Compton v Federal Commissioner of Taxation
(1966) 116 CLR 23340 ALJR 366
(Judgment by: Taylor J.)
COMPTON
v FEDERAL COMMISSIONER OF TAXATION
Judges:
Taylor J.Kitto
Menzies
Owen JJ.
Judgment date: 9 February 1966
Judgment by:
Taylor J.
1966, February 9.
TAYLOR J. delivered the following written judgment:-
By deed dated 1st December 1956, made between F. H. Compton & Sons Pty. Limited (hereinafter referred to as the "company") and Francis Herbert Compton, Brian Francis Compton, and Allan Walter Moore (hereinafter referred to as the "trustees") the company purported to establish the F. H. Compton & Sons (Superannuation Fund). Two of the trustees were, as hereinafter appears, directors of the company and the third trustee was its secretary. The deed provided that the fund should be vested in, controlled and administered by the trustees and that such employees of the company and of every "subsidiary or associated company" as should be nominated by the directors of the company should be members of the fund. The fund was to consist of: (i) Such contributions as might be made to it from time to time by the company for the credit of the members individually; (ii) Any other amounts which might be received by the trustees for the fund; and (iii) Interest or profits arising from the investment of the moneys in the fund. Wide powers of investment were given to the trustees by cl. 6 and thereafter the following clauses appear in the deed:
"8. Profit and Losses. (at p234)
An account shall be opened in the name of each member of the Fund and the amount paid by the Company to the Trustees in accordance with Clause 9 in respect of each member shall be credited to such Member's account. All interest profits and losses arising from the investment of such of the moneys of the Fund as stand to the credit of the individual members shall be credited or debited as the case may be to members' accounts in proportion to the amounts standing to their respective credits at the preceding thirtieth day of June and all interest profits and losses arising from the investment of other moneys of the Fund shall be credited or debited to the Fund.
9. Contributions by Company. (at p235)
The Company shall except as herein provided and at its absolute and uncontrolled discretion from time to time pay to the Trustees such sum or sums which sums shall be subject to the following provisions:
- (a)
- Before paying any such sum or sums to the Trustees the Directors shall determine the portion of the total payment applicable to each individual member who is to benefit under this plan;
- (b)
- The Trustees shall keep a record of the apportionment and shall advise the individual members concerned in writing within one calendar month after the thirtieth day of June in each year of the amounts arising under this Clause which stand to their credit.
10. Voluntary Resignation Dismissal etc. (at p235)
In the event of the member either voluntarily resigning or being dismissed from the service of the Company before attainment of the retiring age he shall cease to be a member and the Trustees may deal with the total amount at credit of the member as they at their discretion may determine and may at their discretion pay the whole or part thereof to the member but any amount not paid to the member shall be credited to the Fund and further that out of the amounts so credited to the Fund the Trustees shall pay to the Company any sum which may be owing by the member to any of the Constituent Companies at the date of his resignation or dismissal upon receipt of a written request to do so from the Secretary of the Constituent Company or Companies involved.
11. The total of the amounts credited to the Fund in accordance with the preceding clause hereof or any part thereof less any prroper deductions may from time to time at the discretion of the Trustees be divided among the members in proportion to the amount standing to their respective accounts and credited to such accounts." By cl. 12 it was provided that on attainment of the retiring age, which by definition means the attainment by a male member of his sixty-fifth birthday or by a female member of her fifty-fifth birthday or in either case such other age as the directors may determine, the trustees should pay to the member for his own use and benefit absolutely either as a capital sum or in such manner as the trustees may think fit "the moneys at credit of the account of the Member in the Fund". It was provided by cl. 13 that, in the event of the death of a member whilst a member of the fund, the trustees should pay by way of lump sum or of such other form of annuity or pension or by transfers of securities which the trustees in their discretion might determine all moneys standing to the credit of the deceased member to such member's dependants or to any such one or more of them to the exclusion of the other or others as the trustees may determine. Clause 26 provided that if the company should so determine or if the company should go into liquidation whether voluntarily or compulsorily except for the purpose of reconstruction or amalgamation the fund should be realized and, after payment of any proper costs charges and expenses, any moneys not standing to the credit of particular members should be distributed amongst all or any of the members in such proportions as should be deemed to be just and equitable by the trustees.
Finally, cl. 29 provided that the trustees might from time to time by instrument in writing and with the consent of the company under its common seal but not otherwise alter repeal or add to any of the provisions contained in the deed and make new provision to the exclusion of or in addition to any of the said provisions provided that no such alteration or addition so made should reduce, vary or otherwise limit the amounts due or payable to the members as at the date thereof except with the written consent of all the members or the member whose benefit is to be so reduced, varied or limited. (at p236)
The only persons who at any relevant time were members of the fund were F. H. Compton, B. F. Compton, N. J. Compton and R. J. Compton. These four persons, who between them held 60,000 of the 100,000 issued shares in the capital of the company and whose wives, between them, held the remaining 40,000, were the directors of the company. It is common ground that the four Comptons were also employees of the company. They became members of the fund in February 1957. The company made a contribution to the fund of 800 pounds (200 pounds each) on their account and they, themselves, contributed 100 pounds each. But during the balance of the income year which ended on 30th June 1957 the company advanced approximately 19,000 pounds to the trustees and F. H. Compton advanced an additional 23,000 pounds. With these moneys the trustees made a number of investments including the purchase of 1,000 redeemable preference shares in the company and a like number in an associated company, F. H. Compton (Civil Engineers) Pty. Limited. The 500 issued shares of the capital of this latter company were owned in equal parcels by the four Comptons who were also the directors of that company. On 2nd February 1957 each of these companies had increased its capital and converted 1,000 of the new shares in each company into redeemable preference shares and by a special resolution had altered its articles to provide that such shares should confer on the holders "the right only to receive such dividends as the Directors may from time to time as they think fit determine". On 16th February 1957 the preference shares in each company were allotted to the trustees of the fund and on 16th March 1957 the directors of the company declared an interim dividend of 20,000 pounds on its redeemable preference shares.
Except for a comparatively small amount of interest this was the only income received by the trustees on their investments in the income year ended 30th June 1957 and the provisions of cl. 8 seem to have created some difficulty in dealing with this income. The deed, it will be remembered, had been executed only on 1st December 1956 and there were, therefore, no "amounts standing to their (the members') respective credits at the preceding thirtieth day of June". For this reason no part of the income was credited to the individual accounts of the members but the whole amount was carried to the credit of what was called an accumulation account. Thereafter, in succeeding years, the moneys standing to the credit of the accumulation account were treated as "other moneys" for the purpose of cl. 8 with the result that the bulk of the annual income of the fund was credited to the accumulation account and a comparatively small portion only to the credit of the individual members. (at p237)
From time to time, during the relevant period, the company made further contributions to the fund to be placed to the credit of each member, further moneys were lent to the trustees in the income year which ended on 30th June 1958, some of which appears to have been repaid during the following year, and these moneys were invested by the trustees. The net income of the fund in the year ended 30th June 1958 was 47,805 pounds, in the year ended 30th June 1959, 24,051 pounds, and in the year ended 30th June 1960, 23,844 pounds. These amounts included dividends on the redeemable preference shares in the company and its associated company, F. H. Compton (Civil Engineers) Pty. Limited, amounting, in the first of these years, to approximately 41,000 pounds, in the second, to 14,400 pounds, and in the third year, to approximately 14,000 pounds. Of the net income in each of these years 45,167 pounds was credited to the accumulation account in the first of these years, 22,307 pounds in the second year and 21,931 pounds in the third year. The result was that on 30th June 1960 a sum of 109,954 pounds stood to the credit of the accumulation account and sums ranging between approximately 2,500 pounds and 2,700 pounds stood to the credit of the four members. (at p238)
The appellants were assessed by the respondent to income tax in each of the four years upon a taxable income which, subject to an adjustment occasioned by a small capital profit in the final year, corresponded with the amount placed to the credit of the accumulation account, i.e., 20,549 pounds for the year ended 30th June 1957, 45,167 pounds for the year ended 30th June 1958, 2,307 pounds for the year ended 30th June 1959 and 21,896 pounds for the year ended 30th June 1960. It is from these assessments that these four appeals are brought and the questions which arise for decision are whether, in the language of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act, these amounts represent income of "a provident, benefit or superannuation fund established for the benefit of employees" and, if that be so, whether the fund was during the relevant periods "being applied for the purpose for which it was established". (at p238)
It was pointed out to me that the evidence showed that the reason for the establishment of the fund was to create a situation in which substantial profits of the company could be distributed without attracting liability for tax. That this is so is, upon the evidence, beyond question. And there is no doubt that the situation so created virtually left the control and disposition of the fund in the hands of the four Comptons who were the four major shareholders in the company and the holders of all the issued shares in its associated company. It did so because it was for the four Comptons to decide who should become members of the fund and events show that no employees, other than themselves, became members. Indeed, no attempt was made to make known to other employees of the company that there was a superannuation fund in existence. But these considerations are, in my view, irrelevant to an inquiry as to whether the fund was one established for the benefit of employees. As to whether, during the relevant periods, the fund was "being applied for the purpose for which it was established" is, of course, another matter. I find myself in agreement with the pronouncement of Owen J. in Mahoney v. Federal Commissioner of Taxation of the Commonwealth of Australia (1965) 39 ALJR 62 , at p 63 that: "Whether the fund that was established was a provident, benefit or superannuation fund established for the benefit of employees is . . . a matter which must be determined from the language of the deed and its meaning cannot vary according to the motives of those who established it." If upon examination of the deed it is found to answer the statutory description then that is the end of the matter and, provided the fund is being applied for the purpose for which it was established, its income will be exempt from tax whatever motives its founder had. (at p239)
The deed itself is, in most respects, in a form which is common enough. In effect, it purported to establish a fund for the benefit of members, which, by definition, means employees of the company or of its subsidiary or associated companies, nominated by the directors of the company for inclusion in the fund. It provided that a member should receive on retirement, in some form or other, the amount standing to the credit of his account and that, in the event of his earlier death, his dependants, or some one or more of them should receive the moneys standing to the credit of the deceased member. Subject to one matter with which I will deal presently, the fund clearly enough answered the description of a fund established for the benefit of employees and this may, therefore, be said to be the purpose, or what in this context is the same thing, the object of the deed. (at p239)
How is it said that this purpose was carried into effect? The four Comptons as directors of the company nominated themselves as members. But at no relevant time did they consider the question of admitting other employees as members of the firm. They did not even let it be known to their employees during the relevant period that there was a superannuation fund in existence which contemplated the admission of other employees as members. Indeed, there is undisputed evidence that on one occasion the knowledge that there was a superannuation fund in existence was actually withheld by one of the appellants from one inquiring employee who had had twenty years' service with the company. Although the deed did not contemplate the establishment of a fund for the benefit of all of the employees of the company as such its fundamental purpose was the establishment of a fund for the benefit of such of its employees as should be nominated as members of the fund. But the evidence establishes beyond question that during the relevant period no attempt was made to give effect to this purpose; indeed, it appears clearly enough that at all relevant times it was the intention of the four directors and for that matter, of the trustees, that no such attempt should be made. In these circumstances I find it impossible to say that during the relevant income years the fund was being applied for the purpose for which it was established. Particularly is this so when it is seen that the bulk of the income of the fund was being accumulated and that its ultimate disposition rested, by virtue of the provisions of cl. 26, virtually, in the hands of the four Comptons. (at p240)
There is a further difficulty in the way of the appellants. As already appears only a small portion of the annual income was credited to the accounts of each of the four members and it was the amount standing to the credit of each member's account to which he was entitled upon retirement or, in the event of his earlier death, to which his dependants were entitled. The residue, the amount standing to the credit of the accumulation account, was not distributable except upon a winding up and then only among the members at that time. If these appropriations of income were made strictly in accordance with the terms of the deed and it was intended by the deed that the bulk of the income should be accumulated and distributed only upon a winding up, it can scarcely be said that the fund was one established for the benefit of employees. This was the qualification which I made earlier. However, Mr. Conacher argued that under cl. 8, or, possibly, under cl. 11, the whole of the first year's income should have been credited in equal portions to the four members' accounts and that failure to follow this course inevitably led to unjustifiable discrepancies in the accounts in later years. But even if this be so, the appellants are in no better case for, if this argument be accepted, it is apparent that the fund was not during the relevant income years being applied for the purpose for which it was established. In the result the appeals should be dismissed.
(From this decision the taxpayers appealed to the Full Court.) (at p240)
N. H. Bowen Q.C. (with him C. V. Cullinan), for the appellants. Part of the income of the fund is credited to members, part, under the terms of the deed, is credited to what is called an "accumulation fund", and not allocated to members at that point of time. "Accumulation fund" is an accountants' name for a balance - it might equally be called "unallocated funds" or even "suspense account". The income of a fund is exempt provided it is a superannuation fund established for the benefit of employees and being applied in the way s. 23 (j) requires. The subject deed is a not unusual form of superannuation deed. The income, not only of superannuation funds, but of any provident or benefit fund, is exempted under this provision, if it meets the two tests of establishment for the benefit of employees and being in fact applied for that purpose. In considering whether it is established for the benefit of employees, motive is irrelevant; one looks at the legal effect of the deed only. It need not be established for the benefit of employees solely; it may apply to dependants or to persons named by employees under powers of appointment. It does not have to be established for all employees or even a substantial number, and there is no obligation to notify employees of the existence of the fund: that consideration is irrelevant to whether the fund is being properly applied. Employees who are also relatives of an employer, or shareholders of, or directors of, a contributing company, are not excluded. It need not be shown that particular benefits were in fact paid, or accrued, to any employee during the year.
The section does not reject a fund which is being properly applied by the trustees, carrying out the declared objects in favour of employees, even though this involved investing the funds wisely and accumulating them in order that substantial benefits may be paid at the time of retirement, death or dismissal, or that help may be given other employee objectives. If the trustees were consistently committing breaches of trust in applying the fund for extraneous and improper purposes, the fund might then well lose its exemption. Under cl. 4, nomination is a prerequisite to membership, but there is no duty to nominate. An uncontrolled power of selection is given to the directors of the contributing companies. As to cl. 28, this provides for long service leave being paid, as it were, out of this fund. It is not an uncommon provision, a kind of stock clause, that the superannuation payment is not cumulative upon long service leave payments. There is nothing in the relevant legislation to prevent this. If the company requests, the trustees are obliged to provide the money to pay its obligations under the Long Service Leave Act. This does not deprive a fund, for example, of the benefits under s. 66 on the basis that the rights of the members are fully secured - the fund at least gives them some security for the payment of their long service leave. The fund was not in any way established with that in view, on the terms of the deed. Reading it as a whole, cl. 28 is anything but the key clause in the deed. It does not indicate that the deed does otherwise than to establish a fund for the benefit of employees. The company obtains a deduction for making a provision in this way, and no doubt this could be a reason for setting up the fund.
That is all it obtains; it obtains no profit. It may well make a better provision because of such deduction; this also benefits the employees. The fund is not established solely for the benefit of employees, but really and substantially so. If this is a fatal clause, this virtually would become a test case for a very large number of deeds. There is nothing adverse in cl. 29 by which the trustees are given the power of alteration with the consent of the company. It is not just a naked or arbitrary power. They must exercise it for the purposes of their trust. If they exercised it for an extran
eous purpose, it would be an invalid exercise of the power. The policy of the section is to encourage employers to have superannuation funds, firstly because, being beneficial to employees, it means that the private sector of the economy is providing what otherwise would fall upon the public sector; secondly, because it leads to stability, without denying mobility, of labour. This deed is not in any way a cloak or facade for some other transaction. There is no obligation to nominate whatever. Only after nomination does an employee become an object of the fund. The purpose of the fund is not defeated by restricting nomination to four persons.
At best, some persons reading the deed might have an expectation which was disappointed by finding that there were only four. The recital shows that there is not a sound basis even for an expectation. The directors could nominate employees of any one of the constituent companies or themselves. They were entitled to consider it in the interests of the company to nominate only a fraction of the employees. The accumulation of the bulk of the income would not matter, provided it must go to the benefit of employees, because this would be one way to apply funds for their benefit. The purpose for which the fund is established is the same as the purpose for which it is applied. If subsequently a very large cash flow went into the accumulation fund, it is still no argument against the exemption of the income of the fund. It could not be distributed except on a winding up, and only to employees then. As to the view that the fund is not established for the benefit of employees if the great bulk of it must go forward to a winding up, this fund is unexceptionable in its terms in that regard. (He referred to Metropolitan Gas Co. v. Federal Commissioner of Taxation (1932) 47 CLR 621 ; Mahoney v. Federal Commissioner of Taxation (1965) 39 ALJR 62 ; Driclad Pty. Ltd. v. Federal Commissioner of Taxation (1966) 40 ALJR 285 and Scott v. Federal Commissioner of Taxation (1966) 40 ALJR 265.) (at p242)
M. H. Byers Q.C. (with him A. M. Gleeson), for the respondent. Section 23 (j) deals with an existing fund, for the period of its existence and no further. One must be able to say of that fund, and of all of it, that it was established for the benefit of employees. This means employees who are members for the time being of the fund from year to year. One must be able to say of the fund, so looked at from year to year, together with the employees who are members, that it was established for the benefit of those employees. A fund which provides for rights only in the event of its winding up cannot be a fund that answers the description in s. 23 (j). Clause 26 gives a right only when the fund has been wound up. The deed defines, for the existing members from time to time, a particular quantum of rights. However, that does not exhaust the fund. As to the rest of the fund, there is no right or benefit for the member except, for the first time, in the dissolution of the fund. Clause 26 prevents the fund from answering the description of being a fund established for the benefit of employees. The rights of members must be rights that enure for the whole period of the fund. When the fund has ceased to exist, it has ceased to be a fund in relation to which the income is exempt. Each year one cannot say of this fund that all of it is established for the benefit of the members from time to time. One cannot say that a fund is a provident, benefit or superannuation fund established for the benefit of employees unless all the benefits supplied by the instrument must be benefits for employees alone, in other words, solely for employees. The benefits cannot be conferred, for example, on employees and on the founder, which is a company, or on employees and non-employees. (Scott v. The Commissioner of Taxation (No. 2) (1966) 40 ALJR 265 , at p 278 .) Under cl. 28, one of the persons entitled to benefits is the company, which is relieved of its obligation, or liability, to make long service leave payments.
One cannot say that the benefits under this deed are chiefly (as in Lloyd v. Federal Commissioner of Taxation (1955) 93 CLR 645 ) - certainly one cannot say exclusively - for the benefit of the beneficiaries, because their very right is subject to destruction in the interest of the company. An additional reason for this conclusion is afforded by cl. 29, which is subject to no restriction except in the proviso ; under it, amendment could be made to cl. 28 extending it to matters other than long service leave ; and to cl. 26, so as to alter the destination of the money on the winding up to someone other than the members for the time being, for example, the company itself, so that one could not possibly say it was devoted to the benefit of employees. Quite clearly cl. 29 contemplates that any provision of the deed may be altered, and a fortiori that must include those provisions which confer the retirement benefits. Hence the fund is not established solely, or exclusively, or chiefly for the benefit of employees. The fiduciary power of the trustees has to be fiduciary in relation to some particular person, and the proviso indicates its extent. One must have, under the deed, beneficiaries who are living people and who are admitted. Even if there is no obligation to nominate, none the less the deed was not administered for the benefit of employees because nomination was deliberately restricted to directors. This does not exhaust the persons who were contemplated by the deed as capable of becoming members. Large sums were accumulated because the only nominated employees were directors (two of them being also trustees), so that the purpose for which the fund was applied during those years was for the benefit of these four persons alone, because they could apply the accumulated funds to themselves. The fund was brought into existence to obtain a tax benefit for the directors. (at p244)
N. H. Bowen Q.C., in reply, referred to Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436 and Royal College of Surgeons of England v. National Provincial Bank Ltd. [1952] AC 631 .
Cur. adv. vult. (at p244)