paragraph had no operation.
I have threatened your Honours with the decision in Union Fidelity. May I take your Honours next to that, unless there is anything else about Tindal’s Case that I can assist your Honours with. It is under tab 9 in the bundle of materials. It is reported in [1969] HCA 36; (1969) 119 CLR 177 and the facts were relatively simple. The trustee of a testamentary estate derived income from a source outside Australia and there was no beneficiary presently entitled to that income, so no beneficiary liable to assessment under section 97, and it was held that, on the 1936 wording of section 99, the trustee was not liable to be assessed. In its then terms the division was held to apply only to amounts that were included in section 95 net income whether or not the trustee was to be treated as a resident of Australia. So an amount which would only be included in net income if the trustee were a resident of Australia, the court said, fell outside section 95 definition of “net income”.
None of the observations on Division 6 in that case appear to us to be presently relevant with the possible exception of what is said by Justice Kitto at page 187 at about point 5 of the page where his Honour is dealing with the significance of the definition of “taxpayer”. The paragraph begins:
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 as to whom none of the facts is postulated which would make him a “resident” within the definition –
That was the core of the reasoning. Sir Garfield Barwick considered the scheme of the legislation in somewhat greater depth at pages 182 to 183 but not, we think, in a manner which assists your Honours in this case.
GUMMOW J: Justice Kitto also put his finger on 26(b), did he not?
MR SLATER: Yes, your Honour.
GUMMOW J: At page 180.
MR SLATER: As did the Chief Justice. It was in consequence of that that section 26(b) was amended.
GUMMOW J: Before that change was made and as the Act stood in 1936, how did 26(b) fit in with the scheme of Division 6 as originally enacted?
MR SLATER: I think the best answer I can give to your Honour is ambiguously. There was debate as to whether Division 6 was a code which excluded section 26(b) in the judgments of the Court in Federal Commissioner of Taxation v Belford, the citation to which escapes me for the moment. It is [1952] HCA 73; 88 CLR 589, your Honours. That is referred to by the Chief Justice in Union Fidelity at page 184 of the report.
HAYNE J: Not least because Mr Shaw for the appellants had adopted it, see page 178.
MR SLATER: Yes. That was, in effect, the foundation of Mr Shaw’s argument. If your Honours are assisted by my going to Belford’s Case, I can do so now or probably more cogently immediately after lunch. Your Honours, the remaining decision of this Court which touches on Division 6 in a fashion which might be relevant is that of the Court in Harmer v Federal Commission of Taxation (1991) 173 CLR 264. That decision is reproduced under tab 12 in the bundle. It concerned whether or not a trustee was liable to assessment under section 99A, and the meaning of “present entitlement”. It turned lightly on the facts of the case rather than on any point of construction. At page 271 the Court adopted the propositions that the parties had agreed upon. Your Honours will see in the paragraph beginning on page 271:
The parties are agreed that the cases –
and they cite Whiting, Taylor and Totledge –
establish that a beneficiary is “presently entitled” to a share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. That being so, the question on the appeal is whether any one or more of the claimants either were “presently entitled” in that sense to the interest earned on the funds deposited with the Building Society . . . That question must be answered as at the time when the interest was derived, that is to say, during the tax years. The fact that orders were subsequently made for payment of the interest earned in the tax years to one or other of the claimants does not assist the appellants -
Our friends place some reliance on the last few sentences in that passage. Those observations are not in issue between the parties. Our friends place reliance on what is said in the Full Court of the Federal Court in Federal Commissioner of Taxation v Totledge. There is a copy of that decision as it is reported in the Australian Law Reports under tab 10. There was a strong Bench of Chief Justice Bowen, Justices Deane and Fitzgerald.
The facts in summary were that the taxpayer company was the trustee of a trust which carried on a pathology business. It did so in consequence of the administration of a failed company. The terms on which it held the assets of the business and the income arising from it were those set out on page 387 at line 33:
the taxpayer was entrusted to manage and conduct -
the business:
“as trustee for the creditors . . . and as and when the same become available to account to and pay the trustee -
“The trustee” meaning the trustee of the scheme constituted under an administration order:
in accordance with the provisions of this scheme all surplus income and other moneys derived by (the taxpayer) from the carrying on of the said business -
So the trust was to pay the surplus income over to the administration scheme trustee for application in accordance with the scheme of administration. The issue which arose between Totledge Pty Ltd and the Commissioner was whether Totledge was liable to be assessed under section 99A on the basis that no beneficiary was presently entitled to the income it derived or whether the administration scheme trustee was presently entitled to that income.
The Commissioner’s argument in substance was that there was no present right to call for the income. There was at most a right to the surplus – your Honours will see that word used in the passage I read to your Honours – and that this was analogous to a bankruptcy or to the position in Whiting’s Case. Those arguments were rejected. The court held – and the relevant passages are on page 393 – that a beneficiary under a trust where the trustee carries on a business or derives gross income has an interest in but no right to demand payment of the gross income but only a right to the surplus as and when it is ascertained and, without my reading passages to your Honours, those findings are in the paragraph beginning at line 5 on page 393 and going down to about line 27 and also in the paragraph first beginning on the next page. Then their Honours held that present entitlement meant a right to demand and receive payment of what out of the income received is legally available to be distributed. Such a right is one to receive a share of what remains income of the trust estate.
GUMMOW J: Where are you reading from, Mr Slater?
MR SLATER: I am summarising, your Honour, but the passage I was going to take your Honour to is the once beginning at about line 35 on page 394 where their Honours say - - -
GUMMOW J: Is it not better to begin at 393?
MR SLATER: I just was not going to weary the Court by reading it all to your Honours.
GUMMOW J: It explains in a more sophisticated fashion what is going on with the rights of a beneficiary.
MR SLATER: Yes.
GUMMOW J: Particularly at lines 13 and 14, et cetera. It talks about the:
gross income . . . He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment . . . Regardless of whether one regards his interest as beneficial “ownership” subject to a charge in favour of –
et cetera.
MR SLATER: Yes.
GUMMOW J: So this notion of personal entitlement is somewhat unsophisticated because it does not really take into account that analysis.
MR SLATER: No, it does not, your Honour. It proceeds on the basis that there is at the end of the year of income a derived sum to which the beneficiary is presently entitled.
GUMMOW J: Yes, this notion of the sovereigns in the bag.
MR SLATER: Yes, or a balance at year end.
GUMMOW J: Sir Nigel Bowen knew there was more to it than that.
MR SLATER: There is, your Honour, and the difficulty with which we are confronted is that the drafting of Division 6 does not actually accommodate trust principles. It is not as egregious as section 960.100 which treats a trust as if it were a person, but still there is this difficulty that the language of the statute does not fully accommodate the sort of issues which their Honours deal with here. In similar vein, there is an extract from Pearson v Lane at about line 35. It may be said that the observations in that passage, at about line 35 to line 45, require some reconsideration in the light of the decision in CPT Custodian. I should have given your Honours the citation to CPT Custodian. It is [2005] HCA 53; 224 CLR 98.
GUMMOW J: If you are coming back after lunch to deal with Belford, in thinking about it over lunch, you might look at what Sir Owen Dixon said at page 603 about two-thirds of the way down the page. There is no need to go to it now.
MR SLATER: No, I will just make a note of it, your Honour.
GUMMOW J: It may be what Sir Harry Gibbs would call a wrong turning at some stage; turning away from page 603, I mean.
MR SLATER: It is not an entirely uncommon event in Sir Owen Dixon’s relationship with the rest of the Court. I should perhaps have drawn your Honour’s attention to the comments that the Court made at about the middle of page 394 in relation to Justice Kitto’s observations in Union Fidelity, that if –
“presently entitled” . . . were to be construed as meaning entitled to call for an immediate transfer of a share of gross income as derived, they would be inappropriate to refer to the ordinary vested interest of a life tenant . . . of a trust estate which was held other than on bare trust or to the entitlement of the scheme trustee . . . They would, for practical purposes, refer only to the case where the trust estate was vested in the trustee as bare trustee.
Then, a sentence or so later, and this is the passage, part of which our friends rely:
Putting to one side questions of legal disability which are not here
relevant, the preferable construction of s 97(1) is to treat
the
requirement of present entitlement to a share of the income of the trust estate
as not being concerned with distinctions between
gross income as derived and
“surplus income” after payment of costs, expenses and outgoings but
as referring to a present
vested right to demand and receive payment of the
whole or part of what has been received by the trustee as income and, retaining
that character in his hands, is legally available to be distributed to those
entitled to it as beneficiaries under the trusts of
the relevant trust estate.
Such a right . . . represents a present entitlement to
receive a share of what retains its character
as income of the trust
estate -
Our friends place some stress upon the reference there to
retention of character. We would respectfully submit that the reliance
is
perhaps overstated because those words are descriptive rather than ratio.
FRENCH CJ: So I can just understand where we are going in terms of your constructional proposition – and I am looking at your summary of it at paragraph 13(b) of the submissions – can I just put two very simple cases. I know you have a number of examples of applications at the end before we get into the complicated stuff. Take the simple case of, say, a trust income of $300,000 and a net income of $180,000 and you have a beneficiary who is entitled to an annuity of $100,000. Now, you say you apply the terms of the trust to the net income.
MR SLATER: Yes.
FRENCH CJ: So on that basis the beneficiary’s assessable income is $100,000 because it is the fixed figure and that is how it is defined?
MR SLATER: Yes, your Honour.
FRENCH CJ: If, on the other hand the beneficiary is entitled to, under the terms of the trust, one-third of the trust income – and again we have an income of $300,000 trust income and a net income of $180,000 – then the assessable income would be $60,000 on the basis that you apply the terms of the trust to the net income. Is that right? Is that how it works?
MR SLATER: I think that is my friend’s proposition rather than mine.
FRENCH CJ: I am just wondering how you apply the terms of the trust to the net income in that situation.
MR SLATER: You apply it as if the net income were the income of the trust. So in that situation - - -
FRENCH CJ: Let us say you have an entitlement to one-third – it says in the trust deed you get one-third of the income of the trust.
MR SLATER: Then you get one-third of the net income.
FRENCH CJ: Well, it is $180,000. One-third of that is 60,000.
MR SLATER: Yes. You would be taxed on one-third.
FRENCH CJ: Yes. You accept my proposition.
MR SLATER: Yes, I do. But if the beneficiary is entitled to an annuity or an appointed amount of 100,000, then, in our submission, you apply that appointment to the net income.
FRENCH CJ: But it is always a proportionate test on your opponent’s argument.
MR SLATER: Always a proportionate test on our opponent’s argument. We say that the consequence of doing that is, if you take your Honour’s example, 300,000 trust income, 100,000 annuity, the amount included in net income oscillates according to what is the net income of the trust estate. If the net income turns out to be 100,000, then it is one-third. If it is 150,000, it is one half, if it is 200,000, it is two-thirds and we say that a proportion which varies in that random fashion – “random” is not an accurate statement – but in that highly variable fashion does not give a sensible result.
FRENCH CJ: You point out anomalies which arise where the net income is greater than the trust income.
MR SLATER: Yes. Where the net income is less than the trust income then the consequence on our submission would be that the beneficiary entitled to remainder, if there is one, would have his entitlement to net income, if one can call it that, abate just as if the income had been insufficient, as it was in the 2000 case here, to make up the amount specified. We accept that all of these things produce strange and odd and curious results, but that is an inevitable consequence of the difference between net income and trust income.
FRENCH CJ: Yes, all right. Well, that might be a convenient moment.
MR SLATER: If your Honour please.
FRENCH CJ: Back at 2.15.
AT 12:46 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.16 PM:
FRENCH CJ: Yes, Mr Slater.
MR SLATER: Your Honours, a copy of the text of Chapter 39 of the Ferguson Commission report has been made available to your Honours. It does not seem to us that there is anything in it that particularly assists one way or the other. Before lunch your Honours asked me about Division 6D of Part 3 of the 1936 Act. Can I very briefly respond by giving your Honours some references. Section 102UA contains what is called an overview, a brief description of what the division is about, and section 102UM is the operative provision. It provides that where, by reason or satisfaction of the criteria in the division, tax is imposed on the trustee or on parties related to the trustee then, except for the purposes of section 99, 99B, 99A and this division, the whole or part of the share of the net income is not included in the assessable income of the trustee beneficiary under section 97. That is the reason for those words at the opening of section 97. But otherwise your Honours need not be concerned with Division 6D.
Your Honour Justice Gummow invited me to deal with Belford’s Case. I confess that I had not intended to do so, partly because it is concerned with source and its consequences have been overtaken by an amendment to the Act, which your Honours will find under tab 17 – I will come back to that – and partly, I confess, because I did not want to discourage your Honours from looking at Division 6, because Belford’s Case is one of the more curious and complex decisions on the provisions.
The facts in Belford’s Case were relatively straightforward. The taxpayer was a resident and not subject to any disability. She was entitled to a share in the income of a trust estate, the trustee of which was in the United Kingdom and the source of income of which was in the United Kingdom. The point at issue was whether the beneficiary, as an Australian resident, was assessable either under section 97 or under section 25 or section 26(b). The Court unanimously held that she was liable to tax but for divided reasons. Justice Webb agreed with Sir Owen Dixon. Justice Fullagar agreed with Justice Taylor and Justice Kitto agreed in the result without endorsing the reasons of either and concluded by saying:
I do not dissent from the view which appears to my brethren to be right, but I confess that I have not been free from an uneasy feeling that the line which divides construction from reconstruction is not far off.
Sir Owen Dixon began at page 596 of the report which is in [1952] HCA 73; (1952) 88 CLR 589 by referring to the circumstance that the problem arising from the provisions of Division 6 was probably attributable to the circumstance that its origin was at a time when the territorial liability for tax was based exclusively on source and not on residence.
Over the page on page 597 his Honour dismisses section 96 by observing that the provision expresses a truism, but its purpose appears to have been to limit the liabilities of a trustee to those imposed by the express provisions of the Act. In the next paragraph on page 597 – and this perhaps illustrates how remote the decision is from the present issue – his Honour comments that:
Section 97 . . . provides that where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the income of the trust estate.
That is not the text of the section. The text of the section is that share of the net income of the trust estate. Further down the page his Honour goes on to refer, at about point 6, to the absence of reference to territorial limitations:
It is evident that these sections left out of consideration altogether the existence of territorial limitations upon the liability to tax. If it were still true that the only territorial criterion of liability to tax was the source of the income no difficulty would exist . . . But residence is a characteristic not of income but of a person -
At the foot of the page over about 10 lines his Honour identifies a series of problems arising from the language of the division and at the top of the next page goes on to say that the problems are made more difficult by the fact that the net income as defined in section 95 is given a fixed meaning. After quoting section 95 his Honour says:
The direction thus given to calculate the total assessable income of the trust estate as if the trustee were a taxpayer . . . and to make allowable deductions at once raises the question whether you calculate income on the basis that the supposed taxpayer has the same residence as the trustee or whether you ignore residence.
He goes on after that to refer to difficulties which arise. At the foot of the page he notes the Commissioner’s submission that one simply has regard to section 25 and section 26(b). At the top of the next page, 599, he says:
This solution of the commissioner sounds attractive and simple but it has its own difficulties.
Without reading them to your Honours, your Honours will see that between there and the end of the rather lengthy paragraph on page 600 his Honour identifies at least ten questions posed by the Commissioner’s suggested solution, none of which appear to be capable of ready resolution. Then on page 600 his Honour refers to the solution advanced by the board of review in the decision which was on appeal and in the paragraph beginning at about point 4 on page 600 says:
There appear to me to be three possible solutions of the difficulty. One is to adopt the view of the majority of the Board of Review and treat Div 6 as an exclusive measure of the responsibility of the trustees and beneficiaries respectively for income tax . . . The objection to that solution is the unexpected and illogical results which it produces.
May I say your Honours, not much has changed since 1952. Then in the paragraph beginning at the foot of the page:
A second possible solution is to treat s 25 (1) as imposing a general liability made more specific by s 26 (b) which is cumulative upon the liability placed by ss 97 to 100.
He goes on to say that that solution is unsatisfactory. At the top of the next page on page 601:
The third possible view is to treat the residence of the trustee as completely immaterial and to base the territorial liability for tax of the beneficiary, if any, where he is presently entitled on his residence and alternatively upon the source of the income . . . This solution is open to some objections which must be stated but it is one which, as I think, has a prima-facie justification upon the natural construction of s 95.
I will not tire your Honours with it, but over the following page and a half he goes on to advert to the difficulties, and in the middle of page 602 says:
Of these three possible solutions, all of which, it must be acknowledged, include major difficulties, I prefer the third -
and a few lines lower down to say “I know of no fourth solution”. Then on page 603 we come to the passage which your Honour Justice Gummow drew my attention to, but before we get there, can I draw your Honour’s attention to the passage immediately beforehand, and perhaps starting at about point 3:
For myself, I think that the difficulty of what Mr. Gibson calls limiting the word “taxpayer” is not so great and that, in fact, the natural reading of s. 95 is to ignore the attribute of quality of residence in the trustee. I agree that there is some difficulty in the calculation of the assessable income for a resident and a non-resident beneficiary, but I have already indicated the answer which I would give to that difficulty. That answer is that the net income must be apportioned according to source under s. 97 and under s. 98, if the beneficiary is a non-resident and under s. 100, and in some cases under s. 99. “Apportioned”, although the term formerly in common use in this connection, is not perhaps the best word, but what I mean is that what is to be included for the purpose of the liability to tax is so much of the net income of the trust estate as is attributable to sources in Australia.
Your Honours, it is in that context that his Honour then goes on in the passage that Justice Gummow adverted to:
I am not disposed to describe Div. 6 as an exclusive measure of the liability.
GUMMOW J: That was the first possibility mentioned at page 600, was it not?
MR SLATER: Yes.
GUMMOW J: He is coming back to that.
MR SLATER: He is coming back to it but dismissing it. He had already dismissed that suggestion as giving rise to unsatisfactory results.
GUMMOW J: Yes, I understand that. All I am saying is he is coming back to it.
MR SLATER: Yes. If I could just read on:
What appears to me to be the truth is that ss 97 to 100 together with s 95 work out the proposition contained in s 26(b) and that s 25(1) has an application in relation to ss 97 to 100 in determining the liability of the beneficiary, or of the trustee on his behalf where the beneficiary presently entitled is under a legal disability, and of the trustee where there is no beneficiary.
GUMMOW J: What do you say about that?
MR SLATER: What we say about that, your Honour, is that what his Honour is saying there is that importing the concepts in or the operation of 26(b) and 25 is the way in which his Honour suggests that the difficulty, which he had adverted to half a page earlier about calculating the assessable income for a resident or a non-resident beneficiary, is to be worked out. It is the justification for adopting variable approaches to the operation of sections 97, 98, 100 and, in some cases, 99 according to the residence or non-residence of the beneficiary. That appears to us to be what his Honour is doing there. He is using section 26(b) and section 25 as a justification for the variant readings of the provisions of Division 6, according to the residence of the beneficiary.
HAYNE J: But you have just inverted it, have you not, Mr Slater? You are treating Division 6 in that explanation as the starting point and 25 and 26 as somehow explaining the operation of Division 6. What I had taken his Honour to be saying when you identify the problem, as he does at page 506, point 6, is that 25 and 26 are the general taxing provisions. Division 6 then works out how those provisions of general application are to be given effect in the case of trust estates. But you begin with the proposition that some things are brought to tax by 25 and 26 and Division 6 is then a working out of what is brought to tax, in whose hands.
GUMMOW J: Hence the importance of section 96.
MR SLATER: We would respectfully submit that it is the other way round, that Division 6 is the set of provisions which determine who is to be assessable and his Honour is using sections 25 and 26 to give content to the operation of Division 6 in the case of resident and non-resident beneficiaries. To some extent this is a debate which no longer has any content because of the change to section 26(b), which I will take your Honour to in a moment.
HAYNE J: Also, of course, the particular problems discussed in Belford are overtaken by the later amendments. That I understand. Can one draw from what is said in Belford that at least Chief Justice Dixon saw the provisions of Division 6 as an explanation or working out, as he put it, of a proposition of taxation law and that the working out, not surprisingly, engages taxation concepts rather than most immediately the language of the law of trusts?
MR SLATER: As to the second proposition, we would respectfully suggest that the judgment does not give support for that. It is only concerned with questions of residence and not with the content of the expression “income of the trust estate”. As to the first, I can do no more than say what I have about that. But can I take your Honours also to what was said by Justice Taylor, because, as powerful as Sir Owen Dixon’s reasoning is, in this case it represents the view of two of the five members of the Court. Justice Taylor, starting at page 604, after setting out the context, at about point 6 on page 605, says:
It is convenient, in the first instance, to consider the first problem raised by the appeal. Sections 97, 98 and 99 deal with the incidence of income tax on what is called in those sections the “net income” of the trust estates. In view of the definition which is contained in s. 95, it is, pursuant to s. 97, incumbent upon a beneficiary who is presently entitled to a share of the income of a trust estate to include in his assessable income a proportion of the total assessable income of the trust estate for the relevant year . . . The ascertainment of the total assessable income of the trust estate for any year is, of course, not concerned with payments by way of distribution to beneficiaries and the total assessable income of the trust estate will, in any particular case, be precisely the same whether the whole or some part only, or none of the estate income has . . . been distributed . . . Yet in such cases, s. 97 requires that the appropriate share of the total assessable income of the trust estate shall be included in the assessable income of each beneficiary –
Just pausing there, his Honour is in effect conflating two provisions, because section 97 speaks of the net income of trust estates and section 95 speaks of the total assessable income less allowable deductions. But I do not think that conflation affects the sense of what his Honour is saying.
Then he goes on to say:
and this is so whether any beneficiary has actually received the whole or some part only, or none of such income. To my mind this is a clear indication that the Act intends, in such cases, that there should be included in a beneficiary’s assessable income, not the amount of his actual receipts of the estate income, but a proportion of the total assessable income of the trust estate which, for obvious reasons, may be quite a different amount and, generally at least, a greater amount.
Then he goes on to deal with section 98 and I draw your Honours’ attention to it but I will not read it. In the paragraph in the middle of the page his Honour then says:
The plan of Div 6 of Pt III is reasonably clear. Its various sections deal with at least four main categories –
97, 98, 99 and his Honour regards section 101 dealing with discretionary trusts as one of the main categories. Then his Honour deals with the way in which those provisions interact at the top of page 607. In the paragraph beginning in the middle of page 607:
It is to me inconceivable that the Act which, in Div 6, requires a beneficiary presently entitled and whether under a disability or not to include as part of his assessable income for any year his appropriate share of “net income” of the trust estate for that year whether or not he has received any part of that income, should be taken to intend that such a beneficiary must also include in his assessable income for that or any later year his actual receipts upon a distribution of the estate income. The provisions contained in Div 6 appear to me to cover the whole field and upon a review of the various sections contained in the division, I am of the opinion that, within the scope of its operation, it makes exclusive provision for the levying of tax upon income from trust estates and to this extent the respondent’s argument must, I think, succeed.
Now, that is not decisive of that issue if it were still live because, again, his Honour, with the concurrence of Justice Fullagar, represents only two of the five voices, but there is a clear division of approach between Sir Owen Dixon and Justice Taylor, each supported by one other member of the Court, the fifth member of the Court saying, “This is all too close to rewriting the test of the legislation for me.”
GUMMOW J: The problem with Justice Taylor’s judgment is it does not deal with Division 1 of Part III, namely, the central provisions in 25 and 26.
MR SLATER: Only to the extent that his Honour says that Division 6, so far as it goes, is an exclusive code and that impliedly deals with Division - - -
GUMMOW J: Well, that is begging the question in the light of Division 1, is it not?
MR SLATER: I would not have thought so, your Honour, but I suppose in the end it does not particularly matter what his Honour said, because your Honours approach this matter unconstrained by any authority in Belford’s Case. The observations provide such guidance as your Honours can take from them, but that is as far as it goes.
Your Honours, I mentioned that the discussion had been overtaken. If your Honours turn to the volume of authorities, under tab 17 your Honours see section 26 as it stood in the years with which we are presently concerned. This was an amendment made after the decision in Union Fidelity. It includes:
beneficial interests in income derived under any will, settlement, deed or gift or instrument of trust, not being –
(i) amounts that are included . . . in pursuance of section 97 or 99B; or –
I have not taken your Honours to section 99B, that is to do with distributions out of corpus where the corpus is an accumulation of untaxed income, but that is a very broad summary of it, but it does not have any relevance for the moment –
(ii) amounts in respect of which a trustee of a trust estate is assessed and liable to pay tax in pursuance of section 98, 99 or 99A -
So that, in effect, this is a statutory endorsement of the view taken by Justice Taylor rather than the view taken by Justice Dixon. The last roman paragraph is to do with Division 6D.
Now, your Honours, I think I said to your Honours before lunch that Harmer was the last case which your Honours might find of some assistance. There is one other case. It is a much more recent decision. It is the decision of this Court in Commissioner of Taxation v Australia and New Zealand Savings Bank [1997] HCA 37; (1998) 194 CLR 328. It is reproduced under tab 13 of the volume of materials, and it is a decision on which our friends rely rather then we do.
It is a piece of litigation which came twice to this Court. The background facts, very briefly, were these. A partnership was formed of which the taxpayer was a partner. The partnership invested in units in a unit trust. The unit trust purchased an annuity from the State Government. When the annuity was received by the trustee, then by force of a provision of the Act, the portion of the annuity which, in effect, represented the invested capital, was excluded from assessable income. At the relevant time the section which had that effect was section 27H.
On its receipt by the trustee, the annuity was treated by the trustee as being in part income and in part capital and there was a distribution which was characterised as a distribution of income of the former part and as a distribution of capital of the latter part. The initial dispute between the Bank and the Commissioner concerned whether the investment was an annuity or truly a credit foncier loan. That point was resolved against the Commissioner, but the Commissioner then sought to argue that so far as the interest expense for which the Bank was claiming a deduction was incurred in connection with the derivation of the part of the annuity which was effectively a return of capital, the Bank was not entitled to a deduction.
The essential question which was litigated in this Court in the second round was whether the annuity was wholly income, partly assessable income and partly exempt income. If it was, then, so far as interest was incurred in gaining the part which was exempt income, it was not deductible. Now, that is a tax question, not a trust question. The question was whether the amount attributable to the return of the investment was income within the meaning of section 51 of the 1936 Act which corresponds to section 8(1) of the 1997 Act.
The judgment of the Court was in effect given by the Chief Justice and because this decision caused some vexation in the Full Court in a judgment which was relied upon by two of the three members of the Full Court in the present matter – I should perhaps take your Honours to it in a little more detail than I have in other matters. Your Honours will see on page 335 in paragraph 5 Chief Justice Gleeson said that:
At common law the instalments of an annuity have the character of income. However, purchased annuities include an element representing a return to the purchaser of the purchase price –
and section 27H recognises that. In paragraph 7:
Sundberg J, with whose reasons Lockhart and Carr JJ agreed, held, contrary to an argument advanced on behalf of the respondent, that the deductible amount referred to in s 27H(1)(a) is “exempt income” within the meaning of the definition in s 6 of the Act. Exempt income is defined to mean income which is exempt from income tax and includes income which is not assessable income.
It was argued on behalf of the respondent that the deductible amount is capital, and not income. In support of this argument reference was made to the history of the legislative treatment of annuities. There is, however, a difference between recognising that an instalment of a purchased annuity contains a component reflecting the need to return to the purchaser the price paid for the annuity, and a conclusion that an instalment of an annuity bears, at least in part, the character of capital.
I do not think I need to read to your Honours paragraphs 9 to 11. That is an adoption of what was said by Justice Hill in support of that proposition. In paragraph 12:
In a given case it may be difficult to distinguish between a loan, with repayments including components of principal and interest, and the purchase of an annuity where, in the language of the authorities, the capital has ceased to exist, and what is paid to the purchaser is wholly income, although income which includes an amount to reflect the fact that a purchase price has been paid. Hill J held that the present case fell into the second category. Sundberg J, correctly, followed that process of reasoning to its logical conclusion, concluding that the instalments of annuity paid to the trust included no element of capital but were, in accordance with s 27H, made up of assessable income and exempt income (the deductible amount).
The trust deed defined income to mean the net income of the fund as determined in accordance with s 95 of the Act. Thus the deductible amount was treated under the deed as capital –
His Honour then went on to say how that operated under the deed. Paragraph 14:
It was argued that the unit holders in the trust, (relevantly, the partnership), had no such individual interest in the amounts in question as would satisfy s 97. However, the relevant provisions of the trust instrument, including those relating to interest in capital, and the procedures concerning redemption, were such that Sundberg J correctly held that the requirements of s 97 were satisfied.
So that the argument, based on the absence of an individual interest, was rejected. Then in paragraph 15:
For the reasons earlier given, the whole of the annuity amounts received by the trustee constituted income of the trust. The circumstance that the trust instrument, for the purpose of dealing with the entitlements of unit holders, treated the deductible amount as capital, did not alter what was described in Charles v Federal Commissioner of Taxation as “the character of those moneys in the hands of the trustees”.
Our friends take that as authority for the proposition that the trust deed cannot alter the character of an amount received by the trustee. We agree that it cannot do so where the test is one prescribed by the statute and the test which was at issue in ANZ was that prescribed by the statute, namely the test in section 51 whether the amount of interest expense was incurred in gaining assessable income or in gaining exempt income, the critical thing being that if it was incurred in gaining exempt income in any part, then as to that part, it was not deductible and the court held that the amount was, for the purpose of section 51, income and that by force of the definition in section 6 it was exempt income and, accordingly, the Bank failed.
In our submission the case does not stand for the proposition that as a matter of trust law the character of an amount as income is to be determined without regard to the terms of the trust deed. The significance of that is a matter I will come back when I endeavour to develop our argument in relation to the individual taxpayer’s appeal.
Now, your Honours, in our submission, there is nothing decisive in the authorities on the questions posed in the present appeals and the matter is to be determined on the text and context of the legislation. The text, if I can remind your Honours, is set out under tab 5 in the materials and the critical words are those in the opening three lines:
where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate -
and acknowledging the difficulties that your Honour Justice Gummow has pointed out about the ellipsis in that expression. The issue in this appeal is what in that context the word “share” means. The dictionaries do not appear to be of much assistance. At the back of the volume of authorities is an extract from the Oxford English Dictionary. Your Honours will see that the relevant meaning of “share” in the present context is that in item 1.a:
The part or portion (of something) which is allotted or belongs to an individual, when distribution is made among a number –
Citations of examples under that are not of particular assistance. Those from the years 1575, 1617 and 1700 perhaps offer some slight assistance but not very much. The Macquarie Dictionary, which we have not provided your Honours with a copy of, uses almost the same words as the definition. One thing to notice about the definition is that it does not use the word “amount” but, equally, it does not use the words “proportion”, “percentage” or “fraction”. Both an amount where a trust confers upon a beneficiary a right to an amount of income and a fraction or proportionate share where the trust deed confers upon beneficiaries one-third of the income fall within the scope of the word “share”, in our submission, but neither of them exhausts the meaning of the word.
FRENCH CJ: You read it in a sense as ambulatory, to be given content by the terms of the trust?
MR SLATER: Yes. Your Honours, in the context of trust estates - - -
GUMMOW J: This expression “trust estate” I think we said is not defined anywhere?
MR SLATER: I am sorry, I did not catch that, your Honour.
GUMMOW J: This expression “trust estate” is not defined anywhere.
MR SLATER: No, your Honour.
GUMMOW J: There are many trusts that do not have a settlement. Is that not so?
MR SLATER: If your Honour means many trusts - - -
GUMMOW J: Many trusts are not the product of an express settlement nor of a provision in a will.
MR SLATER: Yes, indeed.
GUMMOW J: Let us think about constructive trusts, resulting trusts, does this division apply to them?
MR SLATER: Yes, your Honour. If I can give your Honour an example of that, a case of Zobory v Federal Commissioner of Taxation, a decision of Justice Burchett about 15 years ago.
GUMMOW J: Yes, I remember that. What is the citation of Zobory?
MR SLATER: I will have someone find it for you. I do not recall it off the cuff. Certainly an implied trust is one to which Division 6 can apply. In Howey v Federal Commissioner of Taxation [1930] HCA 45; 44 CLR 289 and again – but I think in the Federal Court in Everett v Federal Commissioner of Taxation the observation was made that Division 6 would not apply to a constructive trust which operated only upon amounts received and not upon the yield of any property held by the trustee because there would then be no estate. So that Division 6 does not operate upon a trust declared of my income.
GUMMOW J: We had better have the citation of that, too.
MR SLATER: Yes. Zobory [1995] FCA 1226; (1995) 64 FCR 86; Howey 44 CLR - I will get the citation for your Honours in a moment. The Full Court decision in Everett is a 1978 decision. I know it is in 78 Australian Tax Cases, somewhere around page 4,800, but I will get your Honours the citation from an authorised report.
GUMMOW J: It is in the Australian Law Reports, I think.
MR SLATER: It is in the Australian Law Reports. I think it is also in the Federal Law Reports, your Honour. Howey is [1930] HCA 45; 44 CLR 289, your Honours.
GUMMOW J: Thank you.
HAYNE J: It would then be necessary to relate what is advanced as the relevant proposition to the definition of “trustee”, which in addition to “every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes”, amongst other things, those identified in paragraph (b) of the definition, in effect, persons taking on “administration or control of income”.
MR SLATER: Yes.
HAYNE J: In certain circumstances.
MR SLATER: Also, your Honour, liquidators, receivers, administrators - - -
HAYNE J: To the paragraph (a) persons.
MR SLATER: Yes, “guardian, committee, receiver or liquidator”. Your Honours may recall that in Commissioner of Taxation v Card 109 CLR, the question of the way in which section 221P of the 1936 Act, which was the provision which gave priority in respect of unremitted group tax deductions should operate and who should take priority, was addressed. It was there said that a liquidator, although clearly not a trustee, was to be treated as one. But those sorts of cases, in our submission, fall well outside Division 6. The text of the definition is included not only for the purposes of Division 6 but also for the purposes of provisions such as section 221P and section 254 and, I think, section 255.
HAYNE J: If one were to begin inquiries about Division 6 by noticing the terms of section 96 first – “a trustee shall not be liable”, et cetera – the definition is in play there, is it not?
MR SLATER: That part of the definition – the opening words – certainly is, your Honour, yes. I am not sure where your Honour has in mind that that is taking you.
HAYNE J: I am in a state of blissful ignorance, Mr Slater, as you no doubt have commonly remarked.
MR SLATER: I was about to say to your Honours that there has been some consideration of the meaning of “share” in the context of trust estates. We could find only two cases which said anything that appeared to us to be useful. They are both in our volume of authorities. One is an 1849 case. Neither is an authority which we can advance as being in any way decisive but they are perhaps of some illustrative value. The 1849 case is a decision of Chief Baron Pollock in the matter of Doe d Clift v Birkhead [1849] EngR 651; (1849) 4 Exch 110 and also [1849] EngR 651; (1989) 154 ER 1145.
That concerned a marriage settlement with a remainder to children with a gift over of the share of any deceased child to pass to the others. There were eight children, three of whom died. One of the five survivors assigned his share and then became bankrupt and the issue was whether the share assigned was one-fifth or one-eighth. It was held that the assignment carried all the interest including what resulted from the death of the siblings. The passage which may be of some assistance to your Honours is at the foot of page 125 over onto page 126 or at about two-thirds of the way down page 1151 of the English Reports.
we will think the word share, according to its natural and obvious meaning, includes, or, at all events, if the context requires it, may include, every interest which the child takes under the limitations of the settlement. The word “share” has no technical meaning, and, therefore, in giving effect to the deed in which it occurs, the Court has only to ascertain in what sense it is there used. In such an inquiry there is no difference in the principles upon which we are to construe a deed or will, as was pointed out by Lord Kenyon in Wright v Kemp. In the one case as in the other, the only inquiry is, in what sense, looking at the whole context, is the word used . . . Why may not this further interest –
that is the increase from one-eighth to one-fifth –
be held as included in the word “share,” as it is used in the clause creating cross-remainders?
It does not perhaps take your Honours very far but it may be of some assistance. There is also a brief consideration of similar issue in a decision of the Full Court of the Supreme Court of Queensland in a matter of Re Woods [1941] St R Qd 29. That is under tab 3 in our materials. The question there was whether a gift over to issue operated. It did so if the son died before obtaining any part of his share hereunder, the words used in the will. The will provided that a transfer to the son of a mortgage advanced to the son’s wife was to be part of his share. It was argued that “share” meant only equal share in the residue and that the transfer of the interest in the mortgage could not be part of the share. That argument was rejected and the observations, which may be of some assistance to the Court, are at page 136 in the second paragraph on the page:
On the other hand it was argued that the words “share hereunder” meant “share of residue,” and that as Raymond –
the relevant son –
had received no part of his share of residue the gift over applied.
Now the word “hereunder” I think means “under this my will” . . . However, it was contended that the word “share” connoted part of something to be divided and would refer only therefore, so far as Raymond was concerned, to the proportion of the residue given to him. But the word “share” may be used in the sense of connoting merely the total interest bequeathed to the person spoken of, as well as part of something to be divided –
and there is a reference to a Scottish decision there which we have looked at but do not think greatly assists the Court –
and it seems to me it is used in the former sense in the will before us. The gift over clause applies to Hilda as well as to the sons. Hilda gets no proportion of residue; she gets a specific sum of £1000. So far as she is concerned, then, the word “share” cannot mean “proportion” but merely “interest,” and I see no reason why it should not have the same meaning with regard to the sons.
That obviously is a decision on the wording of a particular will.
FRENCH CJ: That is your contention, is it not, that “share” here means interest?
MR SLATER: Yes. Those cases supply some support for that. I cannot say they are decisive authority, but they indicated - - -
FRENCH CJ: An “interest” means an amount or a proportion, or whatever it is that the trustee gives you?
MR SLATER: Yes. It seems to us that is the concept which was in the draftsman’s mind in 1918 and 1922 because in the 1918 legislation the word “share” and the word “interest” are used to refer to what appears to be the same thing. In our submission, the term “share” is not confined to a percentage or a proportion or a fraction of the estate to the exclusion of an amount of out the income, rather, in our submission, it means an interest in the fund or the income. The interest may be defined either as a percentage or as an amount or as an annuity or as some mixture or combination of them. We say that a proportion is a share, an amount is a share, an annuity is a share, but “share” is not confined to any of them and, in particular, where the income is given in fixed proportions, then each beneficiary has a share that is that proportion, but a share that is a proportion is only a subset of the word “share”.
If I can use a very simple analogy; a dog is a quadruped, but “quadruped” does not mean dog. So a proportion is a share, but share is not confined to proportion. Your Honours, in all the cases which have come before the courts to date concerning this expression “share of the income of the trust estate”, the share of the taxpayer who has been before the court has been defined in the trust deed, or in the appointment made under the trust deed, as a proportion or percentage, or as the whole of the income, or of the excess of the income over a fixed amount. So that each of the taxpayers who have been agitating this issue in the Federal Court have been taxpayers whose entitlement was, relevantly, to a proportion or the entirety of the income. I say “relevantly” because in some cases there was an initial fixed gift, but beyond that it was an entitlement to all or some proportion. None of the cases have considered the issue which is before the Court here where the beneficiary’s entitlement is to an denominated sum and so the discussions on the Federal Court are, in our submission, of limited authority.
There are two leading decisions. One is the judgment of Justice Hill in the matter of Davis v Federal Commissioner of Taxation (1989) 86 ALR 195. It is under tab 11 of the volume of materials. The relevant passages are at pages 229 to 231. The judgment deals with a number of other substantive issues which were argued between the parties. To make good my proposition about the nature of Mrs Davis’ interest in the fund I should draw your Honours’ attention to the paragraphs beginning at about line 13 and going through to about line 28 on page 229:
There is no dispute that with the exception of the 1979 year of income, Mrs Davis was presently entitled to 100 per cent of the trust income –
In the 1979 year, the trust tax return showed two amounts, but his Honour went on to say that it can be inferred – this is line 25:
it can be inferred that the greatest tax advantage would have been obtained by distributing to that company the maximum that could be distributed having regard to the losses available in that company to offset the distribution and that the balance of the amount available for distribution would have been distributed to Mrs Davis.
His Honour then goes on to refer to the alternative views which had been taken of the construction of share of the income of the trust estate up to that point, one being a percentage of proportionate basis and the other being a basis which said one simply has regard to the dollar amounts. Anything in excess of the dollar amounts is a share of the net income to which no beneficiary is entitled. Your Honours will see that discussion from the middle of page 229 over to the very top of page 231. What is perhaps material to note is that it was not contested in that case that the appropriate method was the proportionate method, having regard to Mrs Davis having a 100 percent interest in either/or, or the balance of the income. His Honour’s discussion is illuminating but not more than that.
The matter did come back before the court ten years later in a matter of Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70. That is under tab 14. In that case the company was entitled to the balance of the income in excess of an initial $5,000 appointment to another taxpayer. Your Honours will see that at the foot of page 72 in the paragraph at letter G. Justice Sundberg undertook a careful survey of the issues and authorities, but it must be said on our case that it was a survey only in the context of a dispute between the proportional theory and the quantum theory in the context of a taxpayer whose interest was proportionate.
So that we do not disagree with what his Honour said in that context. But we say that it does not provide assistance to the present context, where the taxpayer is entitled to a fixed amount. There is one thing that I should say about that judgment and that is that we do take issue with an almost passing observation that his Honour made at page 75 at about letter B. His Honour said:
Since the income amount may differ according to which formula is applied, the natural meaning to give to “share” where it appears for the second time is “proportion” rather than “part” or “portion”. When Parliament wanted to convey the latter meaning, as it did in ss 99 and 99A, it used the word “part”.
We would submit that the context in section 99 is quite different from the context in sections 97 and 98. Sections 97 and 98 are concerned with identifying the amount upon which, or in respect of which, a beneficiary is liable to be assessed and that is an amount which is defined by reference to a share. Section 99 is concerned with the rest, what is left over and in that context it is not necessary to identify a share and it is both sufficient and appropriate to refer to it as the part left over.
Your Honours, our friends place some reliance on an explanatory memorandum to an amendment made after the years in question. It is an amendment made in 2007. The amendment your Honours will find in the slight volume of three pieces of material filed by our friends in appeal 311 and described on the cover as first respondent’s materials. The amendment was to the 1997 Act and it was an amendment which allowed the trustee of a testamentary estate to elect to pay tax on any part of the net income which represented a capital gain.
Now, the text of the legislation provides no assistance either way in resolving the questions before the Court. But our friends draw attention to the explanatory memorandum, which is under the second tab, and on the fourth page at paragraph 3.9 gives an example where a testator’s will provides for assets to be held for a life tenancy and a remainder and the example supposes that the operation of Division 6, absent this amendment, is that any capital gain included in the net income is assessed to the life tenant.
In our submission, the example insofar as any regard can be had to it, and there is some doubt about referring to an explanatory memorandum to an amendment made after the period in question, but insofar as any regard can be had to it for guidance, it is not in point in the present case because it concerned the position of a life tenant who is entitled to the whole of the income, and that is not the case with which your Honours are confronted in this appeal.
Your Honours, it is our submission that “share” in the expression “share of the income of the trust estate” directs attention to what the beneficiary is entitled to have. The criterion in the legislation is the beneficiary is presently entitled to a share of net income.
GUMMOW J: Another thing I wanted to ask you, there seems to be an assumption underlying all of this that there are always beneficiaries.
MR SLATER: In the text of the legislation?
GUMMOW J: Yes.
MR SLATER: There is certainly an assumption about that in section 97.
GUMMOW J: How do purpose trusts fit into Division 6, on your submission?
MR SLATER: The answer to that is this, your Honour. First, the premise that your Honour puts to me is not quite correct because section 99 deals with a case where there is no beneficiary presently entitled, so the division does - - -
GUMMOW J: Does that assume because there is not a beneficiary, because there are no such creatures?
MR SLATER: The case where there is no beneficiary would be such a case.
GUMMOW J: I see.
MR SLATER: Second, a purpose trust will ordinarily, in order to be valid, be a charitable trust, and such a trust may, ordinarily would, but not always, be entitled to exemption from tax under Division 50 of the 1997 Act. I say may and not always because your Honours will recall having to deal with a case of Bruton Holdings, and in Bruton Holdings the trust was undoubtedly charitable, and your Honour will recall perhaps, that the tax which was in contest was tax which was claimed under section 99A on the basis that although it was a charitable trust it failed the condition also imposed by Division 50 that the fund be applied for the purpose for which it has been established. That is an instance, perhaps, of a case such as your Honour asked about, where there is no beneficiary because it is a purpose trust.
GUMMOW J: But given the wide definition of “trustee” there may be various statutory trusts. I am thinking about The Registrar of The Accident Compensation Tribunal v Commissioner of Taxation of the Commonwealth of Australia (1993) 178 CLR 145 where the Registrar had various moneys which he collected as Victorian statute office holder. The question was, how did the definition of “trustee” and Division 6 apply to him?
MR SLATER: That was a case – I am sorry, your Honour; it has slipped my mind. That was a case under section 218, or section 254?
GUMMOW J: It was a constitutional question, actually, on section 114 of the Constitution.
MR SLATER: That was the premise upon which it was resolved but I forget the circumstances which gave rise to it.
GUMMOW J: There is some discussion in there of Harmer’s Case too I think, which you referred us to. Anyhow, it might be worthy of some attention overnight.
MR SLATER: If your Honour please.
GUMMOW J: It does seem to emphasise the width of this definition of “trustee”.
MR SLATER: It is a very wide definition, your Honour, because it is there for a variety of purposes.
GUMMOW J: Justices Brennan, Dawson and McHugh at page 187 say that the phrase “trust estate”:
for the purposes of Div. 6 . . . must bear a corresponding meaning, that is, property of any kind held or controlled by a trustee in one or other of the capacities prescribed by the definition -
in 6(1).
MR SLATER: Their Honours seem there to be contemplating that a liquidator could be treated as trustee of the funds controlled. I do not think so, your Honour.
GUMMOW J: Well, I am not going to answer any questions. I am just inviting you to read page 187 overnight.
MR SLATER: Yes. I think a liquidator, one who might be a trustee for the purpose of a provision such as section 221P, does not derive the income; the income is derived by the company in liquidation. The liquidator is simply the officer who controls it. I think that is the correct analysis.
GUMMOW J: The wider the definition of “trustee” the less ground there is for bringing into the operation of the division “trust law” notions. That is the bottom line, Mr Slater, that I want you to grapple with if you wish to do so.
MR SLATER: I will endeavour to do so, your Honour.
FRENCH CJ: A trustee in bankruptcy might be – a trustee in bankruptcy, I suppose, takes control of - - -
MR SLATER: A trustee in bankruptcy is dealt with by Division 6 – by way of example, the trustee in Fox’s Estate v the Commissioner in I think 96 CLR. I was putting to your Honours the proposition that entitlement is at the core of this and your Honour Justice Gummow picked me up about the trust law consequences of that. But the legislative scheme, in our submission, is to apply the words “that share” meaning that interest in the income of the trust estate to net income.
If the share in the income of the trust estate is the whole of the income, then the whole of the net income is assessed to the beneficiary. If the beneficiary’s share is one-third of the income of the trust estate then one-third of the net income is assessed. If the share is all the income in excess of $50,000 or some other denominated sum then the net income assessed to the beneficiary is all of the net income in excess of the $50,000. But – this is the point material to the present appeal – if the share is $50,000 and no more then in our submission it is $50,000 and no more which is that share of the net income for the purposes of section 97.
HAYNE J: How does that fit with 99(2) of the Act and its reference to “no part of the net income of a resident trust estate that is included in”, et cetera?
MR SLATER: As I was endeavouring to put earlier, your Honour, in reference to the comment made by Justice Sundberg along the same lines as your Honour has asked, section 99(2) is concerned with so much to avoid semantic difficulties of the net income of the trust estate as is not included in that share in relation to any beneficiary. But the way the division works is for each beneficiary to determine what share of the net income is assessable to the beneficiary or the trustee on behalf of the beneficiary under sections 97 and 98 by reference in each case to the beneficiary’s share of the income of the trust estate. What is left over is that part of the net income which is not included in the share of any beneficiary. That, in our submission, is how it fits together, your Honour.
Your Honours, on any construction of the Act – and this is the difficulty with which both parties in this appeal and ultimately the Court must grapple – whenever the net income as defined in section 95 exceeds the trust income, there will be tax on the net income which is going to give rise to what we have called an aberrant result. There will be tax on an amount which is not available for distribution to beneficiaries and not able to be retained by the trustee. Somebody will have to pay tax on an amount which is not represented by assets from which the tax can be paid. The problem posed by the proper construction of section 97 and the related provisions is how that burden should be allocated.
The quantum view, which nobody has put forward – that is, nobody at the Bar table has put forward – is one which would impose the whole burden on the difference between income of the trust estate and net income upon the trustee. Sometimes that may seem appropriate because the trustee is in control of the affairs of the trust, but other times it may seem inappropriate not only because the rate of tax upon trustees is much higher, but also because the trustee may properly have paid away the moneys and simply not have any assets with which to met the liability and the remaindermen may not be the appropriate parties upon whom ultimately to charge the liability. The basis we put forward, the interest basis, or the basis of entitlement view - - -
GUMMOW J: Just stop for a minute.
MR SLATER: Yes, your Honour.
GUMMOW J: You are postulating a situation where the Act imposes a liability upon the trustee as trustee, but the trustee – what, has no trust assets to which the trustee has recourse?
MR SLATER: Yes, your Honour.
HAYNE J: Because the trustee has chosen to pay away those assets regardless of the trustee’s personal liability to meet tax. Is that the situation contemplated?
MR SLATER: Can I attempt to give your Honours an - - -
HAYNE J: No, is that the situation contemplated?
MR SLATER: If the trustee has simply chosen to wrongly pay it away, then the trustee bears responsibility. Can I give your Honour an instance of the sort of example that might happen? One is - - -
GUMMOW J: But the payment of the tax, if I can just interrupt you, would be an obligation imposed, rather than incurred, by the trustee, which would be a general law right of recoupment, would it be?
MR SLATER: Yes, your Honour.
GUMMOW J: Which would be a first claim?
MR SLATER: Yes, your Honour. The trustee has a right of recoupment out of the trust fund, so far as it extends, and that in effect means that the burden is cast upon the remaindermen.
GUMMOW J: Yes.
MR SLATER: If there is a fund for the remaindermen. There may not always be. When I said the trustee has paid away, the sort of instance that I had in mind is where – to take a simple example – the trustee is engaged in the professional services - - -
GUMMOW J: You say the burden is on the remaindermen? Why is that a cause of outrage?
MR SLATER: If the trustee has a right of recoupment, assuming that for the moment, then he will be recouped out of - - -
GUMMOW J: It could be recoupment for a contractual claim, or all sorts of things, could it not?
MR SLATER: Sorry, your Honour, I have not made myself clear enough. If the trustee has a right of recoupment out of the trust estate, then the income having been distributed to the income beneficiaries, what remains is the fund held on trust for the remaindermen. If the trustee has a right of recoupment and exercises that right, then the interests of the remaindermen are diminished accordingly. I apologise for putting it in such a shorthand fashion, but that was what I was endeavouring to convey.
GUMMOW J: But do the remaindermen then have a complaint, because the trustee is – what about a situation where this results by a form of administration of the trust. I do not know.
MR SLATER: They may do so, and it may be that there is not a corpus from which the trustee can recoup. I think in the present case, for example, when one looks at the accounts for the trustee, there are no net assets, so that the trustee company is personally liable and although it has a right of recoupment, that right is of no value.
A sort of situation in which this might arise without any particular malfeasance on the part of the trustees, a professional services business, in the course of which the trustee incurs liabilities entertaining clients. The Act has a special provision which says that those expenses are not allowable deductions, and they be properly incurred in order to gain the income from clients. The Act says the net income is greater than the trust income by the amount of those disallowed expenses. That is a very simplistic example. Other examples are, as I said, attribution amounts where the trustee is treated as having a controlling interest in an offshore company, and is therefore taxed on the income derived elsewhere by the controlled company, although no part of it ever comes into the trustee’s hands. Those are the sort of situations which can give rise to this discrepancy.
GUMMOW J: But the wining and dining expenditure you say is properly incurred as a matter of - - -
MR SLATER: I am putting that as an assumption in my example, your Honour.
GUMMOW J: Yes, as a matter of trust law, it is properly incurred to get the business. Why does not the trustee have a recoupment of that over the trust assets?
MR SLATER: He does, your Honour, that is my point about the - - -
FRENCH CJ: It is like any contractual - - -
MR SLATER: Where does the burden of that recoupment fall? I apologise, I have conflated two questions. The expenses of wining and dining are met out of the income. Part of the income has been used to pay those expenses. For trust purposes, that is, be it assumed, acceptable.
GUMMOW J: Underneath all this there is a question of how, as between life tenant and remaindermen, the recoupment is carried, is there not?
MR SLATER: I am sorry, your Honour?
MR SLATER: Recoupment of the tax liability?
GUMMOW J: There is a question underlying this which is, as between life tenant and remaindermen, how is the burden of the trustee’s recoupment carried?
MR SLATER: Recoupment of the tax liability?
GUMMOW J: Yes.
MR SLATER: Yes, there is.
GUMMOW J: Someone had better suggest an answer at some stage.
MR SLATER: It may be that the answer in a particular case is that the trustee has a right of resort to the income beneficiaries, although the circumstances in which a trustee can claim against beneficiaries are fairly limited. It does not at the moment seem to me that this falls within the scope of the reasoning in Hardoon v Belilios.
GUMMOW J: What is the question?
MR SLATER: That may be a question which would - - -
GUMMOW J: If you invite us to immerse ourselves in trust law, you have got to put more than your toe in it. That is what I am suggesting to you.
MR SLATER: But it does not seem to be an answer to the question, how the tax burden falls to inquire whether the trustee can recover from the corpus or must pursue the life tenant. That is a second order question. It is a question which arises after the tax liability has been established.
GUMMOW J: But you are inviting us to consider horrific consequences.
MR SLATER: Yes, I am. I accept that, your Honour.
GUMMOW J: To know the consequences, we have to know what you say about various aspects of trust law. That is all I am putting to you.
MR SLATER: As to that, your Honour, it would seem to me – and if I have a different thought overnight, may inform your Honours tomorrow – that the trustee would not have a right to recoupment from the life tenant either on the principles in Hardoon v Belilios or the exegeses of those principles in cases such as Broomhead’s Case. Your Honours, we accept that there is no construction of the Act – not ours, not the quantum view, and we say, not the Commissioner’s view – which leads to any wholly satisfactory result. It is Hobson’s choice, it is a choice of which is the least worse result, in a sense, in terms of construction. We submit, for the Court’s consideration, that in that regard nothing in the text of the legislation, nothing in the authorities and nothing in the legislative history mandates any one particular answer. We have put forward the answer that we have put forward as that which seems to us most nearly to accord with a legislative policy.
FRENCH CJ: You say accords the legislative policy. Can you just give us a succinct statement of what you say the legislative policy is?
MR SLATER: We take what Chief Justice Latham said in Whiting’s Case as the best indication. That is that there is an assumption underlying the Act that the burden of tax should follow the entitlement to income. The actual structure of the Act does not permit that to be done completely, but it seems to us that that is the framework around which the structure was intended to operate, albeit that the drafting is imperfect.
I do not think I can put it any higher than that, your Honour. I cannot point to any observations by any Minister or anything in judicial consideration which antedated any of the amendments which would support that beyond, as Sir John Latham said, the assumption which appears to underlie the framing of the Act. I appreciate that that is not much assistance to your Honours but it is the best we can do.
Your Honours, I should say something briefly, if I may, about the Full Federal Court. We submit that the court, whose reasons I already embodied in the reasons of Justice Emmett on this point, was wrong, at least in part, because we failed to convey the essence of our submission. The submission is recorded at page 301 of the appeal book at paragraph 38, and we have to accept that what Justice Emmett has said there is very close to a verbatim repetition of what we advanced to the court below.
We say that the underlying concept does not change but the operation of the concept does. But we do think, with respect, that his Honour misunderstood at page 302 at paragraph 42 the submission, or at least in attempting to restate it misstated it. We do not say that - - -
HEYDON J: That is not a submission. Is that not his disposition of the submission? Is that not where he starts to decide?
MR SLATER: Yes, your Honour, and that is what I was endeavouring to say. We think that in dealing with it he has slightly misstated the proposition we were putting. We do not say that the word “share” refers to a fixed amount in the sense of means a fixed amount. We say that it means what the beneficiary is entitled to and it may result in a fixed amount. Now, “refers to” may mean results, but his Honour seems to have elided the meaning of results in with the meaning of using “share” as meaning – I am not putting that very clearly, am I?
FRENCH CJ: The last sentence in paragraph 38:
Mr and Mrs Bamford say the word share in s97 denotes a concept which changes to reflect the method by which the beneficiaries’ entitlements to share in the income of a trust estate is determined.
That is the essence of what you are putting to us here, is it not?
MR SLATER: Not a concept which changes, a concept which remains constant, but whose operation changes.
FRENCH CJ: Well, you talk about the connotations.....in an ambulatory term here.
MR SLATER: Yes, that is the point I am endeavouring to make. I think his Honour has construed the submission as meaning that the meaning changes according to the circumstances. We say the meaning remains constant, but the effect varies. His Honour has rejected, it seems to us, the submission on the premise that we had intended to say the meaning changed, according to circumstances.
GUMMOW J: So in the last sentence at paragraph 38 you would be happy if his Honour had written “In other words, Mr and Mrs Bamford say the word share in s97 denotes a concept, the effect of which changes or the operation of which changes”.
MR SLATER: Yes. Your Honour, there are two other material points which perhaps do not figure all that greatly and I should draw your Honour’s attention to what we say about them. At the foot of page 303 in paragraph 46 the sentence beginning four lines from the foot of the page:
Since the income amount may differ, the natural meaning to give to “share”, where it appears for the second time, is “proportion” rather than “part” or “portion”.
We respectfully submit that that is a non sequitur. Differences in the amount of the income do not entail that share must mean proportion. At page 304 his Honour, in effect, rejects our submission on the reductio ad absurdum basis, that our submission has such aberrant results that it must be rejected. We accept that it has aberrant results, but we say that so does every other submission.
GUMMOW J: Sorry, what paragraph are you reading from?
MR SLATER: Page 304, paragraph 49, your Honour. The substance of the paragraph is that our construction could result in assessment of a beneficiary to tax of more than a beneficiary is entitled to receive, but that is precisely the result of applying the Commissioner’s proportion method. It is only the extent that varies, according to the circumstances.
Your Honours, I have cast the contest in the submissions to date in terms of three alternatives, being the quantum approach, which has not been supported, the proportionate approach and the basis we advance. These are all directed to dealing with a disparity between what is referred to at the top of section 97 as the income of the trust estate and what is referred to or defined in section 99 as the net income.
Our friends put forward for consideration by the Court, should the Court take a particular view, an alternative view. In our written submissions we had opposed that view for the reasons I endeavoured to outline this morning. That is we say that there cannot be a present entitlement to that part of the net income of the trust estate, which is - - -
GUMMOW J: Paragraph, in your written submissions?
MR SLATER: In our appeal, your Honour – that is, appeal 311 – the proposition is to be found in our friend’s submissions in response at paragraph 14 on page 4 and in paragraphs 59 and following on page 14.
FRENCH CJ: You would win on their alternative construction, by the way, would you not?
MR SLATER: This is the alternative construction.
FRENCH CJ: Yes, that is right. They accept that you would win on their alternative construction.
MR SLATER: Yes, they do. It is not being put forward by our friends as their submission but it is put forward to assist the Court.
HEYDON J: Presumably, you therefore accept it. It is in your clients’ interests to accept every argument which may advance their material interests and its material interest, is it not?
MR SLATER: Yes, and for that reason, your Honour, I am now addressing it. I have the duty to my clients to put that. I put as my primary submission the case we have put and I take this submission as the alternative. It is not actually put by my friend as his submission. It is put as something for the Court to consider. I am not quite in a position to leap upon it with glee.
HEYDON J: But this is not a seminar or a Law Reform Commission public hearing.
MR SLATER: No, I appreciate that, your Honour.
HEYDON J: Sometimes one thinks it has been, in a way.
MR SLATER: If I have gone too close to that today, your Honour, I apologise. I am doing the best I can with a difficult position. We dealt with that at paragraph 15. We did not embrace it with enthusiasm because it seemed to us that it could not be supported on the Act. For the reason which was given by the Federal Court in the Pilnara Case, there are amounts included in net income to which a beneficiary cannot be presently entitled.
GUMMOW J: Say that again.
MR SLATER: I am sorry?
GUMMOW J: Because?
MR SLATER: There are amounts which may be included in the net income of the trust estate to which a beneficiary cannot be presently entitled. If your Honour wishes me to illustrate those, one is amounts which are included in assessable income although there is no receipt. Examples of that would include dealings in assets at less than market value where the Act says that, notwithstanding the asset has been disposed of for $100, its market value is $150 and $150 is included in assessable income. The $50 is a purely notional accretion to assessable income.
A second example – and these are by no means a complete range of examples – but the second one is the one which is referred to in Pilnara and that is the attributable income of a taxpayer who has a controlling interest in an offshore corporation or trust, and a controlling interest is maybe one which is held in conjunction with up to 20 other people so that it is not necessarily complete control. In those circumstances, an amount may be attributed to a trustee which the trustee cannot receive.
Third example, and one which may be closer to being familiar to your Honours, is the operation of Part IVA where an amount as in Hart, which was a deduction case – but Hart perhaps illustrates the point. The net income is increased by disallowance of a deduction which was actually paid out – properly and genuinely paid out – but the Commissioner has determined and the court has upheld the determination that the amount is not deductible. In all those cases, there is an amount in net income which does not exist and nobody can be presently entitled to it. For that reason, being proper about it and in response to what Justice Hayne has said, we did not embrace it because it would have been, as we sought, misleading to the Court to do so.
The passages where we dealt with that are paragraph 15 of our reply in our appeal, but, in addition, the submission is dealt with in our friend’s submissions as appellant at paragraph 20 on page 6 of his submissions in 310 and in more detail at paragraph 57 and following of those submissions, and a response to it appears in more detail in paragraphs 36 to 41 of our submissions in the Commissioner’s appeal and then our friend’s reply to that at paragraphs 14 to 16 of their reply. What I wanted to address orally was what appears from their reply because, if I understand their reply correctly, the proposition being put is something along these lines. The income of the trust estate, in the opening words of section 97, refers to all those amounts which are included in the assessable income of the trustee for the purpose of arriving at the section 95 net income, but only that part of all those gross amounts to which a beneficiary can be presently entitled are picked up as the beneficiary’s share.
So that if the trustee were to receive $200,000 of sales revenue and incur $150,000 of cost of sales, only $50,000 would be available for the beneficiary to have a share in and if the net income were increased by another $20,000 under one of the market value provisions, then that $20,000 would not be available to the beneficiary to have a share in because the beneficiary could not be presently entitled to that notional amount. If that is the way in which our friends put the proposition, then we embrace it because, as Justice Heydon points out, it leads to success for our clients here.
We do draw to the Court’s attention that that alternative construction has a significantly different ultimate consequence from the construction we advance. The significantly different ultimate consequence is that, on the contention we advance, that is the beneficiary who is entitled to the balance of income or the beneficiary who is entitled to the whole of the income, who is assessed on the excess of net income over the income of the trust estate. That is the effect of applying the proportion view either to the balance over a fixed sum or if there is no fixed sum, to the whole. On our friend’s alternative analysis put forward for the Court’s consideration, the consequence would be that that excess would be income to which no beneficiary can be or is presently entitled, so that the liability for tax in respect of it would fall upon the trustee and not upon the beneficiary.
Now, from my client’s perspective, it does not really matter which of those conclusions follows because my client does not fall into that category of beneficiary entitled to the balance or beneficiary entitled to the whole of the income and is not assessable and it makes no difference to the trustee because on that analysis, the whole of the capital gain is income to which the beneficiaries in the 2002 year are presently entitled because it was in fact resolved to be distributed to them. But when the Court comes to consider this issue, those are the consequences as we see them of adopting the alternative construction on the one hand and the construction we put forward on the other. Your Honours, with that qualification on our written submissions, we adopt our written submissions and unless there is anything
else that I can tire your Honours with, those are our submissions on our appeal.
FRENCH CJ: Thank you, Mr Slater. Yes, Mr Gleeson.
MR GLEESON: Your Honours, it might be convenient in the time available today to indicate broadly the position the Commissioner puts to the Court as submissions in both matters and the results that would achieve and the role of the so-called alternative construction. Is it convenient to do that, and then I would move to the 2002 appeal first? One critical question concerns income of the trust estate in section 97(1) in the opening words. Before the AAT the parties put two competing positions which are conveniently identified at page 276 and 277.
The position put by the taxpayer is summarised in paragraph 40, and that hinged on the notion that something which was received as capital under ordinary trust law concepts, namely the profit on sale of part of the corpus, could be converted into income under a provision of the trust deed and a trustee determination, and once that occurred there was then relevant income of the trust estate. That employed a notion of giving primacy to trust law.
The competing position put by the Commissioner which is referred to in paragraph 41 is that income of the trust estate means a tax law concept, that is within the statute, income according to ordinary concepts. That submission was accepted at paragraph 44, and the Tribunal found that one looked at the character of the income using, we submit, a tax law focus received by the trustee and then, retaining that character, distributed to the beneficiaries.
What appears to have occurred is that there was not argument before the Tribunal of what was the logical conclusion of paragraph 44. If one was employing a tax law concept, would one stop at ordinary income or would one include statutory income, in which case the capital gain might be viewed as statutory income and therefore the taxpayer would win. That issue was also not expressly taken up in the Full Court. The Full Court, in effect, upheld the argument at paragraph 40.
FRENCH CJ: Now, paragraph 40, did that go any further than simply to find that the trustee had, in effect, operated pursuant to clause 7(n) in the characterisation of the gain as income?
MR GLEESON: It went no further than that. The argument that was then being put by the trustee was since one gives primacy to what is happening in trust law, if we have income - - -
FRENCH CJ: Yes, I understand that.
MR GLEESON: Even though it started as capital.
FRENCH CJ: So 40 goes no further, does it, than to say that that is what the trustee did?
MR GLEESON: Yes, that is what the trustee did. The response of the Tribunal was it does not matter because we are not concerned with those internal dealings.
FRENCH CJ: That is when you get to 44.
MR GLEESON: Then you get to 44. Now, what I am seeking to point out is that the Commissioner feels bound to point out that in response to 44 a question arises which is if we are looking at the tax law concept of income taking up various questions asked by members of the Court today, why does one stop at ordinary income and not embrace the whole of income under the statute which would include everything which the statute treats as income, including net capital gains.
If one takes the argument in 44 to its logical conclusion, the result is the taxpayer deserved to win but via a different form of reasoning. The Commissioner, having carefully considered the matter, wishes to put two submissions to the Court. The first is that that argument, namely, tax income in its full glory, has considerable support in terms of legislation, legislative history, principle and the cases and in that sense the Commissioner embraces everything that has been put by the Court today in argument and in one sense that is enough to resolve that appeal.
The other set of submissions I have are to seek to defend why you would use tax income but stop at ordinary income. I have to confess that is a difficult task the more one thinks about it. The more one seeks to do that the more problems you cause with the division. Our short answer to the 2002 appeal is that the correct legal result is that the appeal ought to be dismissed for the reason that the argument at paragraph 44 although correct in law should have been taken to its conclusion and tax income including net capital gains – this was a net capital gain and there was income to the trust estate in that sense and the beneficiaries were presently entitled to it. Your Honours, that is our short position on 2002 if the Court would respectfully receive such a submission.
HEYDON J: Let me get this straight. The Full Court set aside the Tribunal’s decision in 2002.
MR GLEESON: Your Honour is correct.
HEYDON J: You want the appeal dismissed. Are you not backtracking on the submission that is in paragraph 44?
MR GLEESON: I am putting two positions to the Court. I have an appeal to this Court and the appeal requires me to uphold paragraph 44, full stop. If I can uphold paragraph 44, the appeal wins. To uphold paragraph 44 there are two steps to the reasoning. One is, income of the trust estate means income in the statutory sense of the Act. Step two, that statutory sense stops at the stage of ordinary income and does not go any further to statutory income. If I succeed in that, the appeal wins. If I fail in that, the appeal loses for a reason different to the reasoning of the Full Court. I appreciate the difficulty in what I have just put. I have attempted to be frank with what our position is.
FRENCH CJ: Does that mean you are in substance abandoning the appeal?
MR GLEESON: No, it does not, your Honour.
FRENCH CJ: But you want us to dismiss it.
MR GLEESON: I am seeking to put that if your Honours consider that paragraph 44 has the logical conclusion which is not present in it, the result would be that result. If your Honours treat paragraph 44 as a full and correct statement of the law, the appeal would succeed. The tenor of the argument that I wish to run on that appeal is, firstly, to show that it is the tax concept of income of the trust estate being used and to take up the matters the Court has raised today to that effect, and then to seek to argue it stops short of statutory income.
GUMMOW J: Stops short?
MR GLEESON: Of statutory income, such as capital gains. It applies to ordinary income. That is the 2002 appeal. Could I try and do the same exercise for 2000? At page 268 - - -
GUMMOW J: Which appeal are you talking about now – 311?
MR GLEESON: Yes. For the 2000 year where I am seeking to hold on to the Full Court judgment, the Full Court upheld the reasoning at page 268, paragraph 19. That is, the Full Court followed - what it understood followed from Zeta Force – namely, that in a case where the section 95 income is greater than the tax income, it is assessed to those beneficiaries who are presently entitled in proportion to their shares.
The effect of that decision of the Tribunal and of the Court Mr Slater has accurately explained by going for example to perhaps pages 160 to 161 and what he informed you was that there was an excess of section 95 income over trust income of about $191,000 and the approach which has been upheld below is to say, we attribute that proportionately to those persons who do have a present entitlement. Who are those persons? Go to page 161. They are Mr and Mrs Bamford, in part. They are the Church of Scientology in another part. The Church is an exempt entity, so it will not ultimately pay tax, but Mr and Mrs Bamford, working the proportions out - - -
FRENCH CJ: They are taking 18 per cent.
MR GLEESON: They are going to take 18 per cent each of the shortfall of $191,000, and that is what is being upheld in both courts below. What the Commissioner then wishes to do is to put two positions in relation to this appeal. One position which is to defend the approach taken below and to defend the proportionate approach, an approach which he considered he was bound to follow in the courts below as it had Full Federal Court authority on at least two occasions.
The “however” is this. If income of the trust estate has a tax meaning as we contend it does, the Commissioner frankly concedes that it becomes harder to defend the proportional approach and one moves closer to the approach which Mr Slater summarised at the end of his submissions, namely you work out the share, in the case of Mr and Mrs Bamford their share is $33,872 each. Is that share reflected in the net income which we are seeking to assess someone to? The short answer is their shares are not reflected in the $191,000 shortfall, so it was wrong to assess them to it.
CRENNAN J: So the interest approach is to be preferred to the proportionate approach?
MR GLEESON: If one takes the tax law concept of income, the Commissioner’s position is that the difficulties with the proportionate approach become greater, and what we are calling the “interest approach” I need to say a bit more about how it would work, becomes in principle more satisfactory and it gets rid of, I will not say all, but virtually all anomalies.
HAYNE J: Well, Mr Gleeson, I speak only for myself. I, one, do not know what grounds of appeal in your appeal you persist in prosecuting, and, two, I do not understand your position in 311. I am sorry, I just have not followed what you have said.
GUMMOW J: We really need to know how what you are saying is connected to which grounds of appeal and which of the two appeals.
MR GLEESON: I understand that, your Honour.
GUMMOW J: So we are not lured into giving the Commissioner an advisory opinion, to put it bluntly.
MR GLEESON: Your Honours can be assured that a certain case that involves - - -
FRENCH CJ: Something in writing.
MR GLEESON: A certain case that involved ships, your Honours, I have attempted, given my many limitations, to explain to the Commissioner in the lead up to this appeal – I have attempted to do that – and I recognise the issues arising from that. I am acutely conscious of that. What I have sought to do in the short time available is to give a conspectus for how it all fits together. What I am trying to say is that central to what the taxpayer is putting before this Court is income of the trust estate is a trust law, not a tax law concept. On that the Commissioner says, no, that is wrong, it is a tax law concept. If it is a tax law concept, the Commissioner accepts that there is a very real question whether one can confine its boundaries to ordinary income or whether it applies to all income within the concept of that Act.
Your Honours have in the joint bundle of legislation, at tab 14 of the materials, a diagram which comes from Division 6-1 of the 1977 Act. The diagram, which, in a sense, is a summary of relationships established by many more detailed provisions, shows that the Act reaches to two sorts of income, ordinary income and statutory income, and then the Act treats that as falling into three categories which can be applicable to each; assessable, non-assessable, non-exempt and exempt.
The thrust of our argument in 311 is that income of the trust estate is operating in this field of discourse. It is not operating in the field of what is happening under a trust deed. If that proposition be correct, the next question is, is it limited to ordinary income or does it pick up statutory income. I wish to put then two arguments: one, that it could be limited to ordinary income, in which event the appeal succeeds. The alternative position is it includes statutory income in which event the appeal fails.
GUMMOW J: Now, you are talking about 310?
MR GLEESON: Yes, your Honour, that is 310.
GUMMOW J: That is your appeal?
MR GLEESON: That is our appeal, yes.
GUMMOW J: Now, which of the grounds in the notice of appeal do you adhere to? Which do you jettison? Which do you want to add, and need leave to add? Page 320. It is not just a question of putting arguments. It is a question of hooking the argument to a ground of appeal.
MR GLEESON: I appreciate that, your Honour.
GUMMOW J: Maybe you want to think about that overnight.
MR GLEESON: Your Honour, I can deal with that immediately. Each of grounds 2 to 6 is pressed, and implicit in that are two propositions. One is we are speaking of income of the trust estate within the Tax Act concept, therefore we are not looking at things happening under the trust deed. That is clear in paragraph 4 and 5. To fully win on that argument, your Honours would need to accept that one then stops at ordinary income and does not look at statutory income. So that is in 310.
GUMMOW J: The question in 311 is on which of these grounds do you join issue?
MR GLEESON: We join issue on again grounds 2 to 5, all of them, and that is our defence of the proportionate approach.
HAYNE J: Do you advance, or more accurately, seek leave to advance any notice of contention in appeal 311?
MR GLEESON: I cannot.
FRENCH CJ: As you could have just issued some amended assessments and put out a ruling.
HAYNE J: Press release, probably.
MR GLEESON: Your Honours, I will not repeat it. I have said I am conscious of these issues. I have attempted to explain the issues to the relevant party, and I have attempted to as simply and directly as possible address them with your Honours. I cannot advance the notice of contention because what may well be the correct view of law, which is that it is tax income in its full glory including statutory income, applying an interest type approach is one that cannot see direct success for the Commissioner in either appeal. So therefore the Commissioner is bound to lay that matter before the Court as an alternative argument and the Court then will proceed appropriately in response to that.
FRENCH CJ: This does not appear anywhere in your written submission?
MR GLEESON: Yes, your Honour.
FRENCH CJ: Where does that appear? Looking for 310 first.
MR GLEESON: In 310 the alternative position is recognised in paragraph 20 and the argument which would follow from it is explained in paragraphs 57 through to 63.
FRENCH CJ: But that is conditioned by if the appellant is wrong in his argument on policy?
MR GLEESON: Yes.
FRENCH CJ: That condition is no longer applied?
CRENNAN J: It is put slightly differently now, is it not?
FRENCH CJ: It seems to be an unconditional statement you are now making.
MR GLEESON: I was attempting not to do that, your Honour.
FRENCH CJ: I wonder whether it would not be helpful, Mr Gleeson, for you overnight just to encapsulate what you have given us orally in some dot points so we know precisely what the position is and what conditions in respect of each of these appeals. I appreciate that you have told us what you are doing with the grounds of appeal, but I think the bottom line, which you have explained orally, might be usefully put on a single sheet of paper for each appeal.
MR GLEESON: I will attempt to do that, your Honour.
FRENCH CJ: Perhaps now might be a convenient moment. We will adjourn until 10.15 tomorrow morning.
AT 4.13 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 3 MARCH
2010
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/HCATrans/2010/37.html