Elecnet (Aust) Pty Ltd (as Trustee for the Electrical Industry Severance Scheme) v Commissioner of Taxation of the Commonwealth of Australia [2016] HCATrans 237 (11 October 2016)

Last Updated: 11 October 2016

[2016] HCATrans 237

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M104 of 2016

B e t w e e n -

ELECNET (AUST) PTY LTD (AS TRUSTEE FOR THE ELECTRICAL INDUSTRY SEVERANCE SCHEME) (ACN 080 344 458)

Appellant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

KIEFEL J
GAGELER J
KEANE J
NETTLE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 11 OCTOBER 2016, AT 10.17 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC: If the Court pleases, I appear with my friend, MR B.L. JONES, for the appellant. (instructed by Mills Oakley)

MR G.J. DAVIES, QC: If the Court pleases, MR S.J. SHARPLEY, QC and I appear with our learned friend, MR A.T. BROADFOOT, for the respondent. (instructed by Australian Government Solicitor)

KIEFEL J: Yes, Mr Slater.

MR SLATER: Your Honours, this is an appeal from a decision concerning a ruling given by the Commissioner of Taxation under Division 359 in Part I of Schedule 1 to the Taxation Administration Act. There is only one issue in the appeal, and the issue is whether the trust of which the appellant is trustee is a unit trust for the purposes of Division 6C of Part III of the 1936 Act. The appellant is the trustee of a trust known as the Electrical Industry Severance Scheme and in submissions I will call that either the EISS trust, or simply the trust.

Your Honours, the structure of our oral submissions is that we will first go to the factual context apart from the terms of the deed, then to the statutory provisions and their context and the meaning of “unit trust” as it is used in Division 6C, then to the terms of the deed, and finally to matters arising from the judgment of the Full Court and from our friends’ submissions.

In our submission, the issue should be approached not from any a priori assumption about what is or is not a unit trust, but from the viewpoint of the words of the statute, and having examined the words of the statute which did examine the terms of the trust, and applied the words of the statute to the terms of the trust to determine whether the statutory criteria are met.

Your Honours, if I could go first to the factual background. Because this is an appeal from a ruling, the factual context is quite severely limited. It is limited to the scheme which was ruled on. Your Honours will find the scheme at page 72 of the appeal book, starting at about line 37 and through to the top quarter of page 73. The material which goes on from about line 25 of page 73 is concerned with a question which is not in issue in the appeal and that is the question whether the trustee was carrying on a business.

Your Honours, the EISS was established to provide portability and security of termination and redundancy benefits to workers in the electrical industry. Your Honours will see that at about line 46 on page 72. It is an approved worker entitlement fund, as defined in section 58E(b) of the Fringe Benefits Tax Assessment Act. I will not take your Honours to that but for reference your Honours have the CCH legislation – it is on page 1310 of volume 3.

The consequence of it being an approved worker entitlement fund is that no fringe benefits tax is payable on contributions into the fund. The employers are required to pay into the fund for the benefit of their employees under a range of industrial agreements and awards. There are some 1,000 employers and some 31,000 worker accounts and the terms of the trust on which the funds paid in are held by the appellant are set out in the deed, which commences at page 1 of the appeal book. I will come back to that momentarily.

Could I then turn to Division 6C of the 1936 Act? Your Honours will find that in volume 2 of the CCH legislation. I am not sure whether your Honours are using the paper version or an electronic version, but for those who are using the paper version I will give page references. Division 6C is an extension of Division 6B. I am sorry, I said I will give the page reference. It begins on page 1892 of volume 2.

Division 6B was a response to structures which were established in the 1970s whereby first property income and then trading income was diverted from companies to trusts so as to be able to be passed on to superannuation fund and non-resident beneficiaries without bearing the intermediate burden of company tax. This was at a time when Australia had a classical taxation system for companies, that is, companies paid tax, they paid dividends, and shareholders paid tax on the dividends.

The current system, as your Honours will recall, is that it is an imputation system so the shareholders get the benefit of the company tax. That was not so in the 1970s, so that there was a definite incentive to escape liability to company tax on income. The provisions of Division 6B and subsequently of Division 6C were concerned with taxing the trustee in the same way as a company. There were ancillary provisions in both divisions to deal with distributions to beneficiaries and treat them, in effect, as if they were dividends paid by a company.

The problem which arises in the present appeal arises from the circumstance that Division 6B and Division 6C each use undefined terms, the same terms. One of those terms is the term “trust”. That term appears more than 5,000 times in the present version of the Acts. There was not quite so many in the 1936 version when it was enacted but it was still quite frequently there. Although it is undefined, the word “trust” has a well-established meaning in equity. Although, if one reads the various texts one will find that a conclusive definition has eluded text writers but it has not been needed by the courts. Courts have never had any difficulty determining what is or is not a trust.

In the context of the Income Tax Assessment Act, this Court decided in a matter of Bamford v Commissioner of Taxation [2010] HCA 10; (2010) 240 CLR 481 that the word “trust” as used in Division 6 and, consequentially, in Divisions 6B and 6C, although they were not in issue in Bamford’s Case, took its content from the general law. Your Honours will find that observation on page 501 at paragraph 17.

The expression “unit trust” now appears in over 50 provisions of the combined 1936 and 1997 Acts but it appears without a definition in any of them. Now, we set out in our written submissions at paragraph 31, and I will not repeat what is said there, that there are references to unit trust and units in three categories of provisions. Some of those concern the consequences of the creation of, or dealing with, or extinguishment of units, or entitlements called units.

Those provisions are mostly to be found in the capital gains tax provisions of Part 3-1 of the 1997 Act. Some of the provisions, a second category, concern consequences for the beneficiary or for the trustee of a trust being a unit trust, and the third category which includes Division 6C is a category of provisions which are concerned with the liability of the trustee to pay tax at corporate rates. It is, in our submission, not necessarily the case that the expression “unit trust” has precisely the same meaning in all three categories of provisions. It depends in each case on the terms and purpose of the part of the legislation in which the expression appears so that the inquiry in the present case, in our submission, begins with the terms of the legislation.

If I may, I will take your Honours next to those and, as I said, in the CCH legislation they begin at page 1892. But may I first take your Honours to section 102S, which is the operative provision and which appears on page 1902 of the print? Section 102S provides that:

The trustee of a unit trust that is a public trading trust in relation to a relevant year of income shall be assessed and is liable to pay tax -

and it goes on; I will not take your Honours any further than that. Two things to note there: it is just the trustee of a unit trust, that is all that is said about the nature of the trust, and the unit trust must be a public trading trust. Now, the term “public trading trust” is defined in the legislation and the definitions to a degree go backwards through the Act. So if I could take your Honours for present purposes to section 102R(1)(b), your Honours will find the chapeau to subsection (1) at the foot of page 1901:

A unit trust is a public trading trust in relation to a relevant year of income –

Then we can pass over paragraph (a), because it relates to years which are long past, and go to paragraph (b):

where the relevant year of income is the year of income commencing on 1 July 1988 or a subsequent year –

then the conditions are, first:

(i) the unit trust is a public trust -

Second:

(ii) the unit trust is a trading trust -

in each case “in relation to the relevant year of income”, and third:

(iii) either of the following conditions is satisfied:

• (A) . . . is a resident unit trust –
  

or it:

(B) . . . was a public trading trust in relation to a year of income preceding –

the present, and:

(iv) is not a corporate unit trust within the meaning of Division 6B –

So one can put aside the fourth requirement for the moment; that simply ensures that 6B and 6C do not overlap. Now, the criteria for being a resident unit trust are in section 102Q, which is on page 1901. I do not think I need trouble your Honours with that. There is no question here that this is a resident unit trust. The criteria for it to be a public unit trust is in section 102P which begins on page 1898, and that provides:

(1) For the purposes of this Division, but subject to the succeeding provisions of this section, a unit trust is a public unit trust in relation to a year of income if, at any time during the year of income:

(a) any of the units in the unit trust were listed for quotation in the official list of a stock exchange . . .

(b) any of the units in the unit trust were offered to the public; or

(c) the units in the unit trust were held by not fewer than 50 persons.

The present is a case where neither (a) nor (b) is satisfied, but (c) is. There is an alternative test in subsection (2) with which your Honours are not concerned, and that is a test the substance of which is that the trust is taken to be a public unit trust if units in the trust that entitled the holder to 20 per cent of the beneficial interests in either income or capital were held by exempt unitholders. That, as I said, is not a matter which need concern your Honours in this case.

Now, the criteria for a unit trust to be a trading trust your Honours will find in section 102N on page 1897 at the foot of the page:

For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a) carried on a trading business; or

(b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

The criterion in section 102N is not relevant to the present appeal. What is a trading business is defined in section 102M. I will tell your Honours that in section 102M – and your Honours will find these definitions on page 1894:

trading business means a business that does not consist wholly of eligible investment business.

The “eligible investment business” definition is on page 1892. But we are not concerned with those questions in this appeal because the only question which arises on the ruling and on the limitation imposed on the proceedings by an order made by the primary judge is the question whether this trust is a unit trust. For that reason, your Honours need not be concerned with any of the qualifying sections, section 102MA to section 102MD.

What is notable about these provisions is that all of them use the expression “unit trust” without definition. There is, however, some aid to construction to be obtained from the terms of section 102M, which is the interpretation provision for Division 6C. The first is to be found in the definition on page 1894 of the word “unitholder”:

unitholder, in relation to a prescribed trust estate, means the older of a unit or units in the prescribed trust estate.

So no more is required than that the person be the holder of one or more units. The term “unit” is defined in section 102M, immediately above that:

unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate.

Your Honours, our friends contend and Justice Jessup in the Full Court found significance in the reference to “prescribed trust estate” in those two definitions and “prescribed trust estate” is a term which is used in section 102T, which deals with the consequences of distributions made by the trustee. However, in our submission, that significance is misplaced for this reason. When one looks at the definition of “prescribed trust estate”, which is also on page 1894, it is no more than a public trading trust in any year of income. The wording of the definition is:

prescribed trust estate means a trust estate that is, or has been, a public trading trust in relation to any year of income.

The definition adds no more than a temporal element. The role of the definition is to deal with the case where the trust estate ceases to satisfy one or more of sections 102N, 102P or 102Q in a year of income. So, for example, one sees it in the definition of “unit trust dividend” at the foot of page 1894:

unit trust dividend . . .

does not include:

(c) money paid or credited, or property distributed, by the trustee of a prescribed trust estate to the extent to which the money . . . is attributable to profits arising during a year of income in relation to which the prescribed trust estate was not a public trading trust -

So that income of the trust fund which was generated before it qualified as a public trading trust, for example, by reason that it was generated before it became a public trading trust, is taken outside the scope of unit trust dividend and outside the scope of the special treatment of distributions in section 102T.

The definitions of “unit” and of “unitholder”, in our submission, inform the meaning of the expression “unit trust” as used in all the other provisions of the division. So, for example, section 102P deals with who holds units and who is a unitholder in the unit trust. It uses the term “defined” in section 102M. One finds that on pages 1898 to 9, in each of paragraphs (a), (b) and (c) of subsections (1) and (2). I will not read them to your Honours but I draw your Honours’ attention to them being there.

So, your Honours, the question then is: what can be drawn from the definition of “unit”? Well, there are, in our submission, seven things that can be drawn from the text of the division about the content of the expression “unit” as used in the division. The first comes from the words of the definition itself. It is, however described; it is not necessary that it be called a unit trust, nor that the unit be called a unit. That is perhaps unnecessary to say it is well established in this Court that a label is not decisive.

I will give your Honours a reference, for what it is worth, to the judgment of Justice Windeyer in Radaich v Smith [1959] HCA 45; (1959) 101 CLR 209, and one might say that had the draftsman of this trust sprinkled it and decorated it liberally with the words “unit” and “unit trust”, we would probably not be here, but decorating it with those words would not have made any difference to its substance.

The second thing that can be drawn from the definition is that a beneficiary’s interest in the trust estate can be a unit although it is not an aliquot beneficial share in the assets. That is, although the units do not all carry the same and an equal share of both income and capital distributions.

First, it is enough that it is a beneficial interest. Second, it may be in either income or property, not necessarily both. The draftsman appears to have assumed that property did not include income. That is perhaps a slight confusion of concepts but it is clear enough that it does not have to be in both income and property. So, an interest in income only can be a unit and that is not uncommon.

NETTLE J: But why does it flow from that that unit does not bespeak equal rights as between units?

MR SLATER: Because there can be units which have rights in income and others which have rights in capital. The units which have rights in capital have no rights in income. That is an unequal distribution.

NETTLE J: I am sorry, I put the question badly. Why does it bespeak that there does not have to be equality, say as between income units or as between capital units?

MR SLATER: It does not bespeak that but nor does it require it.

NETTLE J: Granted, but it is at best neutral, is it not?

MR SLATER: As among units of the one class, yes. I would accept that. The interest is that comprises a unit may be in any of the income or the property, it need not be in the whole of the income nor in the whole of the property. That is a proposition which I am putting somewhat to the contrary of what your Honour Justice Nettle just put to me but we made that assertion.

We would say that an interest in the trust estate carrying no share of income can be a unit and an interest in some part only of the property and not all the property and not the income can be a unit. So that an interest, for example, in all of the property in Queensland can be a unit even though it carries no interest in the property in Victoria; that is a point which is relevant to the trust in the present case and I will come back to the relevance when we deal with the present trust. The third requirement that can be divined from the definition is that it must be a beneficial interest in income or property of the trust estate.

What is meant by a “beneficial interest” has been the subject of some discussion but this much, at least, can be elicited from the authorities. First, the object of a bare power does not, in right of being such an object alone, have such an interest. The object of a bare power by reason of being such an object has only the right to be considered. I will give your Honours some references to authority without taking your Honours to it but just for convenience. In relation to that proposition, Kennon v Spry (2008) 238 CLR 366 at paragraph 74, citing the famous decision of the House of Lords in Gartside v Inland Revenue Commissioners [1967] UKHL 6; (1968) AC 553.

Second, the object of a trust power as distinct from a mere power does have such an interest. The trustee must exercise a trust power or the Court will. One will find that proposition discussed and established in the decision of the House of Lords in McPhail v Doulton [1970] UKHL 1; (1971) AC 424 in the speech of Lord Wilberforce starting at the foot of page 456 and going over to the top of page 457. The other members of the House agreed with his Lordship.

The third proposition is that an object of a power who is also a taker in default has by reason of the latter character a defeasible beneficial interest. The best authority for that is probably the decision of the New Zealand court in Kain v Hutton [2008] NZSC 61; (2008) 3 NZLR 589 at 25, which was adopted by this Court in Kennon v Spry.

The fourth thing to be said about a beneficial interest is that a contingent interest will suffice to be a beneficial interest. It is a contingent interest which is held in all but income and, indeed, during any year of income, in income itself by unitholders in a unit trust such as was the subject of the decision of this Court in CPT Custodian v Chief Commissioner of State Revenue. It is an interest in property which is contingent on the unitholder being a unitholder at the time the fund is wound up. Until then, the typical deed will say that the unitholder has no interest in any particular asset, although, as the Court said, there is a beneficial interest in the whole of the assets in the sense that the unitholder has an equitable proprietary state in the fund and a right to require it to be duly administered.

Takers in default – that is, those who, in a typical discretionary trust, will take a share in the corpus or a share in the income of a year if the trustee does not exercise a power to appoint elsewhere – are in the same position. One finds that in Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 237, paragraph 21.

I said a moment ago that it is the same in relation to income as in relation to corpus. That is because during the year of income, the amount of the income of a trust estate is unascertained. It cannot be ascertained until the year has concluded. Someone who is a unitholder during the year will not have a vested interest in income, even if the income is to be distributed to all the unitholders equally at the end of the year, because until the end of the year arrives, one cannot be sure that the unitholder will still be a unitholder, or what the income will be.

Your Honours, the fifth point to make about a beneficial interest is that an interest to take effect at a future time, whether it is contingent or vested but not in possession, will suffice. The interest may be defeasible, but it is still a beneficial interest.

Your Honours, I will come back later to why we say that the requirement of a beneficial interest is satisfied in this case, but sticking with the terms of Division 6C and the definition of “unit” in section 102M, the fourth thing to be noted about it is that it is an inclusive and not an exhaustive definition. When one looks at the definitions in section 102M, one finds that some of them are exhaustive definitions – for example, the definition of “net income” means “the total assessable income”. “Property”, on the other hand, includes the chose in action, whereas the “relevant year of income” means “the year of income” et cetera. The section does draw a distinction between those definitions which are exhaustive in the sense that they mean something, and those which are inclusive in the sense that they include, but are not exhausted by, something.

GAGELER J: So what is left? On your interpretation of the definition, what is left?

MR SLATER: What could be included that is not?

GAGELER J: Yes.

MR SLATER: A solely voting interest under a deed as a unit trustee which says that the holder of a unit has the right to vote or the exclusive right to vote but no share in income or corpus would be such a case. There have been trust funds or trust estates which have been created with such rights and we have given some examples in the instances to – if your Honours will excuse me, I have just forgotten the number, I think it is paragraph 20 of our written submissions.

The fifth thing that can be elicited from the provisions of Division 6C is that a unit must be capable of cancellation, extinguishment or redemption. One finds that requirement implicit in the definition of unit trust dividend which refers to payments made on the cancellation, extinguishment or redemption of a unit and excludes them from unit trust dividends which are subject to the operation of section 102T.

KIEFEL J: Is that to acknowledge then that it is something that comes into existence?

MR SLATER: That a unit is?

KIEFEL J: Yes.

MR SLATER: Yes, it is, and I was going to come to that in a moment, if I may - in just a moment, answer your Honour’s question in that way. Before getting to that, if I could just finish dealing with the concept of cancellation, extinguishment or redemption. Cancellation or extinguishment impose no limitation on what is the nature of a unit but redemption, it seems to us, does impose some limitation. It imposes the idea of a discharge of a unitholder’s rights by payment or delivery of property to the unitholder.

That, it seems to us, involves the idea that the interest must be capable of measurement so that the amount payable on redemption can be ascertained. We would say that the measurement is not constrained in its nature. It can be by reference to the terms of the beneficial interest, for example, to an amount or to a share of corpus or of income. It can be by reference to a sum of money. It can be by reference to the transfer of a particular item of property effecting a redemption. It is not necessary that redemption be at something which might be called the “market value of the unit”. The concept of the market value and units tends to be a little fluid depending – because the one depends on – the market value would depend on the rights attached to the unit.

Now, the sixth thing that we draw from the language of the division is that the terms of the instrument regulating the trust estate must be capable of providing for more than one unit because a unitholder is said to be able to hold a unit or units. In our submission, the units may be of different classes. They may confer an interest in income or in property or in both. They may comprise classes conferring different interests, only in income, or different interests only in property. That is the function of the words “in any of” in the definition of “unit”.

KIEFEL J: Taking your (e) and (f) together, Mr Slater, does that mean that any measurement of an interest amounts to a unit, or putting it the other way, any interest capable of measurement can be a unit?

MR SLATER: Yes, although I think we have suggested to the Court that it must be capable of redemption - - -

KIEFEL J: Why?

MR SLATER: - - - which may be an additional qualification to what your Honour just put to me.

KIEFEL J: Perhaps.

MR SLATER: It must also be capable of creation, which is the point that your Honour asked me about earlier, which I am about to come to. But, subject to those qualifications, I think the answer to your Honour’s question is yes. Just to finish off what I was saying, at least within a class the entitlements of the units must be capable of measurement or delineation in some way for the purpose of redemption and for the purpose of making distributions which qualify as unit trust dividends in section 102M.

The seventh point is the one that your Honour the presiding Judge put to me a moment ago. The units must be capable of being created on the payment of money or the transfer of property to the trustee and again we think that is implicit in the terms of the paragraph (d) of the definition of “unit trust dividend” which speaks of money paid or property transferred to the trustee for the purpose of the creation or issue of the units.

KIEFEL J: There is a slight distinction between being capable of creation and coming into existence, or is there not? There has to be units in fact at some point, do there not?

MR SLATER: Yes.

KIEFEL J: So the capability of coming into existence is not quite – it is that they do in fact come into existence.

MR SLATER: I responded to your Honour’s question a bit too quickly. For there to be a unit, it must come into existence, yes. For the trust estate to be a unit trust estate it is enough that there is the capacity because in the second case one is dealing with the quality of the trust estate and not with the quality of the unit. Does that answer your Honour’s question?

KIEFEL J: Yes, thank you.

MR SLATER: So, your Honours, we say that what one can draw from these matters is that the concept of “unit” in section 102M is extremely fluid or protean. It is not constrained to a divided share in both income and capital such as is contended for by our friends or was, at least implicitly, adopted by the Full Court below. It is not limited - - -

KEANE J: So that it is not to be considered as analogous to a situation of share capital?

MR SLATER: There are two parts to the answer to that, your Honour. The first is that I suspect, but I may be doing your Honour a disservice, that when your Honour speaks of analogous to share capital your Honour is thinking of BHP where there are only ordinary shares and they are all equal.

KEANE J: No, just any company capital structure where there is a subscription to the capital of the company and distributions of the income or capital of the company via shareholding.

MR SLATER: Analogous in the sense that it performs a somewhat similar function, yes. Obviously there is in jurisprudential theory and in a whole range of legal consequences a very substantial difference between a company and a trust and the Full Court - - -

KEANE J: Absolutely, but are we not here concerned with a division of the statute that was brought into existence because of a perception of similarity.

MR SLATER: Yes. Yes, we are.

KEANE J: Is the notion of a unit informed by that analogy?

MR SLATER: Informed but not constrained. So there is a - - -

KEANE J: While I have interrupted you, looking at 102P(a) and (b) it does seem to contemplate units that are capable of being offered for subscription.

MR SLATER: Yes, indeed it does.

KEANE J: Two people who will become unitholders by subscribing.

MR SLATER: Yes. We do not shy away from that. Obviously, the clear and simple concept, the one which appealed to their Honours below and appeals to our friends, is the simple concept as in, for example, CPT Custodian. I use that as an example of a unit trust which has come before the Court in which there is a description in the judgment of the terms of the instrument.

There is a less full description in Charles Case of the terms of the instrument but still one sees there that the paradigm case, if you put it that way, of a unit trust is one where investors subscribe and the trustee invests. We are not concerned with the paradigm case here. We do not profess to be within the CPT Custodian paradigm. What we do say is that the terms of the definition of “unit” and of “unitholder” and the other language of the division takes the concept of “unit trust” which is undefined to a wider range than the simple case which appealed to the Full Court - -

NETTLE J: But only in relation to a - - -

MR SLATER: - - - and we say that we fall within that penumbral area between the simple case and the boundary.

NETTLE J: Does it matter that it only does that in relation to a prescribed trust estate?

MR SLATER: No, your Honour, because prescribed trust estate is no more than a place marker for the expression which is or has been a public trading trust.

NETTLE J: I appreciate that but as you said before we are not concerned whether this is a public trading trust. It is not an issue in this appeal apparently, or are we?

MR SLATER: No, that is the ultimate question. I am sorry, I withdraw that.

NETTLE J: In a way, we have to be, do we not?

MR SLATER: Your Honour puts to me what the issue in this appeal is, yes. The issue in the division ultimately is whether it is a public trading trust because that is what is taxed under section 102S.

NETTLE J: Of course.

MR SLATER: The issue in this appeal is a narrower issue. It is simply whether it is a unit trust but the answer to that is informed by looking at the whole of the provisions.

NETTLE J: But the extended definition of “unit” only applies in relation to a prescribed trust estate, not in relation to others.

MR SLATER: Yes, and our answer to that, your Honour, as I have said, and apologies if I have not made myself clear - - -

NETTLE J: No, it is my fault, I think.

MR SLATER: “Prescribed trust estate” simply means is now or was public trading trust. We say that public trading trust is “a unit trust” which meets the four conditions which are specified in section 102R(1).

The unit trust is a public unit trust. The unit trust is a trading trust. The unit trust is a resident trust. The unit trust is not a corporate unit trust. Each of those conditions for being a public trading trust, and therefore for being a prescribed trading trust, is predicated on there being a unit trust.

NETTLE J: Very well. Thank you.

MR SLATER: That is why all of these provisions are relevant to the notion of what is in a trust which is the issue to which this appeal has been confined. In resolving the issue to which this appeal has been confined, in our submission, one has to look to the context of the whole division.

GAGELER J: Looking to the context of the whole division, the definition of “prescribed trust estate” feeds into the operative provision in section 102T.

MR SLATER: Yes, your Honour.

GAGELER J: I do not think you have taken us to that. Do we need to understand the operation of 102T to understand the entire context?

MR SLATER: I do not think so, your Honour, but I should just draw your Honours’ attention to it. It will take me a moment longer than it would normally do because I just have to read the provisions as I go.

GAGELER J: It would take me longer to read it for myself, Mr Slater, so I would be assisted.

MR SLATER: What 102T does, in subsection (1), is to amend the operation of the Act in relation to distributions by a unit trust, which qualifies as a public trading trust, and assimilate them to the provisions of the Act which deal with companies. The simplest example is subsection (11). It is in a curious sequence, the way this is laid out. Subsection (11):

A reference in subsection 44(1) –

of the 1936 Act - just to remind your Honours, section 44 is the provision which includes dividends in assessable income; so a reference in that section to:

a company or to a company that is a resident shall be read as including a reference to a prescribed trust estate –

For the purpose of taxing a dividend, it is treated as if it were a company.

GAGELER J: Yes.

MR SLATER: Without taking the time – it would take me about 10 minutes to go through and do this. I am sorry, I apologise - - -

GAGELER J: But there are variations on that theme.

MR SLATER: I had not actually prepared a quick summary of this - - -

GAGELER J: Yes, I understand.

MR SLATER: - - - but it is variations of that throughout.

GAGELER J: Yes.

MR SLATER: Does that sufficiently assist your Honour?

GAGELER J: Yes, thank you.

MR SLATER: Your Honours, let us get back to where I was a moment ago. We say that the concept of a unit is not constrained to a divided share. It is not limited to the subject of the discussions in the texts and other materials which are set out in our friends’ submissions. We note that even those texts accept the idea of a “$1” unit, in the passage which is quoted in paragraph 31 of our friends’ submissions.

The concept of “unit trust” in the division is equally fluid. It is used as referring to a trust state in which there are units and that means units as defined at section 102M. They are interests which can be cancelled, extinguished or redeemed and “unitholder” has a correspondingly fluid meaning.

There is no definition of “unit trust” either in the division or elsewhere in the Act. There are definitions of “unit” and “unitholder” to which we have taken your Honours and, in our submission, what one concludes is that a unit trust in Division 6C is something in which a unit, as defined in section 102M, can be held by a unitholder as defined also in section 102M.

In our submission, her Honour the presiding Judge was correct when she said at paragraph 49 of her reasons at page 148 of the appeal book that the definition of “unit” informed the meaning of “unitholder” in the division. Her Honour’s reasons for that are at page 145 at paragraphs 43 to 53. I was not going to read those to your Honours but simply draw your Honours’ attention to them.

In our submission, Justice Jessup, at page 165 of the appeal book, in paragraphs 2 to 4, mistook the role of the definition of “prescribed unit trust” and did not have regard to its content as merely being something which is or was a public trading trust and to that extent his Honour’s decision, in our submission, miscarried.

In our submission, the joint judgment correctly said at paragraph 61 that the argument which was advanced by the Commissioner in the Full Court and is again advanced in this Court should be rejected, although, in our submission, your Honours were wrong to go on to rely, in effect exclusively to rely on a functional description or on a functional basis or functional character of a unit as the basis for determining what is a unit trust.

KIEFEL J: What about the metaphorical conceptions? You have not criticised those?

MR SLATER: Not yet, your Honour, give me time. I do want to have something to say about the Full Court’s judgment but, if it is convenient to your Honours, I will defer that until later. We would say, your Honours, that the width of the definition of “unit” in section 102M puts few limits on what can be a unit trust. The context in which the expression falls to be construed includes not only Division 6C but also the rest of the Act and we acknowledge that. We have addressed that wider context in paragraphs 24 to 30 of our written submissions. In summary terms, the Act uses the words “trust”, as I said undefined, and “trust estate” and the content of those is both to be found in the general law because they are terms which have a meaning in general law.

The Act also uses the expression “discretionary trust”, sometimes with a definition and sometimes without. Where it uses it without a definition, the term does not have a settled meaning in general law. It is merely a description for a range of trust estates with some common characteristics, but there is no general law boundary to that range.

It also uses the expression “fixed trust”. That is a term which is defined in Schedule 2F to the 1936 Act in Division 272 as one where beneficiaries have vested and indefeasible interests. Both “vested” and “indefeasible” do have meanings in general law.

In our submission, the idea of a unit trust in the legislation as a whole fits somewhere between discretionary trusts on the one hand and fixed trusts on the other, but the Act does not contain or imply any clear demarcation of or between those concepts. So what is a unit trust may also have discretionary elements or may also be a fixed trust without losing its status as a unit trust.

If I can give your Honours an example of that without taking your Honours to it at the moment, in Schedule 2F to the 1936 Act – I will give your Honours a page reference to that if I can find it because it is a little difficult to locate. It is on page 163 of volume 3 of the CCH print or the 2015 version of the Act. I am not going to take your Honours to it because it does not directly bear on the present case, but the point of subsection (2) was to deal with the circumstance that in a typical paradigm unit trust, units can be issued and redeemed. That is not always the case. Not all unit trusts have redeemable units. The original form did not.

But where the units can be redeemed the consequence is that the redemption of a unit before the distribution date or the vesting date in relation to corpus and before the end of the year of income in relation to income causes the unitholder to lose an estate in the trust as at the vesting date or the accrual of income, so that it would not be a vested and indefeasible interest for the purpose of being a fixed trust, and the legislature came to the conclusion that they wanted the typical unit trust to be within the idea of a fixed trust, so subsection (2) provides an exception to that.

Your Honours, it is not necessary for the purpose of resolving this appeal to determine the limits of the notion of unit trust, neither in the Act nor in Division 6C. What we have put in our written submissions is merely our submission as to the way in which the Act as a whole may be viewed rather than just confining attention solely to Division 6C.

NETTLE J: If you are right, Division 6C would apply to a very large part of what has traditionally been taxed under Division 6.

MR SLATER: Not really, your Honour, because statistically something over 99 per cent of the trusts which are taxed under Division 6C would fail the public requirement. So the requirements are not simply that it be a unit trust but it would be a unit trust, a resident trust, a public trust and a trading trust. So the actual category to which this applies is quite narrow. I said 99 per cent, that is background knowledge from the Bar table. There is no evidence to that effect but it is, in fact, the case.

As we said, the only issue here is whether it is a unit trust within Division 6C. We have given your Honour this background material so that we hope your Honours can feel comfortable that the conclusion which we invite your Honours to draw does not create an inconsistency with the rest of the Act.

Your Honours, in our submission, to be a Division 6C trust it is sufficient that there is a trust estate, there is a trustee, property and identifiable beneficiaries, that there are beneficiaries who qualify as unitholders as defined in section 102M, that is to say, they hold units as defined in that section. We say that not all beneficiaries need be unitholders. It is enough that there are units as defined, held or able to be held by some beneficiaries. For the purpose of it being a unit trust, it would be enough that the trust provided for the issue of units even though none were issued. That is not this case.

The entitlements qualifying as units must, in our submission, comprise a beneficial interest, in a sense we have already dealt with, be in some income or property of the trust estate, be capable of redemption and be measurable in some manner so that the number of units held can be ascertained and the amount payable on redemption can be determined.

Now, while the commonly encountered style of unit trust that is known as such meets this specification it is, in our submission, not the only one which does. As we have said, we accept that we do not fall within that paradigm case. What we do say is that we fall between the paradigm case and the boundary of the division.

It was the legislative intention that the scope of the division should not be so limited. One can see that in the use of the words in the definition of “unit” as – use in that definition of the words “howsoever described” and in the extension of the concept two units which confer an interest in either income or property and in the absence of limiting language such as “divided into units” or “divided into shares”.

Your Honour Justice Keane asked me before about parallels between companies and trusts. In our written submissions we have drawn attention to the economic parallel. There are, as your Honour will know, many proprietary companies which have shares which carry a range of quite abstruse rights.

Some of those are rights which were established in order to escape the liability to death or estate or gift duties. Typical examples of that are Robertson v Commissioner of Taxation, in I think (1952) 86 CLR. A particularly notorious example would be Gorton v Commissioner of Taxation in 1964, I think it was 19 CLR, but they were the estate planning devices of the 60s and 70s.

So, share rights can be just as convoluted as rights of beneficiaries and in that sense there is a parallel but there is a very distinct difference in the sense that a trust is a quite different animal, if I can use the expression, from a company.

GAGELER J: Mr Slater, does the context of Division 6B assist us in construing the provisions of Division 6C? I think you suggested at the beginning that it did but you have not taken us to it.

MR SLATER: No, I have not taken you to it. They are very closely parallel. The difference between the two is that to be a corporate unit trust in Division 6B – I am paraphrasing this from memory, so I might not be completely accurate – but Division 6B fixes upon trust estates which have acquired property from a company and distribute income to persons associated with the shareholders of the company.

The historical background to that was that the major property companies - to use one particular example which is still around, Westfield Limited – were facing competitive difficulties because the income from their property portfolio was taxed at corporate rates and then distributed to untaxed beneficiaries –superannuation funds, exempt government bodies and non-residents. So, the shareholders were getting less money than would have been the case had they had an interest as beneficiaries.

So Westfield took the rather bold step in about 1975 of splitting itself into two parts – Westfield Limited and Westfield Property Trust – transferring its property assets into the property trust and listing both of them. I do not think – I cannot remember now – that they were stapled. They might have been. Division 6B was introduced to prevent the loss to the Commonwealth of the revenue by way of company tax on that property income.

Division 6C was introduced to deal with the case where what was transferred to trustees was not property but operating businesses, so that the income arising from the businesses also flowed through to the beneficiaries without suffering company debts, but the scheme of the two divisions is very close.

So one finds that the words I have taken your Honours to in sections 102M through to 102S are very closely parallel to those which are in Division 6B. Is your Honour assisted by my going back to Division 6B or is that sufficient?

GAGELER J: No, I think that is sufficient.

MR SLATER: It is our submission that the trust deed of which the appellant is trustee, although it is not in a common form of unit trust, is a unit trust within Division 6C. Can I take your Honours then to the terms of the trust deed and again start with some matters of context which are relevant to the construction of the instrument?

The first point of context is this. The question for determination in this appeal is not what beneficial interest any named worker has in the fund; the question is whether the deed is one which provides for beneficial interests in the trust property or income which meet the definition of “unit” in Division 6C such that the trust estate can be called a unit trust for the purposes of that division.

The second context point we make is this. Payments are made into this fund by employers as required by industrial awards or agreements. The sums which are paid in are the sums which are payable to employees on the termination of their employment, either redundancy or simple loss of job.

The risk which workers face and the risk which this fund is established to mitigate is that the employers will become insolvent before the employees become entitled to receive termination or redundancy payments. So to mitigate that risk, moneys are paid into this fund and other similar funds under the industrial awards so that they are set aside to meet the entitlements of the workers at the termination of their employment.

The object is to provide both security and transportability of entitlements. So if a worker changes jobs from one employer to another, his interest in the fund remains and can be increased by contributions by second or third employer.

What was particularly concerning about these arrangements was the prevalence of phoenix companies and the loss to employees as well as subcontractors arising from companies which became insolvent and then were replaced by the same individuals operating through different companies.

The trustee is directed to hold, subject to the terms of the deed, exclusively for the purpose of protecting those entitlements. That is the second context point. The powers and discretions which are conferred on the holder of the office of the trustee are conferred on it as trustee, not on the appellant personally, not to be exercised according to the whim of the directors of the appellant.

The appellant must exercise its powers in its capacity as trustee and it must observe its fiduciary obligations in doing so. The powers must be exercised in furtherance of the purpose for which they were granted and the fund was established. They cannot be exercised arbitrarily and capriciously. I emphasise that point because a great deal of play is made in our friend’s submissions about what are called discretions. Yes, there are powers which are sometimes called discretions, but they are powers which have about them also the character of duties.

The third context point we make is that this fund was prescribed as an approved worker entitlement fund for fringe benefits tax purposes. I took your Honours to the portion of the ruling which indicated that. Just for reference, it is at line 10 on page 73 of the appeal book. The purpose of that was to avoid the imposition of fringe benefits tax on the employers on paying into the fund, because the payment into the fund accrues for the benefit of workers and it would otherwise be a fringe benefit.

So, provided that the fund continues to meet the limitations imposed by the Fringe Benefits Tax Assessment Act, and in particular by section 58PB of that Act, then no fringe benefits tax liability accrues. This fund is subject to the statutory constraints imposed upon a fund prescribed under that section.

If I could then take your Honours to the deed? The deed begins at page 5 of the appeal book. Can I say at the outset that the deed has its imperfections. It is a pastiche of provisions imposed by various circumstances and parties, so by compliance with the Fringe Benefits Tax Assessment Act; by carrying forward a previous scheme; by the requirements of the sponsors, the Electrical Trades Union and the National Electrical Contractors Association; and by awards, and so forth. Those requirements do not always gel as well as they could. There are also some infelicities in expression, and some cross-referencing errors, but the language is clear enough that the obligations imposed on the trustee are not really open to contest.

I do not propose to take your Honours to the machinery provisions about certificates and records, and so forth. Can I start with Recital A in the middle of page 5:

The Sponsors –

that is, the National Electrical Contractors Association and the union with a very long name known as the ETU:

have agreed to establish a scheme to be known as the Electrical Industry Severance Scheme (the Scheme) to provide benefits to Workers who leave or change their employment in circumstances set out in this Deed.

There is a declaration of trust on page 20 in clause 9:

The Trustee declares that it will hold the Trust Fund on the trusts, and with and subject to, the powers and provisions contained in this Deed.

The trust is specified in clause 11:

Subject to the provisions of this Deed, the Trust Fund shall be maintained exclusively for making Severance Payments to Workers under Clause 6.

Now, my friends take the point that that clause starts with the words “Subject to the provisions of this Deed”, and that is one reason why I took your Honours to the context in which the deed was executed.

Then, there is a reference in 11.1 to clause 6. That should be a reference to clause 8; that is a transcription error. I will come to clause 8 in a moment, but note that the purpose is exclusively for making severance payments. Purpose is qualified only so far as the deed provides, and in the context of the awards, what the deed provides is to be read according to that context.

Your Honours, contributions to the fund are dealt with in clause 3, and that appears on page 13 of the appeal book. Clause 3.1 deals with an employer becoming a member. Clause 3.2 binds the member by the terms and conditions of the deed. Clause 4.1 provides for contributions to the scheme; that is on page 14:

Each Member shall make Contributions to the Scheme –

in accordance with the agreement. The agreement is, to some extent, superseded by awards and industrial agreements. Having said that, I should tell your Honours that the term “agreement” is defined in clause 1 at the top of page 6. Contributions are defined on page 6, at about line 50. They are made in respect of “a Worker”. Contributions in the event are made under industrial awards. That supervenes the agreement which is referred to at the top of page 6 of the appeal book, made for workers covered by the award, each worker in respect of whom a payment is made, is required to be identified.

Your Honours will find that in clause 5 on page 14, in particular at clause 5.2. The remaining provisions of clause 5 deal with circumstances where there is difficulty in identifying the relevant worker and that is necessary because, as I told your Honours at the outset, there are a thousand employers and 31,000 members and record keeping can sometimes be difficult.

If a worker cannot be identified and the payment is put into suspense, your Honours will find that on page 16 in clause 5.9 at the top. Then the trustee is required to maintain worker’s accounts. Your Honours will find that on page 21 at clause 11.2:

The Trustee shall establish a Worker’s Account in its books of account in respect of each Worker. The Trustee shall credit and debit amounts to each Worker’s Account in accordance with Clauses 6, 7 and 8.

The contribution to be credited to a worker following identification in accordance with clause 5.2 is specified at clause 6.1 on pages 16 and 17 of the appeal book and 6.2 is:

required to be made to Worker’s Accounts under Clause 6.1 as at the date the relevant contribution or amount . . . is received by the Trustee.

So, what is recorded is contributions in respect of a worker, amounts transferred from a corresponding, what is called a reciprocating scheme, and amounts transferred from a previous scheme.

Then amounts may be debited to the worker’s account under clause 7. Your Honours will find that starting at line 20 on page 17. Now, 7.1 is a lengthy provision. Things to note about it are that the debit to accounts is subject, in the case of paragraphs (a), (b) and (e) to:

the consent of the Sponsors –

and in the case of paragraphs (c), (d) and (e) – I am sorry, I have misread that, I have misled, your Honours – paragraphs (a), (b) and (e) are subject to the constraints imposed by the Fringe Benefits Tax Assessment Act, restrictions that apply to approved worker entitlement funds and paragraphs (c), (d) and (e) are subject to the consent of the sponsor. So, (a) and (b) are payments out to workers as severance payments or transfers:

from the Worker’s Account in accordance with Clause 13.4 –

I will take your Honours to 13.4 but it deals with transfers to a reciprocating scheme and it is set out on pages 22 through to 25, and 13.4 is on page 24. Then, paragraph (c) and paragraph (d) are the share of each worker’s account of taxes, levies, stamp duties, settlement duties and any other impost et cetera and any related or similar amounts:

which in the opinion of the Trustee have or may be assessed against the Worker , or the Scheme in respect of the Worker.

So, taxes are debited to the account under paragraph (c). Paragraph (d) an amount may be debited to cover costs incurred in administering the scheme. Then, in paragraph (e):

such other amounts . . . [as are] appropriate or equitable to debit –

Now, a debit can only be made under paragraph (e) if the trustee determines that it is appropriate to do so. That would only be so if it were appropriate or equitable. A case might be, for example, a loss on an investment; had the trustee been imprudent enough to invest in Bell Group it would have suffered a significant loss on investment. In our submission, that is not a power which can be exercised arbitrarily and if it is exercised, what it does is to reduce the amount to the credit of the worker’s account. It does not authorise the trustee to pay an amount to anybody else.

Your Honours, the application of worker’s accounts is dealt with in clause 8 starting at page 18. Clause 8.1 - and much is made of this both by the Full Court and our friends – put this clause:

only applies to a Worker who is an Active Worker.

That term is defined in clause 1 on page 5 at line 48 of the appeal book as having:

the meaning determined by the Trustee for the purposes of this Deed.

Now, the materials before the Court, because this is a ruling case, do not disclose the making of any such determination. So that all the Court has to go on is what determination may be made under the terms of the deed. What the scheme does do is to disclose these circumstances. First, that payments are made to the trustee under awards or industrial agreements for the purpose of securing entitlements to termination pay.

Second, that each payment is credited to the account of a nominated worker to secure that the benefit is duly paid to that worker or dealt with appropriately in respect of that worker. Under clause 8.3 payments can only be made out to an active worker. The power to make a determination is one which is given to the trustee as such. It is a duty as well as a power. The purpose of the determination is to identify the category of workers made up of active, inactive and nominated workers. Your Honours will see that in the definition on page 11 at line 45. So, it is to identify the section of the workers as there defined who may receive benefits.

Now, in our submission, the trustee could not properly fail to make a determination as to a meaning of “active worker” because to do so would be to frustrate the operation of the instrument altogether. Nor could it make a determination of the meaning of “active worker” that had the result that benefits were not payable under clause 8.3, again for the same reason, that would frustrate the purpose for which the fund was established. Nor can it make a determination arbitrarily or by reference to some other purpose such as benefiting the sponsors of the scheme.

The trustee has to make a determination in accordance with its duties and for the furtherance of the purposes of the scheme. What is relevant in this appeal is that it is a determination by a trustee and the workers who fall within its terms will be entitled under clause 8.3. The terms of the deed provide for it and the character of the trust estate is to be assessed accordingly.

GORDON J: How then do you distinguish between “inactive worker” and “active worker”?

MR SLATER: The only way one can distinguish it is that each is the subject of a determination made by the trustee. That is all the materials before the Court allow.

GORDON J: There is three categories of worker. It seems to be active, inactive and then somebody who a sponsor agrees could be treated as a worker.

MR SLATER: And from the text of the deed and from what material there is about the awards, one cannot tell - - -

GORDON J: There is nothing to tell us what is active or inactive.

MR SLATER: No, all that one can do is to say that the trustee has the power to make a determination and, in our submission, it has a duty to do so and a duty to do so having regard to the purpose for which the fund was established, the purpose for which contributions were made to it and the consequences of the determination made, which flow on to clause 8. That is as far as I can take it, your Honour. But we say that is sufficient. The trustee could not make a determination which arbitrarily excluded anyone and it could not make a determination which had the effect that the fund was frustrated.

GORDON J: Well, it must be able to make a determination to exclude the operation of clause 8 because they have got to be an active worker, and you make a determination that they are inactive – so there is a distinction to be drawn; what it is I do not know.

MR SLATER: I agree that your Honour is - and the Court and the appellant face a difficulty with that, but the issue in this appeal is not whether any particular worker has an entitlement - - -

GORDON J: No, but it goes to working out whether or not the trustee who falls within – whether or not what we are dealing with is the unit trust for the purposes of Division 6C and - - -

MR SLATER: Well, one answers that, your Honour - - -

GORDON J: - - - taking into account all of the matters that you referred to earlier where you have got a trustee who can make a determination that someone is either an active worker or an inactive worker, but we do not know how or why.

MR SLATER: No. All we know is that a trustee must make such a determination and that it must be made having regard to the purposes for which the fund was established and having regard to the consequences of its being made and we are not concerned here with identifying whether any particular worker has an entitlement nor with identifying whether some workers might be excluded from entitlements by virtue of falling outside the definition of “active worker”.

It is enough to know that a determination must be made and that once it is made it will have, in respect of those who fall within the definition, the consequences that entitlements accrue under clause 8. We are concerned with the character of the deed and not with the entitlements of any particular person.

KIEFEL J: But to employ your method of construction earlier which applied to the statute there is nothing here apparently to limit the exercise of the trustee’s discretion in determining who effectively is going to receive payments.

MR SLATER: No, only the things I have put to your Honour - - -

KIEFEL J: Except by your contextual argument, but where do we see the direction in the trust deed that operates to limit the discretion of the trust deed in that regard? You described it as context to be drawn from its purpose and the purpose we take from the recitals. That is about it, is it not?

MR SLATER: Yes, your Honour, and from what the scheme tells us about the circumstances in which the fund was established.

KIEFEL J: And is not the notion of an “active worker” rather an odd term to use to someone to whom a severance payment is to be made?

MR SLATER: Your Honour, I am not here to defend the draftsman.

KIEFEL J: No.

MR SLATER: He will take it out on my hide afterwards for not doing so.

KIEFEL J: But it is difficult to see limitations operating in relation to this deed in relation to the trustee’s discretion.

MR SLATER: It could certainly have been clearer. Something may be drawn - - -

KIEFEL J: It could, of course, have something to do - potentially, one is left to conjecture - with the status of the person in relation to their industrial roots; that is one possibility.

MR SLATER: I am not sure that I follow your Honour. Is your Honour suggesting that members of a union might be treated as active and non-members might not?

KIEFEL J: Well, what is an active and what is an inactive worker in this context? It is meant to distinguish between two types of workers and it gives us no idea how that has gone about. We are left to conjecture. If you are left to conjecture - - -

MR SLATER: We are not left entirely to conjecture, your Honour, because the power to make a determination is not a personal power; it is a fiduciary power.

KIEFEL J: Quite so.

MR SLATER: It is a power which must be exercised in furtherance of the purposes for which it was established which was given.

KIEFEL J: In relation to the members as well as the workers?

MR SLATER: Yes, the members I think have an interest in the fund and in observance of the trustee’s duties as well.

KIEFEL J: But, in any event, conjecture will not assist us. We are not left with much assistance to determine the width of the description.

MR SLATER: No. We are left with the assistance that I have tried to put to your Honours, that the purpose for which the fund was established, the fact that if an arbitrary or capricious determination were made, or if no determination were made, there will be no entitlements and that suggests very strongly that the trustee must make a determination and must make an appropriate one.

But as to what the distinction might be between active and inactive workers, one cannot say from these materials. There is a provision in clause 12 on page 21 for forfeited benefits. Whether that provides a resolution is perhaps open to debate because it does not refer to inactive workers. One does not know what the draftsman had in mind in providing that distinction.

KIEFEL J: And it is not tied in any way to the fund held for the worker as being in a credit situation. There is no indication to that effect either.

MR SLATER: There is no indication. All there is, as I said, is - - -

GORDON J: I do not know that is right, is it, Mr Slater, because the ability to pay out is limited - I assume you will come to this – to the amount that is credited to the worker’s account, so there is a limit in that sense. Those provisions – I forget which clause it is now – which identifies - - -

MR SLATER: Clause 8.3, your Honour.

GORDON J: - - - the extent to which you can pay out, so there is that limitation, so it cannot be tied, as Justice Kiefel says, to that labelling of active and inactive.

MR SLATER: I am not sure that I follow your Honour’s question in that last sentence.

GORDON J: It was not a question; it was really an observation to say that there is a limitation and that limitation is the extent to which the trustee can pay out to a worker.

MR SLATER: Yes, and that is really what I was relying on, it is the circumstance that it is the limitation in 8.3 that would frustrate the scheme entirely if the trustee failed to make a determination or made an inappropriate one.

GORDON J: Well, no, because 8.3 does not bite unless you have had a determination that there is an active worker.

MR SLATER: Indeed. So if I can explain it – I am sorry, I have not made myself clear. Here we have a fund into which employers have been paying for the benefit of workers. Real money has been paid into the fund, real workers have been identified for each payment, and the workers are entitled to expect under their industrial awards that those payments will accrue to them. Now, the definition of “active worker”, if no determination were made, that would frustrate that scheme entirely. The workers would not get the benefits which had been paid into the fund for their benefit, and we say that the trustee could not properly allow that result to happen, given the purpose for which the fund was established and the purpose for which contributions were made into it. So the trustee must make a determination.

GORDON J: I do not wish to labour the point, but if a determination is made that a worker is an inactive worker, then the consequence is the very consequence that would apply.

MR SLATER: I accept that, your Honour.

GORDON J: We do not know why.

MR SLATER: We do not know why. All we know is that the trustee must make a determination about who is an active worker and that it cannot properly do so in such a way as to capriciously defeat the entitlements of anybody for whom payments have been made into the fund. That is as far as I can put it.

KIEFEL J: Is there any right of redress for workers through the industrial legislation in relation to these schemes, any rights of review?

MR SLATER: I do not believe there are any under the Fair Work Act, but I am not an industrial lawyer and I cannot answer that question of the cuff. I do not think so. Can I answer that question after lunch?

KIEFEL J: Yes, of course.

MR SLATER: Somebody behind me will know the answer.

KIEFEL J: Yes.

MR SLATER: Your Honours, I have wandered slightly astray from my path, and taken a little longer to do so than I had intended. There are a couple of things that I wanted to take your Honours’ attention to about clause 8.2. There is a distinction drawn in 8.2 between what is called a “BFR worker” and what is called a “TER worker”. Those terms are defined on page 6, line 31, for a “BFR worker”, and on page 11, line 36, for a “TER worker”, which is everybody except a BFR worker.

Your Honours will understand it a little easier if one reads “BFR” as an acronym for “bona fide redundancy”. The definition refers to the making of an election under clause 8A, which is on page 20 at line 40. The election there is irrevocable. One sees the connection with redundancy in clause 8.2. Paragraph (a) applies to BFR workers and their entitlement to benefits “by reason of a genuine redundancy” – it is the last line of subparagraph (i) of paragraph (a) of 8.2 – whereas a TER worker is entitled, on termination of employment “for any reason whatsoever”. What they are entitled to is found in 8.3. The reference at the beginning to 8.10 is a reference to time and you will find 8.10 on page 20 at line 30.

What a BFR worker is entitled to is, in each case, its prescribed amount, but what is the prescribed amount is defined on page 10 at line 25. For a TER worker – that is, for anybody who has not taken a bona fide redundancy – it is $4,000. But for a BFR worker, it is the amount which is a tax-free genuine redundancy amount calculated in accordance with – it says section 83-175, that is a transcription error, it should be 83-170 of the 1997 Act. The distinction between BFR and TER is that BFR workers are retiring; they are getting a redundancy amount; they are not going back into the workforce, whereas TER workers are.

The amounts which are paid out are these. If the credit to the worker’s account is less than the prescribed amount, which I have just identified to your Honours, then the whole amount is payable out. That is clause 8.3(a) at page 18, line 45. If the credit is more then on a severance event – and “severance event” is defined on page 10 at line 49 as the events referred to in clause 8.2 – then the prescribed amount is payable and that is at the top of page 19 in (i). So the prescribed amount is, in the case of a TER worker, $4,000; in the case of a BFR worker, the tax-free bona fide.....same amount.

If the worker is not retired or dead, then a further payment out may be made under (ii) of clause 8.3(b) after four weeks, if the employee is still unemployed – that is at page 19, line 22(i) and (A) under (ii). If the worker has changed industry or has been promoted, then under (2) at line 28 on page 19, then the balance is paid out after 39 weeks.

If the conditions for payment out of the balance are not met, then the balance of the account stays in the fund until the next severance event when clause 8.3 payments are made again. So that is something which is relevant to a worker who is not a BFR worker. Each time the worker’s employment is terminated by the employer the worker gets up to $4,000, depending on how much is in the fund, and more if he is still unemployed after four weeks. But if there is a balance left over, that stays in until he takes his next job and is terminated from that. That is the scheme of the deed.

If the worker is retired, permanently retired, which is the second condition on page 18 at lines 28 and 37, (ii), or if the worker has died then the balance of the account on the relevant severance event, which is retirement or death, then that amount goes to the estate or to the dependants and that is under clause 8.7 on page 19 at the foot of the page and going over to the top of page 20. Now, in both (i) and (ii) of clause 8.3(b) the opening words are:

an amount up to and including the Prescribed Amount –

or the account balance. That is an oxymoronic phrase. It cannot be both up to and including and, in our submission, the only meaning which can be given to it is that the full amount is payable – that is, both “up to” and “including” each means “equal to”.

NETTLE J: I took the “up to” to equate to “the less” and “including” to equate to the equal - reddendo singula singulis.

MR SLATER: That may be right, your Honour, yes.

NETTLE J: Either way you get what is there.

MR SLATER: Yes. But our point, I suppose, is that our friends say, and I think the Full Court said, that that confers on the trustee a discretion. We say it does not. Now, the trustee’s liability to pay benefits is limited to the amount in the worker’s account. Your Honours will find that in clause 11.4 at page 21 of the appeal book. Where the worker or the dependants cannot be found, the benefits may be forfeited and applied to the fund expenses. Your Honours will find that in clause 12 on page 21.

The funds may be transferred to or from reciprocating schemes and your Honours will find that in clause 13 on page 22. A reciprocating scheme is another scheme which has been prescribed as an approved worker’s entitlement fund. Your Honours will see the definition on page 10 at line 38.

What is transferred out is the balance to the worker’s account. Your Honours will see that in clause 13.4 on page 24 at about line 28 the fourth line – the third and fourth lines in 13.4. Clause 14 on page 25 deals with the income of the trust fund. Clause 14.1 largely repeats the conditions which are found in section 58PB(4)(c) of the Fringe Benefits Tax Assessment Act. I referred your Honours to that earlier. Those are conditions for endorsement as an approved worker’s entitlement fund.

There is some confusion of concept in clause 14.1 and, for that matter, in the Fringe Benefits Tax Assessment Act. The clause deals with gross income with money received as interest, with dividends. It deals with net or taxable income after expenses and deductions and it deals with accounting treatments and it deals with them all in different – as if they were the same type of thing, which they are not. So that it is not the easiest clause in the world to construe or apply but the conditions which are imposed are conditions which are imposed primarily because of the Fringe Benefits Tax Assessment Act.

Subject to those conditions, clause 14.2 directs that the income be accumulated as an accretion to capital. Your Honours will find that at the top of page 26. The balance of the accumulated income forms part of the surplus on termination. That surplus is dealt with under clause 23.4 on page 34. I will come back to that in a moment but in summary it is shared among the workers’ accounts in proportion.

Before termination of the fund, an amount out of accumulated income may be distributed as to 25 per cent to the National Electrical Contractors Association and as to 75 per cent to what are called the ETU beneficiaries. They are defined at page 7 at line 50. In substance they are the trade union, the workers and their dependants. The shares of any distribution are fixed by the trustee with the consent of the union. One sees that in 14.3 on page 26 at line 20.

Clauses 15 to 22 and 25 to 35 are administrative provisions and powers and I will not take your Honours to them. They are not presently relevant. Clause 23 deals with the consequences of termination. It is on page 33 of the appeal book. Clauses 23.1 and 23.2 are perpetuity provisions and need not concern your Honours. Clause 23.3 provides for termination earlier if the fund is insolvent or the trustee or the sponsors propose termination.

There is a direction to pay winding-up expenses and debts and liabilities and to deal with the remainder by arrangement among the trustee and the sponsors. That is in clause 23.5 at page 35, line 20. And the way in which it may be dealt with includes payments to workers or payments into another approved worker entitlement fund for the benefit of the workers’ accounts in amounts which are fixed by clause 23.4. Now, clause 23.4 directs that any surplus be met or be applied, first, in paying the cost of winding-up:

(b) secondly - in the payment of the debts and liabilities of the Trustee . . .

(c) thirdly – the remaining moneys . . . shall be applied as follows:

(i) if the moneys . . . exceed the sum of the aggregate amount

credited to Workers Accounts’ . . .

(A) by transferring to a Reciprocating Scheme . . .

paying the balance (if any) into the Worker’s Accounts in proportion to the amount credited to their respective Worker Account –

So any surplus under (i), paragraphs (A) and that should be paragraph (B), the second typographical paragraph, they are to be applied to the accounts of the workers in another fund.

If the remainder is less, then the shortfall is apportioned rateably under 23.4(c)(ii), at the foot page 34 of the appeal book and the effect of those two clauses, that is clause 23 and clause 14, is that a surplus and winding-up, including accumulated income, is shared among the workers by credits to their accounts in another like redundancy benefit scheme, rateably to the benefits of their workers’ accounts, except to the extent that the trustee may before determination make a distribution of accumulated income to the NECA and to the ETU beneficiaries and in the case of the ETU beneficiaries, with ETU consent.

So, may I make one final point about the terms of the deed and that is concerning discretions. Clause 26 deals with the powers of responses. Those powers are said to be unfettered and expressly not to be fiduciary. Such a declaration would not make them non-fiduciary if they were but, in the event, they are not fiduciary in character.

Clause 17, on page 29, at the foot of the page, purports to make the discretions of the trustees “absolute and uncontrolled”. But, that clause cannot, in our submission, alter the circumstance that the powers are given to the office – given to the trustee – in its capacity as trustee. That is, they are conferred on the office of trustee. They cannot be exercised in breach of the trustee’s duties. They must be exercised for the purpose for which they are given.

I have given your Honours some reference to authority at paragraph 49 of our written submissions. We mention there leading cases of Vatcher v Paull and Redman v Permanent Trustee. But, other authority is gathered together in chapter 16 of Jacobs’ Law of Trusts, the eighth edition of which has just been published.

Your Honours, if I could turn then to relating the terms of the deed to Division 6C. In our submission, the deed establishes a fund to be invested and paid out to beneficiaries identified by a register. They are the employees for whom payment into the fund and workers’ accounts are established. The amount in the worker’s account is payable or transferable on termination, or earlier if – on termination of the fund – or earlier, if clause 8.2 and clause 8.3 applies. I have taken your Honours to those provisions.

We say the trustee has a duty to make a determination of the meaning of “active worker” which identifies those to whom such payments may be made and that it cannot, properly, exclude the workers for whom the trustee has accepted and credited contributions under clause 5. I have had that debate more than once with your Honours and I will not go there again.

The income may be applied to expenses and the net income may be accumulated. The accumulation and the surplus accrues to the benefit of the workers in their workers’ accounts on termination under clause 23.4 – the provision that I just took your Honours to – clause 23.4, paragraph (c), roman (i), sub-subparagraph (B) at line 45 on page 34.

The interest in what is held by the trustee is a future interest. It is a contingent interest. It is contingent on a worker having a workers’ account at the termination of the fund or at the time of termination of employment and it is defeasible. The trustee can distribute accumulated income before determination and, to that extent, the interest in the fund is defeasible.

Returning to what is required by Division 6C for a fund to be a unit trust, no more is required than that there be a trust estate in which there are beneficial interests which fall within the section 102M definition of “units”. There is no general law normative conception of a unit trust. It is not like a resulting trust or an express trust or a charitable trust, nor is there any statutory criterion. It is not like, for example - to take Justice Keane’s question to me earlier – a proprietary company or a no-liability company. There is no statutory specification. There is only what can be divined from the text of the division and the context of the Act as a whole.

So, as to what is required for there to be units, we have dealt with that earlier. It need not be called a unit trust. There is no such requirement and the definition is to the contrary. There must be a beneficial interest but it can be contingent, future and defeasible and that is satisfied here in relation to each worker for whom there is a worker’s account. In that, the interest of each worker is in all the property of the trust. It is entitled to have it all applied under its terms and to have payments made to each active worker in accordance with the scheme of the deed.

Each worker, within the meaning of “active worker”, has a beneficial interest in trust property, is entitled to be paid. It is a vested future interest. It will accrue on termination of employment or death. But, one of those two must happen – although the future date in which it does happen is uncertain - and it is to the extent of the credit to the worker’s account. There is a future contingent and defeasible income in income and surplus pursuant to clause 14 and clause 23.4. We say that it need not be an aliquot share. It need not be divided into equal units. It need not be, in effect, the interest of a tenant-in-common according to the number of units held.

KIEFEL J: How is it measurable then, or identifiable?

MR SLATER: We say it is measurable in the sense that there is a number of dollars credited to each worker’s account and we say the units are the number of dollars which are so credited, and that the units confer an interest in the corpus of the fund to the extent of that number of dollars and they confer a contingent and defeasible interest in the income of the fund pursuant to clauses 14 and 23 on termination according to the number of dollars credited to the worker’s account which we submit is what satisfies the definition of “unit” in Division 6C.

NETTLE J: You said earlier that you would come back to whether they were redeemable. Will you do that still?

MR SLATER: If I did, I apologise, I omitted to do so. We say that the units are redeemable under clause 8.3. They are redeemed by payment out to the worker of the amount fixed in accordance with clause 8.3.

NETTLE J: Is that redemption or satisfaction?

MR SLATER: In our submission, it does not matter.

NETTLE J: There is a difference, is there not?

MR SLATER: There is in other contexts, but not in this context. We are not dealing with general law principles here. We are dealing with a statutory concept, and so when it says “redemption”, any payment made to a unitholder, it terminating the interest measured by the unit in respect of which it is paid, is both a redemption and a satisfaction in the central CPT or Charles style unit trust as much as in a peripheral trust such as the present.

KIEFEL J: The worker’s account is important to your satisfaction of 6C?

MR SLATER: Yes, the worker’s account is central to our case.

KIEFEL J: Yes.

MR SLATER: It is what we say is the measure of the units. The units are the dollars credited to the worker’s account. The entitlements which flow to the workers flow by reason of the number of dollars credited to that account. Their entitlements, such as they are, in surplus income, accumulated income, flow by reference to the number of dollars in the worker’s account.

NETTLE J: Mr Slater, do you say that CPT Custodian and Charles demonstrate or support the idea that in this context satisfaction of rights is redemption of rights?

MR SLATER: I would not say that they are satisfied, I do not think, but without having reread them - - -

NETTLE J: But they provide support for that proposition, do they?

MR SLATER: I would put it more that they are not inconsistent. I do not know that I could point to any passage, certainly not in Charles, and I do not think any passage in CPT - - -

NETTLE J: Sorry, I mistook you before. You made reference to it in the context of why it should be taken in this case that satisfaction is regarded as the statutory equivalent of redemption. Ordinarily they are disparate things. One is satisfaction, one is giving up the right which otherwise might have been satisfied obviously.

MR SLATER: No, your Honour, redemption is not giving up the right which might have been satisfied.

NETTLE J: If I redeem a share, I do not satisfy the dividend entitlement, nor do I satisfy the other rights which are included in the congeries which constitutes the share. I give up those rights, or at least take them away from those that are entitled to them.

MR SLATER: When a company redeems a share, what it does is to extinguish the share by payment out to the shareholder.

NETTLE J: And that is for the extinguishment of the chose rather than the satisfaction of it, is it not?

MR SLATER: It is both, your Honour.

NETTLE J: No. When I sell my shares, I do not satisfy the dividend entitlements.

MR SLATER: We are not talking about dividend entitlements.

NETTLE J: Or any of the rights that go with it.

MR SLATER: Redemption of a share discharges all the rights of the shareholder. If I can give your Honour a reference – I cannot from memory quote the passage – to Archibald Howie Pty Ltd v Commissioner of Stamp Duties. I do not have the citation to hand.

NETTLE J: It is back in the 1950s, is it?

MR SLATER: My recollection is it is about 1949, but I could be wrong. Then there was another case, also a judgment of Sir Owen Dixon, which shortly followed that and the name which comes to mind is Davis, but I might be wrong about that.

NETTLE J: That supports the idea, does it, that satisfaction of rights constitutes the redemption of them?

MR SLATER: Yes, it supports the idea that when a reduction of capital is effected it is a discharge and satisfaction of the rights of the shareholder and the question at issue there was whether that discharge was consideration. “Redemption” is not a term of art; it is a mercantile usage more than anything else. It is given statutory force by whatever is now the equivalent of section 61 of the 1961 Act, and that is showing my age.

What redemption does is to return to the holder of the security a sum in discharge of all the security holder’s rights in the estate or corporation of the security in which it is redeemed. In our submission, there is no difference for present purposes between satisfaction, discharge or redemption in those circumstances.

GORDON J: The phrase in Division 6C is cancellation, extinguishment or redemption. Does that affect the argument you have just put?

MR SLATER: I do not think so, your Honour. It is a very curious phrase.

NETTLE J: I do not know that it is. You cancel shares, you extinguish shares and you redeem shares.

MR SLATER: It is curious in this sense, your Honour. If your Honour goes to page 1894 of the statute, the context in which it is used in both paragraphs - - -

GORDON J: Can you please tell me what section you are looking at? Are you in 102MA?

MR SLATER: Yes, 102M. I am sorry; I forgot that your Honour does not have the text.

GORDON J: It is all right; it is fine.

MR SLATER: In 102M, the definition of “unit trust dividend” paragraph (d):

money paid or credited, or property distributed, by the trustee . . . in respect of the cancellation, extinguishment or redemption of a unit -

In that context, one would think the cancellation, extinguishment and redemption all meant the same thing because they are all the consequence of payment to the unitholder to terminate the unitholder’s rights.

It is difficult to see how there could be – I accept what your Honour said to me earlier, cancellation can be quite different from redemption. The trustee could just cancel the units if it had power to do so. It might do so, for example, if it found that the units had been acquired in some underhanded deceptive fashion which breached some statute. The trustee might then be entitled to cancel the units, but that would be a cancellation without paying anything.

Where there is a payment which is made to effect a cancellation extinguishment or redemption, it is difficult to see any distinction of a consequence between those. There may have been. I cannot find anything either in the explanatory memorandum or in the circumstances which led to the enactment of these provisions which would suggest it. The explanatory memorandum, unfortunately, is from that period where the author of the explanatory memorandum merely parroted the provisions. It does not tell us anything.

NETTLE J: So, in this case, would amounts paid by the trustee to a worker on redundancy be a unit trust dividend, or would it be a payment in extinguishment of the worker’s entitlements and thus not such a dividend?

MR SLATER: It is the latter, payment in extinguishment of entitlements.

NETTLE J: And therefore not the unit trust dividend?

MR SLATER: Not a unit trust dividend.

NETTLE J: Hence the purpose of the exercise.

MR SLATER: The purpose being to protect the workers, yes.

NETTLE J: From taxation on the amount so paid.

MR SLATER: No, your Honour. The workers are subject to tax on the amount so paid under the other provisions of the Act, or, if they qualify under the redundancy provisions, they are relieved of tax by section 83-175, I think it is. I might have that section wrong, but it is Division 83 anyway, which provides for relief upon redundancy.

GAGELER J: Which of the provisions of section 102T would be applicable to the payments to workers?

MR SLATER: To the payment of a unit trust dividend?

GAGELER J: Yes.

MR SLATER: The one I took your Honour to.

GAGELER J: Section 102T(11)?

MR SLATER: Yes.

GAGELER J: I see.

MR SLATER: Then, subsection (3) deals with the curious case of dividend stripping of a public trading trust, which perhaps might be unlikely, but nonetheless, the draftsmen obviously went through and picked up every provision that might be said to be affected.

KIEFEL J: Insofar as the definition of “unit trust dividend” has a premise that a unit may itself be cancelled, extinguished or redeemed, how does that apply here in relation to a unit under this trust deed in the context where a worker may continue and work and may be subject to more than one severance payment, in which case you have something like an account which operates as a running account?

MR SLATER: In our submission, each dollar credited to the account is a unit. It is units of $1.00 recorded by being credited to the account.

KIEFEL J: So now the units have become monetary, rather than the worker’s account?

MR SLATER: Sorry, the units are the dollars credited to the worker’s account.

NETTLE J: All of them constitute the one unit.

MR SLATER: No, no, each dollar constitutes one unit.

NETTLE J: So it is units of a dollar?

MR SLATER: Yes.

NETTLE J: What if they contributed in 50 cents? What happens then; half a unit?

MR SLATER: I do not think the scheme or the terms of the deed tell us anything which would enable one to answer that, but the answer I would offer as being probable is yes, there would be 251 and a half units created by the payment. That is not uncommon in subscription funds especially when there are reinvestment provisions because the reinvestments are very rarely in round dollars, or in round numbers of units where the fund is divided into units.

NETTLE J: So on this analysis, each worker in the fund has units of $1.00 each up to the number standing to the credit of his or her account.

MR SLATER: Yes. I said at the outset, your Honour, this is not an ordinary unit trust. This is a trust which fits within the definition of unit trust but is at the boundary.

KIEFEL J: I think we have got that idea generally.

NETTLE J: And does each of those $1.00 units confer the same rights on each of the unitholders or are each of them bespoke?

MR SLATER: Each of them confers the same right, that is, a right to payment of $1.00 and a contingent future defeasible right in respect of the surplus.

NETTLE J: So the right to payment of $1.00 in the event of termination or so forth.

MR SLATER: Yes, that is the unit. Your Honours, I am conscious that I have overstayed my time so I will endeavour to deal with the next points fairly briefly. Matters arising from the Full Court decision, the principal point we make, and we have made this in our written submissions, is that the joint judgment, in our submission, proceeds from the wrong starting point. Their Honours went to historical and textbook materials to a white paper, to legislation in other jurisdictions and conceived what they variously described as a “functional” or a “metaphorical” conception of unit trust. We say that was not derived from legal principle but from adventitious sources.

Their Honours addressed the import of context for construction and the primary judge’s inference from the definition of “unit” at paragraphs 51 to 54 on page 178 of the appeal book and the Commissioner’s attack on that reasoning at paragraphs 60 to 70 on page 180 and 182. It is fair to say that their Honours did not accept the Commissioner’s argument but we would say that at page 181 in paragraphs 64 and 65 their Honours misread the definition of “prescribed trust estate”. Now, I have taken your Honours to that at length and I will not repeat it. In our submission, their Honours departed from consideration of the legislative context in favour of their functional and metaphorical concept as a core concept and did not return to the statute.

Your Honours, metaphors are an important true device but they are not a legislative tool and they are not a basis for statutory construction. Functional analysis is an important economic tool but it is not a tool of statutory construction. We would submit that the approach that the Full Court should have taken was that which was identified by this Court in CPT Custodian v Commissioner of State Revenue. I have referred to that a number of times without giving your Honours a citation. It is [2005] HCA 53; (2012) 224 CLR 98. The passage that I have just directed your Honours’ attention to is on page 109 at paragraph 14. One should ascertain the terms of the trust established by the deed, construe the statute to see whether the terms fall within its terms. One should not start with the functional conception of a unit trust. If that course is taken then – if the course which was enunciated by this Court in CPT Custodian was taken then for the reasons we have advanced, in our submission, the trust is shown to be a unit trust.

KIEFEL J: What was the passage you have just referred to from CPT Custodian? Why was that important to the issue on – with which their Honours were there concerned?

MR SLATER: The issue with which they were concerned - - -

KIEFEL J: Was ownership, was it not?

MR SLATER: No, it is not the same issue as the present. I am sorry, your Honours, I just moved away from the microphone.

KIEFEL J: I am not aligning it to this case but the discussion their Honours have about what the first step is to take, how is that important to the question before their Honours?

MR SLATER: It was important because the Court of Appeal had first – and your Honours will see this at page 108, paragraph 10 – the Court of Appeal had first considered the characteristics of a unit trust and having determined what the best characteristics were then went on to consider the - - -

GORDON J: It starts at paragraph 10, I think, the complaint about the approach adopted by the Court of Appeal?

MR SLATER: Sorry?

GORDON J: The Court identifies its complaint about the approach of the Court of Appeal at paragraph 10.

MR SLATER: Yes, that is what I was endeavouring to put to your Honours. Sorry if I did not make that clear. At paragraph 14 they say what should be done. Your Honour Justice Nettle is more familiar with this case than I am.

NETTLE J: It is a long time ago now.

MR SLATER: The statutory question was whether - - -

NETTLE J: Whether the unitholders were owners of property within the meaning of the Land Tax Act.

MR SLATER: Whether the sole unitholder - and the passage is on page 98 in the headnote - whether the sole unitholder was:

entitled to any land for any estate of freehold in possession.

The argument was about whether the sole unitholder in a unit trust was entitled to all the assets of a unit trust and the Court of Appeal answered it by investigating the nature of the interest of a unitholder in a unit trust. What the High Court said was that is the wrong way to go about it, you start with looking at what the statute says and then saying does this case answer the statutory specification and that is the course which, in our submission, should be taken here, not starting with interesting questions about what is the nature of a unit trust and what its history is as interest because they are - starting, rather, with the statute and then with the terms of the instrument.

GAGELER J: What the High Court was criticising, as I read it, in CPT was what it described as the making of a priori assumptions about the nature of a unit trust. That is the language used in paragraph 50.

MR SLATER: Yes, it is directed to a very slightly different point from this but - - -

GAGELER J: Yes, but here you could hardly describe what the Full Court has done as a priori. There is an attempt to engage with the policy of the legislation. You might criticise that. You may say they have it wrong, they have misunderstood it, but they are hardly just plucking the concept of a unit trust out of the air and giving it some meaning that is then attributed to the statutory language.

MR SLATER: They are not going far from that, your Honour, with respect. They start with Dr Sin’s book and the Bubble Act and Black Friday.

GAGELER J: There is a lot of context, I accept.

MR SLATER: I had to look up which Black Friday it was. Then with the desuetude into which managed funds fell between about 1840 and 1930, the transition from America to England of managed trusts which were trusts in which units were not redeemable, and then the gradual evolution of it after that, and did so by reference to text writers and by reference to the treatment in statutes and other jurisdictions and white papers which were not directly in point, and out of all that came up with what they called a functional analysis of a unit trust. They repeat the word “functional” more than 30 times in the course of the judgment.

It may be trying to pluck at the heartstrings of the Court to use the words “a priori” simply because they were used in another judgment, but it is not far from the reality. What they have done is to start with a conception of what a unit trust ought to be and then try to fit the statute around it, rather than looking at the statute. That is our submission.

Your Honours, there are also matters arising from our friend’s written submissions but, given the length of time I have already taken, I might defer those until this afternoon in reply, but the reply will be more than five minutes to deal with them. If your Honours please.

KIEFEL J: Thank you, Mr Slater. Yes, Mr Davies.

MR DAVIES: Your Honours, might I deal quickly with the terms of the trust as my learned friend has taken your Honours in detail to them. Can we make these observations about it, your Honours? It is a trust that provides for defined benefits to workers. It is set up to provide portability and security of termination and redundancy payments to workers. It nonetheless provides discretions for discretionary distributions in relation to in particular the capitalised income of the trust.

I make these general observations about it. It is defined and accepted as an approved worker entitlement fund for the purposes of the Fringe Tax Assessment Act. My learned friend contends that it is a unit trust. If your Honours look at the trust fund which is defined in clause 1, it consists predominantly of contributions made by in excess of 1,000 member organisations in respect of 31,000 workers where the contributions are made weekly. In addition, the trust fund consists of any income earned on those contributions and the trustee has powers of investment.

The declaration of trust is under clause 9 and the application of the trust fund is set out under clause 11. None of those clauses, your Honours, mention a unit. None of them say, or purport to put in place for this particular trust, a unit structure whereby three things will happen. The first is that the beneficial interest in the trust fund will be divided into bits, into shares, where they are called units or some other way of calling the portions – naming the portions into which the beneficial interest is divided. The second is that the beneficiaries are all determined without reference to the holding of a unit.

As uniformly understood, and we will take your Honours to some of the material later on, but one of the purposes of a unit is the trustee is able to identify the person for whom the trustee holds and administers the trust fund by reference to who it is who is holding the unit.

KIEFEL J: You mean a unitholder?

MR DAVIES: A unitholder, yes, your Honour.

NETTLE J: Mr Slater says you can do that here because the unitholders hold the number of units equal to the number of dollars standing to the credit of the respective account.

MR DAVIES: Yes, I know, your Honour. Well, your Honour, if your Honour looks at the trust deed in relation to the account and the workers, the workers are defined by reference to a description that has nothing to do with the holding of a unit, whether it is money standing to the credit of the worker, the worker is defined by reference to the member making a contribution on behalf of the worker.

KEANE J: If the dollars are the units, one thing that is clear is the workers do not hold the dollars.

MR DAVIES: In any event, your Honour, with respect, your Honour’s observation is correct. The way in which the deed is set up, it is not seeking to set up a trust structure that is utilising a unit structure. It is intended to come up with a trust fund to provide security for workers in the event of termination.

The third and final observation to observe at a general level is that, as traditionally understood, the rights and entitlements of the beneficiaries are attached to a unit. In other words, there are provisions in the trust deed that will set out the rights and entitlements that a unit will confer upon the person who is the unitholder.

Before I go to way in which we say the meaning of “unit trust” should be approached in this case, can I jump to the legislation perhaps to clarify one or two things that my learned friend said. We say that to view this type of trust – that is, the EISS – as a unit trust for the purposes of Division 6C does not advance the legislative object or purpose of that division at all.

The first step in that process is to observe that the effect of Division 6C is twofold. It is to tax the net income of a unit trust at the same or similar rate for the rate at which the taxable income of a company is taxed – that is the effect of section 102S.

The second is to tax distributions by the unit trust to unitholders in the same manner in which dividends paid to shareholders are taxed. That second objective is achieved by the combination of the definition of “unit trust dividend” in section 102MA, which includes, in paragraph (a):

any distribution made by the trustee of a prescribed trust estate . . . to a unitholder –

Then, that definition, in conjunction with the provisions of section 102T, has the effect that I have just outlined. Section 102T starts on page 1209. Subparagraph (1) states that:

For the purpose of the application of this Act in relation to the imposition, assessment and collection of tax in respect of:

(a) the net income . . . and

(b) the income or assessable income of a unitholder in a prescribed trust estate;

the following provisions of this section have effect.

Subsection 102T(12) – your Honours, at first reading, one is a bit distracted by the words:

the definition of paid in subsection 6(1) –

but that is part of it. The material words for our purposes are:

A reference in . . . 44(1) . . . to a dividend shall be read as including a reference to a unit trust dividend.

Then, subsection (14) states that:

A reference in subsection 44(1) to a shareholder in relation to a company shall be read as including a reference to a unitholder in a prescribed trust estate.

It is those two subsections, in particular, that enliven the operation of section 44 in relation to the taxation of dividends and that makes it applicable to the taxation unit trust dividends. Now, your Honours, my learned friend submits that the common usage of the term “unit trust” certainly is an unsafe way to ascertain its meaning and he may even be saying that it is a completely incorrect way of ascertaining its meaning.

KIEFEL J: The way in which you are approaching it, though, is not the way in which the way the Full Court approached the question, is it?

MR DAVIES: Your Honour, I think it is because I think that before the Full Court it was not submitted that - by the appellant or respondent at first instance - that the term was not used in its ordinary meaning or in a meaning that was consistent with its ordinary meaning.

At first instance, the trial judge had decided the case on the basis of the consequence and significance of the definition of “unit” in section 102M and Justice Jessup in the very short judgment dealt with it saying that it did not have the consequence that her Honour at first instance had drawn. Having said that, his Honour then said that it was uncontroversial that the unit trust was not – that the trust in this case was not unitised and did not come within its ordinary meaning.

The joint judgment did approach the discussion in a different way, but the discussion is concerned with predominantly its meaning as a matter of common usage. Their Honours did take the view that the nature of the interest of a unitholder in a unit trust informs the characterisation of the trust as a unit trust, and then said that this was not such a case.

KIEFEL J: That might be a convenient time, Mr Davis. The Court will now adjourn until 2.15 pm.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

KIEFEL J: Yes, Mr Davies.

MR DAVIES: Your Honours, may I turn to the manner in which we submit the meaning of “unit trust” should be ascertained for the purposes of Division 6C. The first and most important matter to note is that the expression is used in that division without definition. The second matter to note is that it is an expression of common usage and it follows from those two features that its meaning in Division 6C is to be ascertained from a consideration of its common usage informed by the context in which it appears in Division 6C.

KIEFEL J: That is the meaning of “unit trust”.

MR DAVIES: The meaning of “unit trust”.

KIEFEL J: Do you distinguish the word “unit”? You were talking about “unit trust” having a received or common understanding but the word “unit” is defined. Does that potentially bear a different meaning for different purposes?

MR DAVIES: No, your Honour, in our submission, when we come to the definition it is clear that the definition which is an inclusionary one, not exhaustive but inclusionary, it is clear that the definition is talking about a beneficial interest in a unit trust. Therefore, the inclusionary definition is not one that expands the concept of what does or does not fall within “trust” in its ordinary usage.

NETTLE J: Or, therefore, the idea of a unit for that purpose, that is to say, for the purpose of defining or recognising a unit trust.

MR DAVIES: Yes, your Honour. The purpose of the definition is directed at the taxation treatment - - -

NETTLE J: Of distributions.

MR DAVIES: - - -of distributions - - -

KIEFEL J: Yes.

MR DAVIES: - - - which are the two particular aspects about the definition. The first is that in order to be a unitholder, it does not turn upon whether the description “unit” is used. If it is called some other name then that will suffice. The second is that a unitholder need not have beneficial interest in all of the property. It is sufficient that if there are units, and it is otherwise a unit trust, then a distribution is regarded as a unit trust, even though the distribution has been made to a unitholder who, by reason of the rights and entitlements attaching to that particular unit, has a beneficial interest in only, for example, the income, or beneficial interest in only, for example, the capital.

We say that is the work that the definition does. It is not intended to expand the concept of the unit trust for the purposes of the division. In paragraphs 22 onwards of our written submissions which set out some authorities and quoted at length from them - the first was Buckle [1998] HCA 4; 192 CLR 226 at 234 where the High Court said in relation to discretionary trusts:

The meaning of this term is disclosed by a consideration of usage rather than doctrine, and the usage is descriptive rather than normative.

This Court in CPT Custodian adopted that same observation in relation to the meaning of “unit trust”. In Scott 40 ALJR 265 and Mahoney 41 ALJR 232 the High Court was concerned with the meaning of, in the first case, “superannuation fund”, and in the second case considered the meaning of “provident fund”, “benefit fund” and “superannuation fund”. But the purposes for considering the meaning of those expressions in those cases was for the purposes of section 23J, as it was, of the Income Tax and Social Services Contribution Assessment Act 1936. That provision had the effect of exempting the income of provident benefit and superannuation funds. Those terms were not defined. In the first case, that is Scott, Justice Windeyer said

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage.

In the passage we have quoted, his Honour then sets out a number of things that he looks at in order to work out the ordinary usage and in the last sentence of the passage that we quoted at 278 he stated:

Such reading as I have been able to do leaves me with the impression that the connotation of the phrase in the Act must be determined by one’s general knowledge of the extent of the denotation of the phrase in common parlance.

In Mahoney, the next case, Justice Kitto stated:

There is no definition in the Act of ‘a provident, benefit or superannuation fund’, and the meaning of the several expressions must therefore be arrived at in the light of ordinary usage and with only one piece of assistance to be gained from the immediate context.

At page 237, Justice Windeyer made much the same observation in relation to those expressions. He did say further this:

The expression “provident, benefit or superannuation fund” in the Income Tax Assessment Act thus takes its meaning from past usage. But it has now a wider meaning in that the words no longer denote only funds contributed by the members of a mutual society: superannuation and pension schemes for employees to-day may be “non-contributory” being set up by the employer and maintained entirely by contributions made by the employer.

I only bring that to the attention of the Court because my learned friend says one of the difficulties of attempting to understand the meaning and expression of common usage is that the common usage may change over time.

Our purpose for taking your Honours to that passage is to indicate, well, that is not a reason for not having regard to it and moreover one should act upon the change of meaning over time if that is consistent with the context in which it appears in the legislation.

GAGELER J: Do you say the term is ambulatory in Division 6C?

MR DAVIES: We say, your Honour, that not to the extent that central characteristics are that there must be a unit structure set up in order to give the trust a functioning structure that operates through units, whether they are called units or something else. To that extent it is not ambulatory. The rights and entitlements that may attach to units may well adapt with changing commercial transactions and the types of units that are created may well change over time, but the fundamental of requiring there to be the beneficial interest being divided into units that are to be issued to and held by the beneficiaries so that their rights and entitlements can be ascertained by reference to their holding of the units, those fundamentals are not ambulatory.

In Herbert Adams, Justice Dixon - we refer to Herbert Adams in paragraph 25 of our written submissions – another case where the legislation used not words with a normative meaning. Of course, the words there were “pastry” and “cake” which are far removed from the expression with which we are concerned with. I would like to take the Court to Consolidated Press just to demonstrate how the Full Federal Court and then the High Court tackled the question about the meaning of “dividend stripping” and that expression, by the time it was inserted into the Act first in 1972 and then later in the form of section 177E, which was the section before the Court, that expression had gained usage in what was said to be - in common parlance. It was used in the context of tax avoidance as a matter of common parlance.

The question before the Full Court, the particular issue before the Full Court and then the High Court was whether, for the purposes of section 177E, it could be predicated from the steps that were said to give rise to the dividend stripping scheme in that case that there was a dominant purpose of tax avoidance. The Commissioner’s case was that no purpose at all needed to be predicated and if a purpose did need to be predicated, it was sufficient that it would be substantive.

GORDON J: Mr Davies, though, did not the High Court say that, in a sense, that term was not a term of art and it was not to be in effect considered separately from the scheme in which it sat, the provisions, the general anti-avoidance provisions? Are we not driven back to this fact, to the - - -

MR DAVIES: We are, your Honour, and I will come back to the statute but what the Court did indicate was that to give it meaning one had to have a look at how it had been used and then look at the context in which it appeared because, your Honour, that question about attribution of dominant purpose of tax avoidance, that was one that could be answered by reference to the context in which it appeared in section 177E.

To find out whether all the other characteristics were present, in a dividend stripping scheme, that could not be answered simply by looking at section 177E. One had to look at the case law and the manner in which it had been used on previous occasions in order to determine whether or not all of the matters required for such a scheme were present so that it is not just a case of looking at the legislation.

If I can go first to the Federal Court decision reported in [1999] FCA 1199; 91 FCR 524. The particular transactions that were the subject of inquiry are those set out in the headnote on page 525. We can take your Honours to it. Can I take your Honours to page 558 to paragraph 119? The court is there considering the structure of 177E and notes that within the definition that:

The scheme must be of the kind identified . . . (“by way of or in the nature of dividend stripping”). The drafting of each limb assumes that there is an identifiable activity known as “dividend stripping” that can serve as a reference point for deciding whether a particular scheme is “by way of or in the nature of dividend stripping”.

We would say here, your Honours, that the adoption of the expression “unit trust” throughout Division 6C is on the basis that there is an identifiable entity known as a unit trust. Then if I can jump to page 566 at paragraph 157:

Since the legislation does not identify those central characteristics –

That is, of the scheme by way of in the nature of dividend stripping:

it is necessary to look to the decided cases preceding the 1981 Act and to the extrinsic materials accompanying the relevant legislation. We have identified what we would see as the central characteristics of a dividend stripping scheme, by reference to the High Court decisions discussed in Patcorp. The six characteristics so identified are set out in-

the following paragraphs. They are characteristics, your Honours, that would not be powered from a consideration just of section 177E. At paragraph 160 over the page, their Honours noted that there were:

two features of the scheme in the present case which are not easy to reconcile with the central characteristics of a dividend stripping scheme.

We need not go to what they are. What they then indicate in paragraph 164 is that, because of the view they take of purpose, it is not necessary to consider whether those considerations were sufficient to mean that there was not a dividend stripping operation. Then at the foot of the page, paragraph 168, their Honours observed:

When the concept of a “dividend stripping” scheme or arrangement was introduced into the ITAA in 1972, it was on the basis, expressed in the Explanatory Memorandum, that the concept had a widely understood connotation. This was also the basis for the use of the expression “scheme by way of or in the nature of dividend stripping” in s 177E(1)(a). There is no other explanation for Parliament’s disinclination to define or clarify the expression.

The widely understood connotation was explained in the pre-1981 case law to which we have referred. The so-called dividend stripping cases invariably had as their dominant, if not exclusive, purpose the avoidance of tax that otherwise would or might be payable by the vendor shareholders in respect of the profits of the target companies. The apparent exceptions, such as Slutzkin . . . The case law preceding the 1981 Act strongly supports the view that Parliament framed s 177E(1)(a) on the basis that dividend stripping operations necessarily involve a predominant tax avoidance purpose.

This conclusion is reinforced by the extrinsic materials to which we have also referred.

They go on. Now, what I did not take your Honours to was the long consideration of the numerous cases in which it considered the meaning of the term together with the explanatory memorandum and the legislative history of section 177E itself. The High Court approved that approach. I could hand up the High Court’s decision which is reported at [2001] HCA 32; 207 CLR 235. Sorry, your Honours have the case.

KIEFEL J: I think so, yes.

MR DAVIES: If I could take your Honours to page 273 at paragraph 127. The Court is setting out what the Full Court said commencing with the observation:

The Full Court pointed out that there were two features of the present case which were difficult to reconcile with a dividend stripping scheme.

But then skip to the sentence before the quote:

However, it was the purpose, or absence of purpose, which the Full Court regarded as decisive. Their Honours said:

“The widely understood connotation [of the expression “dividend stripping”] –

and so on, which is the passage that I have just read to the Court:

The Full Court agreed with Hill J that no purpose, let alone a dominant purpose, of avoiding tax on a distribution of dividends could be found in the present case.

At page 274, paragraph 131 sets out the argument of the Commissioner that was then before the High Court and that was that it was not a central characteristic of the dividend stripping scheme that will not be able to predicate a tax avoidance purpose and if it was necessary to predicate a tax avoidance purpose it need only be substantive, not dominant. That was the issue. The Court disposed of it at paragraphs 132 and 133 at page 275:

The argument of the Commissioner comes close to treating the words . . . It -

being the argument:

pays insufficient regard to the context in which s 177E appears in the Act, and to the history of the use of the expression “dividend stripping” in the context of tax avoidance, and it treats the explanation that was given to Parliament as to the purpose of s 177E as, at the least, highly selective.

Then in paragraph 133:

Hill J and the Full Court found that there was no purpose of avoiding tax on distributions of profits. For the reasons already given, it is dominant purpose which matters. There was a corporate reorganisation, entered into for reasons related to the United Kingdom tax treatment of future earnings and a desire to avoid double taxation. The disposal of shares involved in the reorganisation attracted liability in Australia to capital gains tax. A number of the characteristics common to schemes that have been regarded as typical dividend stripping schemes were absent. Above all, there was an absence of the particular taxation purpose which is the hallmark of such a scheme, and which is the reason why such schemes were intended to be covered by Pt IVA of the Act.

The conclusion of Hill J and the Full Court on this issue was correct.

So, by way of transposing the reasoning to unit trusts, the expression “unit trust” is one that has been used in a commercial sense and in a commercial context and in a way that is intended to delineate a particular entity that operates as a trust which has been set up with a unit structure.

When one looks at Division 6C, it is that sense that the division is intending to adopt. We say that, your Honours, because the purpose and effect of the division is to treat for tax purposes the net income of unit trusts in a similar way to the way it taxes the taxable income of companies and it seeks to treat the distributions by trustees of unit trusts to unitholders in the same manner that it treats taxes of the dividend paid by companies to its shareholders.

The analogy between unit trusts and companies is one that is established by historical analysis and by common usage as a matter of expression. It does not advance the legislative object of purpose to read “unit trust” to mean an entity such as the EISS, which has no feature that resembles a feature of a company.

NETTLE J: Just to come back then to the definition of “unit” in section 102M, does one read that as meaning that it includes a beneficial interest, as it were, of a kind recognisable as a unit in the sense that you have described, howsoever described? Must it be a beneficial interest which, one way or the other, whatever it be called, bears the qualities of what you said is the ordinary acceptation of a unit in a unit trust?

MR DAVIES: Yes, your Honour.

NETTLE J: That is implicit in that definition.

MR DAVIES: Your Honour, we say it is express in the definition because the definition is a definition of “unit” in relation to a prescribed trust estate, and a prescribed trust estate is an entity that is or was a unit trust. Sorry, that is not quite accurate, because a prescribed trust estate is only a limited type of unit trust. One of the essential features of a prescribed trust estate is that it is or was a unit trust. There are other requirements as well. The definition then concludes with the words “of the trust estate”. When it says “beneficial interest . . . in any of the income or property of the trust estate”, it means the estate of the prescribed trust estate.

Your Honours, we then, in our written submissions, attempt some of the sort of analysis that would have been undertaken in Mahoney, Scott and CPH. We refer to some texts by learned authors, and also to the attributes of cases in which the expression “unit trust” has been used to apply to the trust that is the subject of consideration.

In all of them, your Honours, a common feature mentioned, particularly in the learned texts, is that a unit trust is one where the beneficial interest is divided into units. Of course, that is a consequence of enormous significance because it defines for the trustee the type of trust that it has; it defines for the trustee the beneficiaries for whom it holds and administers the trust; and it then defines the manner in which one is to work out the various entitlements and rights of the beneficiaries. They are entitlements and rights that attach to the units that they hold.

Now, also, the other matter to be observed about the writings about unit trusts is that the concept of a unit trust developed – the concept of the actual use of an entity such as a unit trust developed in conjunction with and as an alternative to a corporate structure.

The history is touched upon by Gower in paragraph 30, that we have quoted from but it is also helpfully mentioned by Justice Gummow in Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193, a time when his Honour was sitting as a member of the Federal Court. His Honour was concerned, in part of his judgment, to determine the meaning of “promoter” and the related fiduciary obligations that such a person had and in the course of it his Honour touched upon the development of unit trust.

In that case, see from the headnote on the first page at page 193 that there is a reference there to a company known as GGI, being the manager of the unit trust known as the GGI Pig Trust so it is a case having the involvement of a unit trust. If I can go to page 229 at line 17, his Honour stated that:

The trust played an extensive role in the evolution of the limited liability corporation as an instrument of business endeavour.

Then go to line 36:

Corporate identity and character might be conferred by Crown charter, or by statute, and in addition there were certain corporations by prescription . . . But as James LJ later observed (in Baird’s case . . . “...there were large societies on which the sun of royal or legislature favour did not shine, and as to whom the whole desire of the associates, and the whole aim of the ablest legal assistants they could obtain, was to make them as nearly a corporation as possible, with continuous existence, with transmissible and transferable stock, but without any individual right in any associate to bind the other associates, or to deal with the assets of the association.” The result was the unincorporated joint stock company.

Over the page at the end of that top paragraph, his Honour noted:

These enterprises were described as companies but, of course, lacked incorporation and separate legal identity, the term “company” having no strict meaning . . . and being used to describe business associations, incorporated and unincorporated.

If I could then jump a paragraph, his Honour continues:

Before the nineteenth century the terms “trustee” and fiduciary relationship” were not used with the precision later acquired, and the expression “trust” was used more generally as identifying the subject-matter of the exclusive jurisdiction of Chancery . . . Further, the nineteenth century saw the foundation in English law of the modern statutory system of incorporation and with that the decline in the use of the trust as the vehicle for business enterprise. In particular, the Joint Stock Companies Act 1844 (7 & 8 Vic C 110) required the incorporation of all associations with 25 or more members which carried on business and whose shares were transferable . . .

That left deeds of settlement which did not provide for the carrying on of business but rather for the investment in the businesses of others of funds received from members. These were known as management trusts and were the forerunners of the modern unit trust. They were not required to incorporate because they themselves did not “carry on business” in the sense required by the Companies Acts –

Over the page at line 12:

In Australia, circumstances have changed. There has been, at least in this country, a shift back to widespread use of trusts as the vehicle for business enterprise, including those which, as this case illustrates, involve raising money from the public.

Then his Honour refers to an article by Professor Ford and Mr Hardingham and quotes from it, if I can go to line 35:

They continue . . . “Public trading trusts represent a resurgence of something like, but not identical with, the unincorporated joint stock company which was repressed in England by the Companies Act 1862 . . . in a provision forbidding the formation of large unincorporated partnerships. The public trading trust shares with those old companies the characteristics of a joint stock devoted to the conduct of a business, the ability of investors to transfer their interests and reliance of trustees for the holding of assets in a convenient manner.”

GAGELER J: Do you say that the ability to transfer the interest is an essential element of a unit trust?

MR DAVIES: Well, your Honour, it is a common element. It is something that on our researches, your Honour, has been a characteristic of – because one has a unit, it is an item of property that, subject to whatever the terms of the unit trust deed might say, is transferable. Now, your Honour, for the purposes of this case we do not need and do not wish to say that that is a necessary element in every case of a unit trust.

GORDON J: It may be that you have to surrender if you do not meet the prerequisites for being a unitholder in certain unit trusts.

MR DAVIES: Sorry, your Honour?

GORDON J: There may be certain unit trusts where you have to have certain indicia to be a unitholder - - -

MR DAVIES: Yes, your Honour, yes.

GORDON J: - - - and when you lose that indicia you must surrender them.

MR DAVIES: Surrender, yes, your Honour.

GORDON J: So it may be transferred back to the trust, but I do not know if the transfer can be an essential element, can it?

MR DAVIES: Yes, that is right, I think that is right, your Honour. The critical thing about it is that the unit as used and commonly understood appears to be an item of property. What you could do with that item of property will be subject to what the terms of the particular trust say you can do with the item of property but it is more often than not in a unit trust - there is a provision that enables one to buy and sell units.

GAGELER J: Just so I understand it, you say the unit is an item of property that is distinct from the beneficial interest that is signified by the unit. Is that the way you put it?

MR DAVIES: It might be one and the same, your Honour. The unit will have rights and entitlements attached to it and the unit will confer upon the unitholder in most cases an interest, a beneficial interest.

NETTLE J: Well, it is the rights that will confer the interest. The unit confers the rights and the rights create the interest.

MR DAVIES: It is the rights – the rights attached in the same way that the rights attach to shares. It is the rights that will create the beneficial interest, yes, your Honour.

KEANE J: Unlike ordinary beneficiaries, unlike people who are described generally but accurately as beneficiaries of the trust estate, one can speak of unitholders who hold units.

MR DAVIES: Yes, your Honour, and the – I said earlier but the ascertainment of the identity of the beneficiary is done with the impersonal description “unitholder”. With this trust, the EISS, they are all personal descriptions. The final passage I wanted to take your Honours to is in Professor Ford’s article “Unit Trusts” in 23 Modern Law Review 192. We have quoted the passage – page 129, paragraph 32 we quoted a passage which repeats the observation that the beneficial interest that is in the unit trust is divided into a large number of units which are then sold by a manager to investors. At page 130, Professor Ford notes in the second complete paragraph that:

The idea of vesting property in a trustee for a large number of investors is not new. The unincorporated trading company, common in England at the end of the eighteenth century, was organised in such a way that the property of the company was held by trustees for the benefit of the investors on the terms of a deed of settlement which prescribed the rights, duties and powers of the members of the trading company. When the legislation regulating trading companies was enacted in the middle of the nineteenth century the provisions of the deed of settlement in the earlier unincorporated trading companies became the model for the articles of association of the new registered companies. The development of unincorporated business enterprises in the form of unit trusts provides an interesting example of a throwback in the evolution of legal institutions.

What seems to have happened, your Honours, is that in about the 1860s with the passing of the – I have now forgotten the name of the Act but it made illegal business trading by large persons in partnerships unless they were incorporated and there was a case in the 1860s where the unincorporated joint stock company was declared to be illegal.

GORDON J: This is what you took us to - what Justice Gummow set out at 230.

MR DAVIES: Yes, that is what Justice Gummow - and what happened was that all the others then incorporated with the exception of one. What were used as the articles and memoranda of association were the existing constitutions of those unincorporated joint stock companies and that was the connection between them and the development of the registration of private companies.

If one then goes to the legislation to see whether or not it uses – there is an intention to use or to refer to the concept of unit trust in some manner other than as it had been commonly understood. The context indicates in our submission that it was clear that it was intended to pick up the meaning of unit trust in the manner in which it had previously been understood or commonly understood.

The first and most important observation is the one that I have made and that is to the purpose and the effect of the position treating effectively certain unit trusts as companies for the purposes of taxation. But there are other provisions there that proceed on the basis that it is the ordinary usage that is intended and not some different or expanded meaning.

If I can go to section 102P, which is the provision that defines public unit trusts and it is the one that says:

a unit trust is a public unit trust . . . if –

and then the first category is where units are listed for quotation. That is consistent with ordinary understanding. In (b):

units in the unit trust were offered to the public –

Again, consistent with ordinary understanding. My learned friend relies upon (c):

units in the unit trust were held by not fewer than 50 persons.

In our submission, that particular provision does not carry with it any suggestion that “unit trust” is being used in some sense other than its common understanding. If we go on to subsection (2), which is alternative tests, the - - -

GORDON J: It is not alternative, is it? It is additional. It expands it to pick up other bits, does it not?

MR DAVIES: I used the word “alternative” by reference to the title, but you may not have the title there, your Honour. No, that would be – it is “also”, yes; it is a further. There is the right to acquire or become the holder - that is not apposite to the rights of workers under clause 8 – and to acquiring or holding units that entitle the unitholder to not less than 20 per cent of the beneficial interests; that presupposes that units are of the nature that you can quantify them comparatively.

KEANE J: Or that there is a charter that does that work.

MR DAVIES: Yes, your Honour. Then, that observation appears in relation to a number of the subsections, including the next one. But then, there is paragraph (c), “by reason of: (i)”. First of all, it is:

any provision in the instrument . . . authorising the variation or abrogation of the rights attaching to any of the units –

So again, that is language inapposite to refer to a case where the entitlements are fixed by the terms of the trust. They must relate to:

the conversion, cancellation, extinguishment or redemption of any such units –

In our submission, that language is completely inapposite for what my learned friend is suggesting is the unit in this case. Then, again, after (iii), there is a reference to “rights attaching to any of the units”. In subsection (3) it deals with unit trusts:

A unit trust shall not be taken to be a public unit trust in relation to a year of income by reason that units in the unit trust were offered to the public . . . if –

again, picking up the wording of subsection (1)(b).

GAGELER J: The Full Court referred fairly extensively to extrinsic material.

MR DAVIES: Yes, your Honour.

GAGELER J: You do not seem to be doing that at all?

MR DAVIES: Your Honour, I can – the extrinsic material – no, your Honour – I think, your Honour, that the answer lies in the legislation. It is not necessary to go to the legislative material. If one goes to the legislative material as the Full Court did, the same conclusion is reached. Justices Pagone and Edelman dealt with it at appeal book 170 to 173 from paragraphs 15 to 31.

Can I – just to correct an error that appears in that dissertation – paragraph 16 on page 170 their Honours refer to what was said by Mr Willis in Parliament and they described that as being in the second reading speech. In fact, that was a statement made by Mr Willis who was then in Opposition but made as part of the second reading debate and the Opposition supported the Bill. So, I just wanted to correct that description there. Their Honours refer to the white paper and at paragraph 18 say that as a result of white paper that:

defined a “unit trust” as follows: “a unit trust is a trust in which the beneficial ownership of the trust property is divided into a number of units”. This emphasises a core concept of a beneficial interest in the trust property and a functional description of that interest involving units.

GAGELER J: What does that add, the reference to a functional description?

MR DAVIES: Your Honour, the adoption of a unit structure will have a functional connotation in the sense that there will be – it sets the structure for identifying the beneficiaries and what the beneficiaries’ entitlements are, so there will be a – I think, your Honour, that it is designed to indicate that the beneficial interests are divided by certain people who are identified in the register as being unitholders and that they have units that are likely to be transmissible and are likely to be redeemable or liable for cancellation or extinguished or sold - - -

GORDON J: Well, at 25, they say:

the functional notion of a unit involving participation in profits or income.

MR DAVIES: Yes, well, your Honour, I do not think that observation adds much and can I say also about the joint judgment, that so far as their Honours refer to the unit as a metaphor, we, with respect, do not adopt that. It is not quite clear what their Honours mean by the metaphor. Can I take your Honours to paragraph 13 on page 169. Their Honours say:

The EISS was not a unit trust because the Workers did not have units in any meaningful sense.

Justice Jessup did not deal with it, simply to say the trust was not unitised and it is uncontroversial that it was not unitised. Their Honours went on to give some body as to why they thought that there were not any units in any meaningful sense and then in the last sentence, their Honours state:

The single most striking feature making it appropriate to treat “unit trusts” as if they were companies, is that the interests of the beneficiaries (whatever those interests might be) are held through a metaphor of a “unit” which Parliament has treated as analogous to the way that shareholders hold shares.

Now, it may be that their Honours are treating the metaphor as something to do with analogy. In our respectful submission, that sentence would be more accurate if the words “a metaphor of” were deleted and everything else just sat.

GORDON J: Can I ask one question which you can come to at any point that you like, rather than interrupt your flow, and that is this: at some point can you explain to us what the Commissioner’s position is about the tax effect of the outcome of whether or not this trust is within Division 6C or not, from the point of view of the workers – not the workers, I withdraw that – yes, the workers, rather than the members.

MR DAVIES: The active members, those entitled to pay money under clause - - -

GORDON J: Active workers.

MR DAVIES: Your Honour, the Commissioner’s position is that it would be a peculiar result if the distributions to the active workers under clause 8 were unit trust dividends. The Commissioner’s position is that is an unintended consequence, having regard to the nature of their interests in the trust, but if that is wrong, and it is found that this is a unit trust, so that it follows that the active workers are unitholders and it is ultimately found that it is a prescribed trust estate, it has to satisfy the other things. If it is found that it is a prescribed trust estate and they are unitholders, then the Commissioner I think, your Honour, has not formed a view, your Honour.

In order to find that it is not a unit trust dividend, one has to accept that the payment under clause 8 is a payment with respect to cancellation and extinguishment or redemption of the unit.

GORDON J: So just assume there are two views. Does it mean that on distribution of a severance payment to an active worker, absent Division 6, is assessed as income under the ordinary rules? What is the tax effect? What is the advantage to the worker of the application of Division 6C?

MR DAVIES: Your Honour, I do not think there is - your Honour, I do not think there is any advantage to the worker.

GORDON J: So there is only an advantage to the trustee?

MR DAVIES: Trustee.

NETTLE J: At the moment it is taxed at concessional rates, is it not?

MR DAVIES: Yes, your Honour.

NETTLE J: That is to say, payments made to workers are taxed at concessional rates.

MR DAVIES: Yes. Well, there are real problems in it all, but there is another section of the Act dealing with the taxation of employment termination payments. These payments are likely to be caught up by those provisions. A genuine redundancy payment will be free of tax. So if the worker is getting a genuine redundancy payment, then the worker would say it is not a unit trust dividend, not taxable under Division 6C. It is a genuine redundancy payment and therefore not taxable under Division 83-C.

NETTLE J: But au contraire in the case of a TER payment, I take it?

MR DAVIES: Yes, your Honour, and that turns upon what type of payment it is for. It is not clear what these other termination payments are for. They may be for unpaid - - -

NETTLE J: Salary?

MR DAVIES: They may be paid for unused sick leave. They may be paid for untaken long service leave. But those get - some of them can get concessional treatment under Division 83-A and 83-B. If it is for neither of those and it is an eligible termination payment that is not one of the others, then it would get taxed under Division 82 without concession.

NETTLE J: Whereas, if Mr Slater is correct, there would be no tax payable because this would be a cancellation of the unit?

MR DAVIES: No, this would – no, Mr Slater contends it is a cancellation of the unit, therefore it cannot be a unit trust dividend, therefore it is not taxable under Division 6C. But it will be an employment termination payment of whatever description and either taxed or taxed at a concessional rate or free of tax under Divisions 82 and 83.

GORDON J: To complete that out, can I just understand the way in which the Commissioner reads “unit trust dividend” then, which is central to the way in which I understand Mr Slater’s argument is put? At the moment it is structured to have two amounts of inclusion, one by way of distribution whether by money or property to a unitholder under (a), as well as any amount credited to a unitholder under (b), and then it in effect carves out part of what we would regard as a return on an investment, being the cost base element, or that is the way it arguably may be seen to be.

What does the Commissioner say in relation to “but does not include - (c) and (d) operate” in a context of a unit trust - what I will call - what Mr Slater calls the paradigm of a unit trust? In other words, is the purpose of “unit trust dividend” definition in order to identify the pool of amounts that are to be treated as a dividend subject to in a sense treatment as it would be if it was a company dividend, or is it directed at some other purpose?

MR DAVIES: No, it is the former, your Honour. The structure of the definition is similar – not exactly the same, but similar to the definition of “dividend” in section 6 of the 1936 Act. It is designed to result in a distribution to a unitholder being a taxable dividend so far as it is paid out of profits.

GORDON J: That is why (c) comes out, because it takes out “public trading trust”, does it? It removes from the pool distributions which are attributable profits, but in respect of something which is not a public trading trust in the year of income.

MR DAVIES: That is in the year of income.

GORDON J: Yes, in the year of income. I am not doing it generally; I am dealing with this particular year. Then what is (d) directed at?

MR DAVIES: If I can go back to (c), a prescribed trust estate is – I will truncate it - an entity that is or was in a previous income year a unit trust with other requirements, but it is an “is or was”. You can have a current year of income where the prescribed trust estate is not presently a unit trust. The idea of (c) is to include distributions in the current year of an existing entity that is not a unit trust – not a public trading trust. It is to restrict the distributions that are to be treated as unit trust dividends to distributions of profits that were made when the entity was a public trading trust.

GORDON J: I understand (c). It is (d), which is the provision which deals with “cancellation, extinguishment or redemption”, to which Mr Slater refers.

MR DAVIES: Yes.

GORDON J: One of the ways it may be able to be read is to say what it is excluding is, in a sense, the amount contributed to the acquisition of the unit, in (d)(i), and the reverse of it in (d)(ii). The question which arises is the way in which the Commissioner sees this working in the context of what I will call a paradigm unit trust deed, or a unit trust. What is to be picked up by these taxing arrangements?

MR DAVIES: Your Honour, what is intended to not be treated as the unit trust dividend is the amount that was subscribed for for the unit.

GORDON J: In (d)(i). Put (d)(i)’s - - -

MR DAVIES: Okay, so that is (d)(i) and then (d)(ii) - it is just a qualification.

GORDON J: Yes.

MR DAVIES: Yes. The difficulty in this case is whether payment under clause 8 is in respect of cancellation, extinguishment or redemption in order to get into (i) and (ii) and in our submission that language is not a ready application to the scenario where the trustee is simply paying a worker what he is entitled to be paid under clause 8. The cancellation, extinguishment or redemption is completely irrelevant to the payment. At most, the worker’s entitlement is being satisfied. So it becomes – it is a matter of language – a bit tortuous to be describing clause 8 payments as payments that fit within with (d).

GORDON J: I just want to loop it off, if I can. Does that mean that the unit itself in a paradigm example is, to pick up Justice Gageler’s example, transferred, the value of it – we are not talking about distributions now by way of unit trust dividend; we are talking about disposal of the underlying unit - the cost base is dealt with there and we go elsewhere to find what happens on the disposal of the unit.

MR DAVIES: I am not sure that the cost base is dealt with there.

GORDON J: No, but the purchase price, the subscription amount.

MR DAVIES: The subscription price is the cost base. Capital gains applies to disposal of units and we go elsewhere for that.

GORDON J: Which would include cancellation under that regime.

MR DAVIES: Which would include cancellation, yes, your Honour.

GORDON J: In the true sense.

MR DAVIES: Yes, your Honour. I think, your Honour, that units were regarded as an asset for - unit and unit trust is a.....but, your Honour will see our point is that that language is very tortuous - in applying that language to what one would have thought there was not an intention that if the workers are genuinely said to be unitholders then what they get from clause 8 will be a unit trust dividend.

The only way of reaching that conclusion is somehow to apply the language – “cancellation, extinguishment or redemption” to something on the face of it that has nothing to do with those things. That is used in contradistinction, your Honours, to the language of Divisions 82 and 83. I will just refer you to them at this stage but the language is clear. In those divisions they are dealing specifically with employment termination payments and the provisions are of ready application to the type of payment under clause 8. Can I talk about another anomaly in this case - - -

NETTLE J: I am sorry, just before you pass from that point, is that to say that even if these were unit trusts and units they would still only be taxable under Division 82 because it is the more specific set of provisions or is it a different submission to that?

MR DAVIES: It is not more specific, your Honour. It fits - subject – the question is there is one dividend – the definition of “employment termination payment” would capture clause 8 payments and would therefore operate except for the question mark in section 82-135(h). This says what is not an eligible termination payment and:

a payment that is deemed to be a dividend under this Act –

is not an eligible termination payment. So, if Mr Slater is wrong and clause 8 payments are unit trust dividends the question then becomes does that – are such dividends declared to be dividends for the purposes of the Act. If they are, then they are taxed under Division 6C and not under Division 82.

If they do not – if those provisions do not operate to deem them as dividends - and there is some conjecture as to whether they do because what they do is require you to read section 44 as though the reference to dividend includes the unit trust dividend - it does not purport to make any difference to the definition of “dividends” in section 6(1). If it is not a provision that deems it to be a dividend then both provisions apply but my learned friend says, well, it is not a unit trust dividend and if he is right on that then Division 82 certainly does apply.

Now, can I come to an anomaly? My learned friend’s case is that this is a unit trust because the workers under clause 8 have units. He says, however, that anything distributed to them under clause 8 is not a unit trust dividend, so we have a unit trust for the purposes of the Act where nothing that is capable of being distributed can be a unit trust dividend.

What is the point? That is a bit facetious for me to say. When I say what is the point, where is the legislative objective being furthered? The result is you have a unit trust, the net income of which is being taxed as though it were a company and yet nothing that it distributes is a unit trust dividend.

Now, I say whilst nothing that it distributes is a unit trust dividend, it is because the other thing, clause 8 according to my learned friend is not a unit trust dividend. That leaves distributions under clause 14 and they do become relevant because they are payments of income and distributions of capitalised income. Payments of income are called payments, they are not called distributions, and what is said to be is that at year end one has to accumulate the income, so what is left is capitalised income.

If that capitalised income is distributed, which it can be to the discretionary beneficiaries, they receive capital payments free of tax. They are not unit trust dividends because they are not unitholders, even on my learned friend’s submissions. Now, we say that it would be anomalous for this trust to be included within the definition of “unit trust” in those circumstances.

That leads me really to the next point. In paragraphs 38 to 43 of our written submissions we set out the reasons why we say the EISS is not a unit trust within the meaning of Division 6C. What I want to elaborate a little bit on is what I have just touched upon, which is paragraph 42. What has to be characterised here is the whole of the trust and you have here my learned friend seeking to characterise the whole of the trust by reference to units which can only be held by a subclass of beneficiaries, that is, the active workers. None of the other beneficiaries are unitholders in circumstances where the trustee’s power to make distributions out of the trust fund is not limited to payments to the beneficiaries who are said to be the unitholders and further that – and as an example – no part of the income can be distributed to a unitholder.

The capitalised income can be distributed to unitholders and others. But the unitholding itself does not account for the whole of the capital of the trust. If one accepts that the clause 8 workers are unitholders, then one still has the capitalised income to which no unitholder has an entitlement and also that part of the contributions that one made on behalf of inactive workers.

So my learned friend’s case depends upon focusing upon a small element of the trust and of course doing that then gives rise to the anomalies that I have just outlined because the consequence of characterising the whole trust as a unit trust then means, for example, that the net income of the trust is taxed at company rates in circumstances where the income is going to be capitalised and then distributed tax free because it will not be a unit trust dividend, unless of course it is distributed – even if it is distributed to a clause 8 worker, on my learned friend’s case, it is not a distribution to a unitholder because the units are to the amounts standing for credit in the worker’s account.

NETTLE J: Tax at company rates would be paid annually by the trustee on the income of the fund.

MR DAVIES: That is right.

NETTLE J: So the only advantage is in the difference between rates.

MR DAVIES: That is the advantage in the rates, but also there is no tax consequence for the subsequent distribution of the income after it has been capitalised. It will be distribution under clause 14.2 and 3, it will not be caught by employment termination payments and it is tax free because it is distributed as capital.

GAGELER J: Are we to read paragraph 5 of your outline as saying in its common usage a critical characteristic of a unit trust is that the whole of the beneficial interest in the trust fund is divided into units?

MR DAVIES: Yes, your Honour, and Justice Jessup I think very succinctly put it that way. His Honour said at page 166 at line 38, having said that it needs to be divided into units:

There needs to be an irreducible, discrete, “unit” or, as the Administrative Appeals Tribunal said in BERT, parcel of rights, by reference to which those interests are held, such that every person or entity –

So we - - -

GAGELER J: Is there another element that I think you may have at times in your submissions made explicit and that is that the holding of the beneficial interest arises solely by reason of the holding of the units or is that not part of your formulation?

MR DAVIES: Well, it is the use of the word “sole” then, your Honour, but our submission was that the beneficial interest in a unit trust as commonly understood arises by the holding of a unit, and I think probably yes, solely, your Honour. I am struggling to think of why it would not be.

NETTLE J: Well, if you insist that the whole of the fund must be unitised, then if the interest is acquired by reason of the rights arising out of units it must follow, must it not.

MR DAVIES: Yes, your Honour.

KIEFEL J: Where are we then, Mr Davies, in relation to your outline? Have we arrived at your notice of contention?

MR DAVIES: We have, yes, your Honour. Your Honour, the notice of contention was put in as an abundance of caution because we just wanted to make it clear to my learned friend particularly that we did not accept that the workers have an interest of the type that is described in the definition that had been the basis upon which the learned trial judge had decided the case.

Our major point about it, your Honour, is that the beneficial interests to which that definition is directed, a beneficial interest in a unit, and what is or was a public trading trust which is something that must be or must have been a unit trust, so they are directed at beneficial interests in a unit trust. The error that we say the learned trial judge made was firstly, not to take into account the words “in respect of a prescribed trust estate” and the concluding words which are:

of the trust estate.

In the definition, it makes it clear that the definition is restricted to any interest in that type of entity.

The second error that her Honour made was that the words “beneficial interest” themselves are of indistinct meaning and can vary

depending upon the context. What her Honour did not do was to look at the context in which they appear in this case. If one just looks beyond the words of the definition itself, it is in the context of the division that is designed to treat certain unit trusts as companies.

Oddly enough, her Honour did set out the explanatory memorandums. I will just refer to them for the moment; on pages 146 and 147, her Honour sets out some passages from the explanatory memorandum to both Divisions 6B and 6C – sorry, the second reading speech. Her Honour did not pay any heed to the fact that the purpose of the division is to treat, for taxation purposes, certain unit trusts as companies. If that is so, then when looking at the question of what is and what is not a beneficial interest, one is not furthering the purpose of the division if you say that “beneficial interest” can include a beneficial interest in something other than a unit trust.

Can I say a further matter is that it was not, at the time the division was introduced, the concept that a unitholder conferred a beneficial interest in a unit trust. It was something that was accepted. When I say it was accepted, that was what was said by the High Court in Charles, repeated by the High Court in Read, and so the concept of a unitholder having a beneficial interest in the trust fund of a unit trust was consistent with common understanding.

That does not have to be the case in every case, because as the definition points out, it is an inclusionary definition. What the definition does add to it is that the beneficial interest of a particular unitholder need not be in the whole of the trust fund. It can be in either the income of the property, or a particular item of income, or a particular type of property. That is what the inclusionary bit of the definition adds to the understanding of “unit”. They are our submissions, if the Court pleases.

KIEFEL J: Yes, thank you. Yes, Mr Slater.

MR SLATER: Thank you, your Honour. Your Honour, can I first answer a question that was asked of me before lunch, and that was what recourse do the workers have if they are not paid by the appellant? As far as I can ascertain, their recourse is to approach a court in equity. They do not, that I have been able to find over lunch, have any access to any remedy under the Fair Work Act or otherwise under industrial law.

Can I deal with the second preliminary matter and that is the question that Justice Gordon asked, what is the effect of Division 6C applying or not applying? Can I give our answer to that as succinctly as I can? If Division 6C does not apply then the income of the trust to which the appellant is trustee is taxed under section 99A at approximately 50 per cent depending on which surcharges were applying for the time being, the payments out are taxed to the employees as income for services provided, in effect, ordinary income, or they fall within the relief in Divisions 82 and 83, some of which relief is in the case of bona fide redundancy to exempt them. I have not endeavoured to distil the operation of those two divisions and given the time, I will not attempt to do so.

The other consequence is that any entitlement that the workers may have to have any part of surplus credited to their workers’ accounts on termination of the fund is reduced by the incidence of tax at the rate of approximately 50 per cent rather than at the corporate rate of 30 per cent. If the fund is taxed under Division 6C then the income of the appellant is taxed at the rate of 30 per cent, the company rate. Distributions made by it, if they are taken to be dividends, will be franked dividends. Our friends say they are not dividends because they are not paid to unitholders. We would say if the question arose that it was paid to somebody other than the holders of the workers’ accounts one would have to look at the position of the person to whom it was paid to decide whether or not it fell within the definition of “unitholder”.

But, if it is not taxed under that provision, then it will be taxable as a yield on investment in the fund on the general principles which were discussed by this Court in McNeil v Commissioner of Taxation [2007] HCA 5; (2007) 229 CLR 656. Now, I appreciate that that is not a perfect answer. There are anomalies. There are always going to be anomalies because – and tortuous language to use my friend’s phrase - what the legislature has done is to try to shoehorn a square object into a round hole. That is, they have tried to treat a trust estate as if it were a company when the two are fundamentally different.

The anomalies that my friend pointed to in various respects are a consequence of that and of the legislature using an undefined and descriptive expression as if it had a normative meaning. That is the fundamental problem which gives rise to the various anomalies that my friend has pointed to.

Your Honours, matters arising out of our friend’s submissions to a large extent are addressed in our earlier submissions and in writing and I will not reply to them at length. Can I deal with a couple of preliminary points arising from my friend’s oral submissions? The first was that my friend said the purpose of Division 6C was not to tax this fund as the company. We wholeheartedly agree. This fund was not what Division 6C was aimed at. It was aimed at listed or public offer funds which carry on business but that is not the question. It is not the question which your Honours have to grapple with. The question is not whether this fund which was not in existence in 1985 was the target of the amendment. The question is whether this fund falls within the words of the amendment.

It has been said many times – Cape Brandy Syndicate and others – that there is no equity in a tax. Similarly, the language of tax often sweeps up things that were not intended to be swept up. This fund was not constituted with the idea that it should fall within Division 6C. It was constituted in 1988 for the purpose which is set out in the language of the instrument. The question whether it falls within Division 6C is a late question. It is a question which was raised with the Commissioner some considerable time ago. The Commissioner first said yes, it does fall within Division 6C, and then said it does not, and that is why we are here.

KIEFEL J: But are you saying that the initial object or purpose of the legislation is not any aid to construction?

MR SLATER: No, I am not saying that, your Honour.

KIEFEL J: It just sounded rather like a literal approach. I know that one tends to get into that area – into that kind of discourse in this area of law, but you are not going quite that far?

MR SLATER: I am not going back 50 years, your Honour, to Gorton’s Case.

KIEFEL J: No.

MR SLATER: This Court has said many times, and it said it to me most unkindly in Alcan, that one looks at the words of the legislation but does so in context.

Another preliminary point, if I may, takes up a discourse between Justice Nettle and my friend along the lines that the units confer the rights and the rights confer the interest. We would respectfully say that that is a wrong line of analysis.

Shares in a company are separate choses in action and one can talk about having interests in shares and shares conferring rights but units are not separate choses in action; they are simply a name given to a collection of rights under the trust instrument. They do not confer rights or interests in the trust property. They are the name given to rights or interests. They are a convenient label for gathering together under one word.

So a unit trust is a trust estate – that is, there is a trustee, there is property and there are beneficiaries who have interests in the property and the word “units” in a unit trust is used to describe the collection of interests which is transmissible in the simple case by a transfer accepted by the trustee.

NETTLE J: I am sorry, what is the essential difference? Shares are congeries of rights. A unit is a congeries of rights, at least in the paradigm sense. What is the difference?

MR SLATER: The difference is that a share in a company is a distinct item of property at law. A beneficial interest in a trust estate, one can put it various ways. It was put by Justice Hope in DKLR Holding Company No. 2 in about (1981) NSWLR in a passage which has been endorsed at various times in this Court as being that equitable rights and obligations are engrafted on rather than carved out of property and so forth. An interest in a trust is a claim on the assets of the trust against the trustee.

NETTLE J: Which is the product of the rights conferred on the unitholder by reason of the congeries of rights assembled within it.

MR SLATER: With respect, your Honour, that is just semantics. It is going around in circles.

NETTLE J: It is not intended to be – I am trying to understand the distinction. The units that say in the paradigm case confer certain rights.

MR SLATER: No, the units are a name given to rights, they do not confer them.

NETTLE J: Well, they are a collection of rights, if you wish.

MR SLATER: Yes.

NETTLE J: Those rights then confer or may then confer an interest.

MR SLATER: No, the rights are the interest. The interest is the rights. If one wants to be very particular about it, the rights are the rights to enforce the interests.

NETTLE J: I am with you. So, what is the difference between that and shares?

MR SLATER: A share is a chose in action distinct from the property of the company. A shareholder owns a share. A shareholder has no interest in the assets of the company. That is the fundamental difference between a company and a trust.

NETTLE J: All right. Well, why does that bear on whether the rights which are expressed, if you like, within the unit, do not confer or represent the interest in the fund?

MR SLATER: I am not dissenting from the notion that the expression “unit” refers to a collection of rights and interests in the property held by the trustee. What I was dissenting from was the way in which it was put that units confer the rights and rights confer the interest which makes it sound like units are shares in a company. The Income Tax Assessment Act is framed by somebody who did not appreciate the difference. The Income Tax Assessment Act repeatedly in Part 3-1 talks about units as if they were shares, so it says, for example, you can have a bonus issue of units. That is just nonsense. A unit is a one-hundredth part, say, of the property. A bonus issue gives you two two-hundredth parts. That is a nonsensical proposition. So there is scope for great confusion in the Assessment Acts about this. But analytically a unit is not a share. It does not confer a right. It is the right. I am sorry, that took rather longer than I thought.

There are two substantial points of difference between the parties. The first is as to the construction of the statute and the second is as to the construction of the deed. As to the first, the Commissioner’s analysis starts with a non-statutory common usage conception. That is an expression which is found throughout the written submissions and was used several times by my friend today.

Then our friend’s analysis begins by asking whether the definition of “unit” in section 102M expands that conception. We respectfully say that that is the wrong starting point. It is the starting point the Full Court adopted. It is the wrong starting point. One does not start with an assumption and then see whether the statute expands it. One starts with the statute.

What our friend’s argument does, in effect, is to read some such verbiage – and Justice Nettle put it to my friend in a way which my friend almost adopted – but it reads some such verbiage as “unit trust according to common usage” into the definition of “unit” in section 102M and we say that is not warranted.

GAGELER J: I am not sure he does say that. I think he says you first catch your hare - before you get to the definition of “unit” you are looking at that definition in relation to a prescribed trust estate. You find a prescribed trust estate; therefore you need to find a unit trust first.

MR SLATER: Yes, you do, but can I come to that in just a moment as to what we say about that? We do say you find a trust estate, and you find trust property, and you find beneficiaries, and you find rights which can be described as “units”. Those are the central elements, but you do not find the common usage concept that my friend wants to impress upon that.

Can I come to it this way? My friend took your Honours to Consolidated Press, and to the expression “dividend stripping”. We agree dividend stripping was a term in widespread mercantile usage. It was the subject of entries in dictionaries, and it had its own entry in Fowler’s Modern English Usage. That was referred to by Justice Windeyer in Investment & Merchant Finance v Commissioner of Taxation, in a 1971 High Court decision, but it had a variety of meanings.

Lord Denning, in Griffiths v J.P. Harrison (Watford) Ltd [1963] AC 1, described it as “prospectors digging for wealth in the subterranean passages of the Revenue”. The reason he described it as that was that dividend stripping, for a time in England when England had advanced corporation tax, involved techniques which involved getting credits from the revenue by buying and selling companies.

The point I make is that it had a widely used meaning, but no clear or defined meaning. That became very apparent in the passages which my friend read to the Court from the judgment of this Court in Consolidated Press [2001] HCA 32; 207 CLR 235. The Commissioner’s argument is in paragraph 131 on page 274. The Court, as my friend took the Court to, rejected it in the first sentence of paragraph 132 on page 275. If I could direct your Honours’ attention, without reading it, to the whole of paragraph 132 and elicit from that paragraph, and from the rest of the judgment, this proposition.

The meaning of the expression, the Court said in that paragraph, is to be gathered from its context. There were different views expressed in the courts below and in English courts about the elements of dividend stripping. You will find what Justice Hill said in paragraph 125 of the High Court judgment. You will find what the Full Court said in paragraph 126. They are similar but not quite the same and as I said, the UK cases were quite different. But the context showed that there was one key element and the key element was that it was a tax avoidance device and so one finds that in the first paragraph quoted from Justice Hill in paragraph 125 of the Commonwealth Law Reports, and in the passage from the Full Court in paragraph 127 of the Full Court report on page 273, and the High Court in the second half of paragraph 132 on page 275 makes it clear that it is the context of section 177E that is important.

What is significant is that that was the core idea. The boundaries of dividend stripping, the Court did not need to explore in that case. Now, in the present case the core idea lies in the words “trust” and “unit”. The “trust”, it has to be a trust estate and there has to be unit for it to be a unit trust and we have said what we say about units this morning.

We say they are present in the unit trust estate. We say, and I have said this many times, that this is not a central case but it is within the context of the division. Common usage is not an acceptable or statutory consideration. There are several problems with using common usage. The first is that it has no identifiable scope as a criterion of liability. The draftsman assumed that it did. We agree with our friends on that point but we say the draftsman was wrong to do so. That leaves this Court with the conundrum what to do with what we respectfully submit is a mistaken piece of drafting. We say the answer to that is you get what you can out of the context in the way that we put to the Court this morning.

KIEFEL J: Unless you agree with the draftsman.

MR SLATER: If your Honours agree with the draftsman then I am not going to be very successful. We say that unit trust is merely a descriptive term. It is like large or western. Everyone knows what “large” means more or less but nobody knows where the boundaries are. Everyone knows what “western” means more or less but nobody knows where “western” stops being western and starts to become eastern again. The instances which fall within the common usage in the reported cases are wildly variant. We have given your Honours a reference to a string of cases in which cases trusts have been said to be unit trusts, have been accepted as being unit trusts but they have extraordinarily variable content. Sometimes there are - - -

KIEFEL J: Or variable application.

MR SLATER: Sorry?

KIEFEL J: But, Mr Slater, are you really saying that the draftsman was – that there was no understood – an ordinary understanding of terms such as “unit trust”?

MR SLATER: There was a core understanding.

KIEFEL J: As distinct from the fact that in reducing in writing division – in drafting Division 6, there have been some additional – there have been some specific expressions which might have the effect of taking it beyond that ordinary meaning.

MR SLATER: We say there is a core understanding which is no more than that it is a trust in which there are units and units are a defined term here.

KIEFEL J: And that is really what you are relying upon.

MR SLATER: Yes, it is.

KIEFEL J: In the end result, the two features that you rely upon in Division 6 are the definition of “unit trust” and the extension in section 102P(1)(c), do you not?

MR SLATER: The definition of “unit” – in a trust there is not one.

KIEFEL J: Sorry, the definition of “unit” and also the extension in section 102P(1)(c) where the units in the unit trust can be held by fewer than 50 persons and do not have to have the sense of public offering or listed for quotation; it has a wider connotation.

MR SLATER: A wider connotation than - - -

KIEFEL J: You rely upon that - and then you rely upon that in the context of trust as a whole. They are really the features, are they not, of Division 6C which you are relying on?

MR SLATER: I am not sure that I would put the 102P(1)(c) point quite as high as the definition of a unit in 102M.

KIEFEL J: Yes.

MR SLATER: But we do say that what 102P(1)(c) says is that you can have a unit trust which is not, as was CPT or Charles, offered to the public or listed.

KIEFEL J: It does not have the more common understanding.

MR SLATER: And we also say that unit trust as a matter of common usage has a meaning that is so fluid that it cannot be pinned down except to an irreducible minimum of there being a trust estate and a beneficial interest in the trust estate, to which the label “unit” can be attached. I went through this morning - - -

KIEFEL J: Yes.

MR SLATER: - - - what other things you can draw from the language of the statute. So I will not take your Honours to all those cases, but I do press upon your Honours that the expression has been used in such a disparate range of instances that it does not have a common usage meaning beyond that irreducible to common elements that I addressed.

We say that the status of a unitholder under the division is no more than status as a member of a class of beneficiaries or as an object for power of appointment or as a mechanism for allocating income or capital distributions to desired beneficiaries. In all of those cases, they are still called units in common usage.

The second problem we press on the Court in relation to common usage is that it does not connect with the language of the statute. The idea of a fund divided into equal shares called units is wholly absent from the statute; does not appear anywhere. There is no more than the use of the expression “unit trust” and the definition of “unit”, and the definition goes somewhat contrary to the common usage that my friend presses because it says it is:

a beneficial interest, howsoever described, in any of the income or property -

Your Honours, as to the construction of the deed, our friend’s submissions, more perhaps in writing than orally because my friend did not address your Honours at length on it, your Honours having had the benefit of being wearied by me this morning, but their interpretation of the deed starts by taking as a fundamental premise to the exercise the idea that there is a common usage notion of a unit as the product dividing the fund into a number of equal shares called units and then sets about identifying departures from that common usage notion rather than doing, as we endeavour to do, and going to the language of the deed as a whole.

Now, can I make one other point arising from the argument this morning and that is in response to a comment made by Justice Keane to my friend. As I transcribed it, and I may not have got it entirely accurately, but your Honour said to my friend one thing is clear, that if the dollars in the accounts are the units, the workers did not hold the dollars. That is not the case we put. We say the units in the fund are $1.00 units. The number of units held equals the number of the dollars in the worker’s account. Each unit entitles the holder to receive a return of $1.00 and no present income but a future contingent and defeasible right to share in any surplus under clause 23.

KEANE J: You say the workers hold those units.

MR SLATER: Yes. The units are not the dollars. The dollars are the moneys or, more accurately, the credits in the bank account which are transferred to the trustee to hold. The units have a measure of $1.00. They are, in the same way as we used to say of shares, that they were 50 cent shares, these are $1.00 units and the rights they confer are to payment of $1.00 per unit. When that payment is made, the units are redeemed which is why we say there is no unit trust dividend at that point.

NETTLE J: Please do not think this flippant, but could one also say that they are units of a cent?

MR SLATER: Sorry?

NETTLE J: Could one say that they are units of a cent, in the sense that one is entitled to be paid every cent that is due?

MR SLATER: Yes, I would have to say that, your Honour.

KEANE J: Because the quantification of the units is just something that is not determined by any charter.

MR SLATER: No, no. But, that is a consequence of trying to accommodate the diffuse language of the division.

KEANE J: Or to recognise that the division is intended to operate - or to render tax, something that is seen to be analogous to companies and shares.

MR SLATER: We do not shy away from that having been the purpose of the draftsman. I put that right at the outset. What we do say is the draftsman used language which goes beyond that and that we fall within the language the draftsman used. It is not a simple case. It is not the simple case of a unit trust. It is a case which falls outside the simple case. But, we say, it is still within the words of the statute.

Your Honours, finally, my friend’s notice of contention. Orally, my friend put it - and again I may have mistranscribed this - as being that the question was whether there was an interest in that type of entity, that is, an interest in a unit trust. We would respectfully say that that is the wrong question. It is not whether it is an interest in a unit trust, it is whether it is an interest in the property held by the trustee of a trust which is characterised as a unit trust.

One does not have an interest in a trust. A trust is a relationship. It is not a thing. It is not a person. It is not a legal entity. It is not something one can have an interest in. It is one something can have an interest under. The interest that one has under a trust or under a unit trust is an interest in a trust property. It is a beneficial interest in the trust property and to start the analysis was talking about whether you have an interest in units or an interest in the trust is to mistake the issue and to confuse the analysis.

Now, as to our friend’s written submissions, our friend’s reliance on Gartside, we would say, picks up the common misconception of the decision in that case. All that case decided was that a mere object – and that was a case where there was a trust to accumulate the income but with a bare power to appoint to beneficiaries if the trustee so desired it - the mere status of being an object of that bare power did not create a measurable interest to which anyone could succeed under section 2(1)(b) of the Finance Act 1984. That is all the case decides really.

We say in this case there was a beneficial interest and I have taken your Honours to this many times before so I will do no more than to say that sums were put into the fund to meet the entitlements of workers, that workers had an entitlement in respect of those funds from the time they were put in. And within that context, we would submit that the observations which were made in Finch v Telstra Super, which are set out in our written submissions[2010] HCA 36; , 242 CLR 254, page 270, paragraph 30, we would say are entirely apposite.

And, finally, we would say that two decisions of Full Courts of the Federal Court, which were cited both by Justice Davies at page 142 to 145, especially at paragraph 37 of the appeal book and by the Full Court at page 187, paragraph 92, but were not addressed by our friends, either in writing or orally, are directly in point.

Both cases deal with superannuation funds and not with termination benefit funds but the material point is the same. It is a payment into a fund under employment terms for the benefit of employee come beneficiaries. The entitlements are contingent on termination of employment and are defeasible but in both cases it was held that the employee beneficiaries had beneficial interest in the funds, or more accurately in both cases it was said that the beneficiaries had an equitable proprietary interest and, in our submission, that is what the somewhat loose expression “beneficial interest” really means.

The two other cases quoted by our friends in the footnotes to their submissions do not help. If one looks at Commonwealth Bank Officers Superannuation v Beck [2016] NSWCA 218 and looks at the clause which was in issue there, clause 11.3, set out by the Chief Justice at paragraph 13 of his reasons, one sees that it has nothing to do with this.

Similarly, the decision of this Court in Commissioner of State Taxation v Cyril Henschke [2010] HCA 43; (2010) 242 CLR 508 is a case about the rights of partners. And the observations which our friends referred to at paragraph 25 are directed to the rights of partners and the difference between the rights of partners inter se and the rights of partners in partnership property, and the comments were made in saying that – talking about beneficial interest in the partnership property - did not assist in understanding the rights existing as between partners. Your Honours, unless there is anything else I can assist the Court with, those are our submissions.

KIEFEL J: Thank you. The Court will reserve its decision in this matter and adjourn until 9.45 am tomorrow for pronouncement of orders and otherwise until 10.15 am.

AT 4.15 PM THE MATTER WAS ADJOURNED