Federal Commissioner of Taxation v. Totledge Pty. Limited.
Judges:Bowen CJ
Deane J
Fitzgerald J
Court:
Full Federal Court
Bowen C.J.; Deane and Fitzgerald JJ.
In the days before Medibank, there was a company which carried on, in New South Wales, the practice or business of providing pathology testing services to the medical profession and which actually operated at a loss. It had a paid-up capital of $2.00 and acquired many creditors. Its name, somewhat inappropriate from the point of view of its creditors, was Preventicare Pty. Limited (``Preventicare''). The two issued shares were held, upon trust, for two medical practitioners, Thomas Richard Wenkart and Geoffrey Walter Edelsten, as tenants in common.
A petition that Preventicare be wound up was presented to the Supreme Court of New South Wales. On 1 July, 1971, the Supreme Court appointed Mr. J.E. Walker, an accountant, as provisional liquidator. A Scheme of Arrangement (``the Scheme'') between Preventicare and its creditors was proposed and agreed to. On 11 December, 1972, the Scheme was approved by the Supreme Court pursuant to sec. 181 of the Companies Act (N.S.W.), 1961.
Totledge Pty. Limited was incorporated under the name Burradoo Investments Pty. Limited on 7 November, 1972. Shortly after its incorporation, it changed its name to Morlea Pathology Services Pty. Limited. It is referred to in the Scheme as ``Morlea''. Without prejudging the issue in this case, which is whether it has to pay any income tax, we shall call it ``the taxpayer''.
Part of the Scheme, as proposed, had to be abandoned by reason of the Parliament changing the legislative provisions under which the past losses of Preventicare could be treated as an asset in a tax avoidance market place. The utilization of those past losses would have involved ownership of the issued shares in Preventicare being transferred to the potential tax avoider. As a result of the abandonment of that aspect of the Scheme, the beneficial owners of the issued shares in Preventicare remained Dr. Wenkart and Dr. Edelsten. Further shares (100) had been issued in connection with the proposed ``sale'' of past losses with the result that the issued capital of Preventicare had been increased to $102 divided into 102 shares of $1 each.
In essence, the Scheme, as it eventually became operative, provided for the establishment of two distinct trusts. One of these took the form of a Trust Fund (``the Scheme Fund'') of which Mr. Walker was the trustee (``the Trustee'' or ``the Scheme Trustee'') and to which there were transferred the cash at bank, book debts and certain other rights of action being assets of Preventicare's former business. The other trust was a trading trust of which the taxpayer was the trustee and which was constituted by the sale and transfer by Preventicare to the taxpayer, ``as Trustee'' upon the trusts in the Scheme ``set forth'', of all the other assets of Preventicare's business. We shall, on occasion, refer to this trust of the business as ``the business trust''.
The Scheme provided for the settlement by the Scheme Trustee of a list of creditors of Preventicare (``the creditors'' or ``the former creditors''). Upon the taking effect of the Scheme, ``all the debts of and claims by each creditor'' were forever extinguished and discharged and such creditor had ``in lieu thereof the right to participate in the distribution of the Scheme Fund in respect of the amounts of such debts and claims...''.
Subject to certain provisions providing for premature sale of the business, the taxpayer was entrusted to manage and conduct
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Preventicare's former business ``as Trustee for the creditors... and as and when the same become available to account to and pay the Trustee for application in accordance with the provisions of this Scheme all surplus income and other moneys derived by (the taxpayer) from the carrying on of the said business until such time as such creditor... has been paid'' one hundred cents in the dollar ``in respect of his claim against'' Preventicare and interest at the rate of 8% per annum. ``Upon repayment in full to the creditors... and upon completion of the administration of (the) Scheme'', the taxpayer was ``to assign and transfer for nominal consideration the whole of the said business and all the assets and undertakings thereof to Thomas Richard Wenkart and Geoffrey Walter Edelsten, the original beneficial shareholders of (Preventicare), or as they may direct in equal shares and for their own use and benefit absolutely...''.
For his part, the Scheme Trustee was given power to lend to the taxpayer, upon such terms as he should determine, sufficient funds to enable the taxpayer to perform the trusts binding upon it ``to the best advantage of the creditors''. He was required to make certain specific payments and was entitled to appropriate and hold in reserve in the Scheme Fund ``such moneys as he shall think necessary to provide for any claims of a contingent or prospective nature or not capable of being ascertained prior to the proposed distribution of the Scheme Fund by reason of pending proceedings or the like''. The Scheme Fund was to be distributed by the Scheme Trustee ``as and when moneys become available for distribution'' in payment of Crown debts, remuneration of the Provisional Liquidator, costs and charges of the Scheme and remuneration of the Scheme Trustee, and ``unsecured creditors whose claims would be preferential...''. After such payments, ``the balance of the Scheme Fund'' was to be ``distributed amongst all the other creditors... proportionally according to their respective debts...''.
The express provisions of the Scheme are, in some respects, ambiguous and incomplete. To a large extent, the ambiguities result from a tendency to treat as one overall trust what should properly be seen as two distinct but related trusts, namely, the business trust of which the taxpayer was the trustee and the Scheme Fund of which the Scheme Trustee was trustee. The main incompleteness consisted of a failure to make express provision, as regards the business trust, for the unlikely event that ``the said business and all the assets and undertaking'' were not acquired ``for nominal consideration'' by Dr. Wenkart and Dr. Edelsten ``or as they may direct'' or in respect of any intervening income after the income earned enabled payment to the Scheme Fund of sufficient to enable the Scheme Trustee to discharge all his obligations. Notwithstanding such problems, it is plain that the transfer of the assets of the business was to the taxpayer in the capacity of trustee under the trusts contained in the Scheme or resulting from its establishment and that the taxpayer subsequently carried on, and received the income of, the business as such trustee. It is not suggested that there was any failure or invalidity of the trusts established by the Scheme and we find it unnecessary to determine precise entitlement to income or capital of the two trusts in all the hypothetically possible circumstances which might have occurred. It will, however, subsequently be necessary to determine, with some precision, the beneficial entitlement to income of the business trust up until the time when sufficient income had been derived to enable the full discharge of the entitlement of creditors under the Scheme.
After the Scheme came into operation and assets were transferred and accepted according to its terms, the fortunes of the business underwent a dramatic improvement. The excess of gross income of the business over what was described, in the taxpayer's returns, as ``allowable expenses'' was $76,900 for the period 12 December, 1972 to 30 June, 1973. For the financial year ended 30 June, 1974, it was $165,553. For the financial year ended 30 June, 1975, it was $369,362. For the financial year ended 30 June, 1976, the excess of gross income over ``allowable expenses'' was no less than $2,396,874. From this excess income, payments were made, apparently to former creditors direct, of amounts sufficient to discharge the full amount of the former creditors' entitlements under the Scheme. The whole of the excess income over ``allowable expenses'', as disclosed in the
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taxpayer's returns, was so applied by the taxpayer in respect of the period ended 30 June, 1973 and the income years ended 30 June, 1974 and 30 June, 1975. In respect of the income year ended 30 June, 1976, an amount of $466,945 was so applied during the income year. While the above payments in respect of the 1973, 1974 and 1975 income years were actually made after the end of the income year, the taxpayer had, during each year, resolved that the full taxable profit for the year be so paid.In its taxation return in respect of each of the four income years, the taxpayer adopted the approach that it was not liable to pay income tax upon the profits of the business for the reason that its income was income of a trust estate to which beneficiaries were presently entitled and which was included in the assessable income of such beneficiaries pursuant to the provisions of sec. 97(1) of the Income Tax Assessment Act, 1936-1976 (``the Act''). The Commissioner refused to accept that approach. He assessed the taxpayer, pursuant to the provisions of sec. 99 of the Act, in respect of the whole surplus of income over ``allowable expenses'' disclosed in its return for the income years ended 30 June, 1973, 30 June, 1974 and 30 June, 1975. As regards the income year ended 30 June, 1976, the Commissioner assessed the taxpayer, pursuant to sec. 99, on the amount of $466,945, being part of the excess of income of that year and being the amount applied for the benefit of the former creditors. The Commissioner did not purport to tax the taxpayer in respect of the residue of the excess of income over ``allowable expenses'' of the business in the income year ended 30 June, 1976.
During the 1976 income year, Dr. Wenkart and Dr. Edelsten exercised the power (under cl. 7(b) of the Scheme) of nominating the assignee of the business and all the assets and undertaking thereof. There were subsequent assignments by those nominees. The taxpayer accepted such nomination and assignments as resulting in the ultimate assignees being entitled to the residue of net income of the year ended 30 June, 1976 and to ``the business and all the assets and undertakings thereof''. The evidence does not disclose whether there was a formal observance of the requirement in cl. 7(b) of the Scheme that the assignment by the taxpayer be ``for nominal consideration''. If there were not, it would seem probable that there was an effective waiver of it. Be that as it may, it is not suggested that anything turns upon that for the purposes of this appeal.
Notices of Objection were lodged by the taxpayer in respect of the four income years. The objections were disallowed by the Commissioner. The taxpayer appealed to the Supreme Court of New South Wales (Rogers J.). All the appeals, which were heard together, were upheld by his Honour who set aside the four assessments. This appeal is by the Commissioner against his Honour's judgment and orders.
For present purposes, the essential provisions of the Act are to be found in sec. 96, 97(1) and 99 which are in Pt. III, Div. 6. We refer to the provisions of those sections in the form applicable to the four relevant years of income. Section 96 lays down a general rule that, except as provided in the Act, a trustee ``shall not be liable as trustee to pay income tax upon the income of the trust estate''. Section 97(1) provided that where ``any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the net income of the trust estate''. Section 99(2) provided (in a case such as the present where sec. 99A was inapplicable):
``99(2) Where -
- (a) there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary in pursuance of section 97 or in respect of which the trustee is assessed and liable to pay tax in pursuance of the last preceding section; or
- (b) there is a part of the net income of a trust estate that is not included in the assessable income of a beneficiary in pursuance of section 97 and in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of the last preceding section,
the trustee shall be assessed and is liable to pay tax on that net income or on that part of that net income, as the case may be, as if it were the income of an individual and were not subject to any deduction.''
It is, in our view, clear that the assets
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which were vested in the taxpayer as trustee of the business trust constituted assets of a trust estate for the purposes of Pt. III Div. 6 and that the income derived by the taxpayer from carrying on Preventicare's former business constituted income of that trust estate for those purposes. The Commissioner assessed the taxpayer on the basis that the excess of income over ``allowable expenses'' disclosed by the taxpayer's income tax return represented ``net income'' (i.e. total assessable income calculated as if the trustee were a taxpayer less allowable deductions other than concessional deductions: sec. 95(1)) ``of a trust estate'' for the purposes of sec. 99(2). It is not suggested by the taxpayer that sec. 99(2) was inapplicable by reason of any assessment pursuant to ``the last preceding section'' (i.e. sec. 98). The issue between the parties is whether, in the particular circumstances of the present case, the provisions of sec. 99(2) were inapplicable for the reason that the relevant net income was, within the words of the subsection, ``included in the assessable income of a beneficiary in pursuance of section 97''. The answer to that question will depend upon whether there were one or more beneficiaries who were not under any legal disability and who were, for the purposes of sec. 97, ``presently entitled to a share of the income of (the) trust estate''. There is no suggestion of legal disability in the present matter. At issue is the ``present entitlement'' of any beneficiary of the trust estate, in his capacity as such, to the relevant income.In the Supreme Court, Rogers J. found that the Scheme Trustee was presently entitled to the relevant income of the trust estate for the purposes of sec. 97 with the consequence that the net income in question was not caught by sec. 99. Senior counsel for the taxpayer sustained a determined ambivalence on the question whether, on the taxpayer's case, his Honour was correct in identifying the Scheme Trustee, rather than the former creditors, as beneficially entitled to the income of the business trust. The taxpayer's approach in this regard may have been influenced by, inter alia, the fact that the taxpayer's returns for the relevant income years ignore the existence of the Scheme Trustee and nominate the creditors as the persons who were entitled to the balance of the net income and the fact that the evidence indicates that the taxpayer, in fact, distributed the various surpluses of income direct to the creditors who were described in the taxpayer's minutes as ``creditors/beneficiaries''.
Examination of the detailed provisions of the Scheme underlines the distinct character of the two trusts for which it made provision. The assets of the Scheme Fund were quite separate from the assets of the business trust. The trustee of the business was the taxpayer; the trustee of the Scheme Fund was the Scheme Trustee. Indeed, the Scheme emphasised the separate nature of the two trusts by providing for the making of loans by the Scheme Trustee to the taxpayer as trustee of the business and for the sub-lease and hire by the Scheme Trustee to the taxpayer of certain equipment as may be ``necessary expedient or desirable for the advantageous carrying on of the said business'' by the taxpayer. Beneficial entitlement to the assets of the two trusts was also quite distinct. Pending payment in full of creditors, the obligation of the taxpayer as trustee of the business trust was ``to account to and pay the Trustee for application in accordance with the Scheme all surplus income''. It is relevant to mention that in the present case the amounts of surplus income in fact corresponded with the amounts of ``net income'' as defined in sec. 95(1) (see above). After such payment, Dr. Wenkart and Dr. Edelsten became entitled to acquire the assets for a nominal consideration or to exercise a right of nomination in that regard. The Scheme Trustee, for his part, was required to apply the assets of the Scheme Fund in accordance with the provisions of the Scheme governing entitlement to the Scheme Fund. Neither Dr. Wenkart nor Dr. Edelsten is mentioned as an actual or potential beneficiary of that Fund.
There is an express statement in the Scheme that the taxpayer shall ``carry on manage and conduct the said business as Trustee for the creditors''. That statement does not, however, lie well with the existence of the two distinct trusts under the Scheme, with the specific obligations imposed upon the taxpayer as trustee or with the actual entitlement of the former creditors. The obligation of the taxpayer as regards the relevant surplus income was, as has been
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seen, to account to and pay the Scheme Trustee. The former creditors were not direct beneficiaries of the business trust. Their direct claims were against the Scheme Trustee and the Scheme Fund. Nor could the former creditors properly be regarded, under the terms of the Scheme, as beneficially entitled to the income of the trust estate as it was derived. Between the income of the business carried on by the taxpayer as trustee and the former creditors there existed the Scheme Trustee with his powers to pay, from surplus profits of the business distributed to him, a variety of costs and expenses and with power (under cl. 13 of the Scheme) to appropriate and hold in reserve in the Scheme Fund such moneys as he might think necessary to provide for contingent, prospective or unascertainable claims. In our view, Rogers J. was correct in his view that the Scheme Trustee, as distinct from the former creditors, was the relevant beneficiary for the purpose of sec. 97 and 99. If the Scheme Trustee did not satisfy the requirements of present entitlement under sec. 97 of the Act, nobody did.As has been said, the taxpayer appears to have regarded the former creditors as beneficiaries of the business trust and distributed net income to them direct. It is, however, clear that the Scheme Trustee, who was a director of the taxpayer in his capacity as such, was a party to all such distributions. Distribution to former creditors direct should be regarded as having being effected with the consent of the Scheme Trustee and as having involved a notional distribution, under the business trust, by the taxpayer to the Scheme Trustee and a further notional distribution, under the Scheme Trust, by the Scheme Trustee to the former creditors. The resolutions with respect to distribution established prior to the end of the relevant income years that the amounts in question were available to be distributed by the taxpayer.
It was not argued, on behalf of the Commissioner, that the fact that any entitlement of the Scheme Trustee was in the capacity of trustee of a separate trust in itself precluded him from being a beneficiary presently entitled to income of the trust estate for the purposes of sec. 97 of the Act. Any argument to that effect would, in our view, have been misconceived. The fact that the Scheme Trustee held his interest in the trust estate in the capacity of a trustee of a further trust is irrelevant to whether the whole or part of the net income of the business trust should have been included in his assessable income as such trustee. The existence of the further trust would be relevant at the later stage of determining, upon a re-application of the provisions of Div. 6, whether the Scheme Trustee was liable to pay income tax upon the income of the Scheme Fund including any income that was included in the assessable income of the Scheme Trustee, in his capacity as such, pursuant to sec. 97. For present purposes, the question whether the Scheme Trustee was, for the purposes of sec. 97(1), presently entitled to a share of the income of the business trust falls to be determined by reference to the Scheme Trustee's rights as regards income under the trusts of that trust and to the meaning to be given to that requirement of present entitlement.
As has been seen, the Scheme Trustee was, under the business trust, entitled both to receive an account from the taxpayer of and to be paid all surplus income derived by the taxpayer from the carrying on of the trust business until such time as the creditors had been paid both principal and interest. The reference to surplus income is to be construed as a reference to what remains of gross income after payment of, or provision for, expenses and outgoings properly incurred in carrying on the business and costs and expenses of the administration of the business trust. The taxpayer, as trustee, was both entitled and obliged to pay or provide for such costs, expenses and outgoings before distributing surplus income to the Scheme Trustee. The Scheme Trustee had no entitlement to be paid gross income as received. The Scheme of Arrangement is silent as to the nature or extent of the Scheme Trustee's interest, if any, in such gross income. The nature and extent of that interest falls to be determined by reference to basic principles of the law of trusts. It is convenient to define the interest at this stage leaving for later consideration the question of its relevance, if any, for the purposes of sec. 97(2).
A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate
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share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee's proper costs, expenses and outgoings. Regardless of whether one regards his interests as beneficial ``ownership'' subject to a charge in favour of the trustee (see, for example, per LordWrenbury, Baker v. Archer-Shee (1927) A.C. 844 at pp. 866-867) or whether one regards the concept of equitable ``ownership'' misleading where other than a bare trust with one ascertained beneficiary is involved, the life tenant or a beneficiary entitled to income under a trust ordinarily has a present beneficial interest in gross income as derived. The relevant principles, in that regard, were stated by Isaacs J. in
Glenn v. F.C. of Land Tax (1915) 20 C.L.R. 490 at p. 503:
```Trusts', says Lindley L.J. in In
re Williams (1897) 2 Ch. 12 at p. 18 are `equitable obligations to deal with property in a particular way'. Trustees have no equitable interest; that belongs to the person or persons for whom the benefit is intended. The right of any cestui que trust to have the property dealt with as the trust requires is regarded for the purposes of equity as equivalent to a right in the property itself, but only commensurate with his particular right in personam. In
Pearson v. Lane 17 Ves. 101 at p. 104 Sir William Grant makes this plain. He says: - `The equitable interest in that estate must have resided somewhere: the trustees themselves could not be the beneficial owners; and, if they were mere trustees, there must have been some cestui que trust. In order to ascertain who they are, in such a case a Court of equity inquires, for whose benefit the trust was created; and determines, that those, who are the objects of the trust, have the interest in the thing, which is the subject of it'.But it must not be overlooked that the complete interest in the thing is shared by all the objects of the trust.''
(See, also, per Jordan C.J.,
McCaughey v. Commr. of Stamp Duties (1946) 46 S.R. (N.S.W.) 192 at p. 202 ff. and note that it is not necessary, for present purposes, to become involved in the conceptual difficulties surrounding the position of a beneficiary in an unadministered deceased estate which were examined in, inter alia,
Smith v. Layh (1953) 90 C.L.R. 102 at pp. 108 ff. and
Livingston v. Commr. of Stamp Duties (1960) 107 C.L.R. 411 and, on appeal, (1965) A.C. 694.)
In the context of established principles of the law of trusts, the Scheme Trustee was, during the period until sufficient income had been derived to enable it to pay the claims of creditors in full, entitled to receive, from the taxpayer, an account of all gross income that he derived as trustee of the business trust. The Scheme Trustee had a present beneficial interest in the gross income of the business trust as it was derived and a vested right to be paid the surplus of that income as and when it became available. The Scheme Trustee's interest under the Scheme was, in other words, the ordinary interest of a beneficiary with a vested interest in the income of a trust which is not a bare trust. Did he have, as such beneficiary, a present entitlement to the income which the taxpayer had resolved to distribute?
As Kitto J. pointed out in
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of T. 69 ATC 4084 at p. 4090; (1969) 119 C.L.R. 177 at p. 188, sec. 97 applies in a case where the beneficiary is presently entitled to a share of the income of the trust estate: ``not, be it noticed, to a share of the net income of a trust estate''. If the words ``presently entitled'' to a ``share of the income'' in that subsection were to be construed as meaning entitled to call for an immediate transfer of a share of gross income as derived, they would be inappropriate to refer to the ordinary vested interest of a life tenant or other
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beneficiary entitled to share in the income of a trust estate which was held other than on bare trust or to the entitlement of the Scheme Trustee under the business trust in the present case. They would, for practical purposes, refer only to the case where the trust estate was vested in the trustee as bare trustee. It is apparent that it could not have been the legislative intent that sec. 97(1) should be given such a restricted operation: indeed, the section itself, by including in the assessable income of the beneficiary the appropriate share of ``net income'', seems to recognize that, in the ordinary case, the beneficiary will not be entitled to require that the trustee distribute gross income as it is derived. Putting to one side questions of legal disability which are not here relevant, the preferable construction of sec. 97(1) is to treat the requirement of present entitlement to a share of the income of the trust estate as not being concerned with distinctions between gross income as derived and ``surplus income'' after payment of costs, expenses and outgoings but as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate. Such a right to demand and receive payment represents a present entitlement to receive a share of what retains its character as income of the trust estate regardless of whether, upon closer analysis, it can be seen to reflect a beneficial interest in gross income as derived or whether it represents no more than, for example, the right of an annuitant to be paid a particular amount from surplus or net income. Examination of the decided cases in which reference has been made to sec. 97(1) supports this approach.In
F.C. of T. v. Belford (1952) 88 C.L.R. 589 at pp. 597 and 605, neither Dixon C.J., nor Taylor J., who delivered the principal judgments, appears to have seen significance in the distinction, in sec. 97(1), between the share of ``income'' to which the beneficiary must be presently entitled and to the share of ``net income'' which was included in assessable income. The explanation may, however, lie in the fact that present entitlement was not in issue in that case. That explanation is not, however, available in respect of
F.C. of T. v. Whiting (1943) 68 C.L.R. 199 where the issue was whether there were beneficiaries presently entitled to the income of a trust estate and where the members of the Full High Court, in overruling Rich J. at first instance, seem to have regarded the existence of a right to demand payment of a share of distributable, as distinct from gross, income as decisive of whether there existed, in the relevant sense, a present entitlement to income of the trust estate. Thus, Latham C.J., and Williams J., in a joint judgment, said (ibid. at pp. 215-216):
``The words `presently entitled to a share of the income' refer to a right to income `presently' existing - i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of sec. 19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as he directs or on his behalf.
... The crucial question is at what moment of time, having regard to these general principles and to the provisions of the trust instrument, can it be said that a beneficiary has become presently entitled to a share in the income of a trust estate. A beneficiary under a will may become entitled to a share of such income as an annuitant legatee or a residuary beneficiary.''
Starke J. (ibid. at p. 219) said:
``My brother Rich thought it `reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee, is that he should be presently entitled to income of the estate. By this... is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of the income'. The last-mentioned proposition is true enough, but a beneficiary is not, I think, presently entitled to income unless it can be established that there is income which he is presently entitled to receive: that he is
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entitled to obtain payment thereof from the trustee.The sections do not look to the nature of the beneficiaries' title to shares of the income whether they be vested or contingent, but to the right to receive income which is available in the hands of trustees for payment to the beneficiaries. So far as cases throw any light upon the construction of the Act they are, I think, all in favour of this view, from
Lord Sudeley v. Attorney-General (1897) A.C. 11 down to the case in this Court of
Robertson v. D.F.C. of Land Tax (1941) 65 C.L.R. 338.''
In
Taylor & Anor. v. F.C. of T. 70 ATC 4026 at pp. 4028-4030; (1970) 119 C.L.R. 444 at pp. 449-452, Kitto J. examined what was said in the judgments in Whiting's case (supra) and concluded that ``the tenor of the judgments is, I think, that `presently entitled' refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he were not under a disability''. Kitto J.'s reference to ``legally ready for distribution'' was, as is made clear both by his decision in the case and subsequently in his judgment, to income that was available for distribution regardless of whether the accounts necessary to enable its precise ascertainment had been completed at the end of the income year or whether it was actually held in a form ready for immediate payment.
In the present case, the surplus income of the business trust was, in each of the income years, legally available for distribution. In respect of the 1973, 1974 and 1975 income years, the Scheme Trustee was beneficially entitled to the whole of that surplus income and had a right to obtain payment of it from the trustee. During each of those three income years, the taxpayer, as trustee, resolved that the whole of that surplus income be distributed. As regards the 1976 income year, the Scheme Trustee was entitled to be paid the amount of surplus income which is in issue in the present case and that amount was, as has been seen, actually distributed by the taxpayer in the course of that income year. The Scheme Trustee had, under the trusts of the business trust, a present vested right to demand and receive payment of the whole of the relevant surplus income of each income year. In the result, the Scheme Trustee was prima facie presently entitled, for the purposes of sec. 97(1), to the whole of the relevant income of the business trust for the 1973, 1974 and 1975 income years and to the relevant share of the income of the 1976 income year.
For the Commissioner, two distinct but related arguments were advanced against the proposition that the Scheme Trustee was presently entitled to the taxpayer's trust income. First, it was said that the position under the Scheme was analogous to the administration of a bankrupt's estate or the liquidation of a company and that the decision of the High Court of Australia in
Official Receiver v. F.C. of T. (Fox's case) (1956) 96 C.L.R. 370 was directly in point. Second, it was argued that, until the entitlement of the creditors had been satisfied, even if the income were received by the taxpayer as a trustee, neither the Scheme Trustee nor the former creditors should be seen as beneficiaries: the former creditors should be seen as creditors with claims against the Scheme Fund and the Scheme Trustee should be seen as their agent. What has been said above goes a long way towards answering these arguments which are plainly related. We turn to a specific consideration of them.
The challenged assessment in Fox's case (supra), was an assessment, pursuant to sec. 99 of the Act, of the trustee in bankruptcy of a deceased estate. The creditors of the estate had not been paid out and the trustee had not reached the stage of having any ultimate surplus in his hands. Administration was proceeding. The Full High Court held that, in those circumstances, neither the creditors nor the persons entitled to any surplus after debts and the costs of administration had been met were presently entitled to the income derived by the Official Receiver as liquidator. In the course of their judgment, their Honours (Dixon C.J., Williams, Webb, Fullagar and Kitto JJ.) said (ibid. at p. 383):
``The question whether the official receiver should be assessed as a trustee assumes, of course, that he has derived taxable income upon which, in accordance with sec. 17 of the Income Tax and Social Services Contribution
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Assessment Act 1936-1954, tax may be levied, and that he derived the taxable income in his capacity of trustee of Rankin's estate. On this assumption it seems clear enough that Div. 6 of Pt. III of that Act would apply to the case. Were it otherwise the official receiver would be taxed on the aggregate of his personal income with the total of whatever taxable income he might derive from the investments or activities which he made or conducted in the various estates of which he is trustee. The definition of trustee in sec. 6(1) is certainly wide enough to include him and there is no reason why Div. 6 should not apply to him. Section 99 operates to impose on a trustee the obligation of paying the tax `where there is no beneficiary entitled to any part of the income of a trust estate'. In the case of a trustee in bankruptcy, who has not reached the point of having a surplus in his hands all creditors having been paid, there can be no doubt that there is no beneficiary presently entitled to any part of the income of the trust estate.''
The above comments from the joint judgment in Fox's case (supra) leave no room for doubting why it was held, in that case, that there was no beneficiary presently entitled to a share of the income of Fox's bankrupt estate. The creditors who had proved were not beneficiaries in a trust estate. Nor were they entitled to any share of income as such. The trustee in bankruptcy held neither capital nor income as trustee for them. He held the assets in his hands for the purpose of administration in bankruptcy in accordance with the elaborate provisions of the Bankruptcy Act, 1924 (see
Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079 at pp. 4089-4090; (1970) 125 C.L.R. 52 at pp. 69-70). It is true that Fox's legal personal representative would have been entitled to receive any ultimate surplus after payment of all claims against the bankrupt estate and the costs and expenses of administration in bankruptcy. The stage had not however been reached where there was such a surplus. It could not even be said that any such possible ultimate beneficiary would ever be entitled to receive any share in any income of the estate. It certainly could not be said that he had any present entitlement to any part of the income of the bankrupt estate in respect of the two income years which were in issue. The Scheme Trustee in the present case, in complete contrast to the creditors and legal personal representative in Fox's case (supra), had, as has been seen, a present vested right, as the beneficiary entitled to surplus income under the trusts of the business trust, to demand and receive payment of the whole of the relevant surplus income. Indeed, if their position were relevant, the former creditors in the present case had actually had their debts extinguished as the price of the interest which they obtained in the Scheme Fund.
The Commissioner's argument based on the proposition that the former creditors of Preventicare should be seen as creditors entitled to have their claims discharged rather than as beneficiaries of a trust estate entitled to trust income would be possibly more relevant if what was in issue was an assessment under sec. 99 of the Scheme Trustee in respect of income of the Scheme Fund (but cf
Stewart Dawson's Holdings Pty. Ltd. v. F.C. of T. (1965) 39 A.L.J.R. 300). It is unnecessary to express any view as to whether it should prevail if advanced in that context. It suffices, for present purposes, to say that the relevant beneficiary in the present case, namely the Scheme Trustee, had never been a creditor of Preventicare and cannot properly be regarded as being merely an agent for the former creditors of Preventicare. In a situation where, on the proper construction of the Scheme, the taxpayer had no beneficial interest in the relevant income and the Scheme Trustee was beneficially entitled to the income as derived, the fact that the Scheme Trustee's entitlement was as Trustee upon the various trusts upon which he held the Scheme Fund neither alters the nature of the taxpayer's position as trustee nor justifies a denial either of the Scheme Trustee's position as a beneficiary of the relevant estate or of its present entitlement, for the purposes of sec. 97, to the relevant income.
It should be mentioned that a further argument was advanced on behalf of the Commissioner to the effect that the assessments could be justified pursuant to sec. 25 of the Act. This argument was based on the supposition that there was no ``trust estate'' for the purposes of Pt. III Div. 6. We have already expressed our conclusion that
ATC 4178
there was such a trust estate. The argument fails with that conclusion.In the result, we are of the view that the trustee of the Scheme Fund was a beneficiary of the trust estate of which the taxpayer was trustee and was, as such beneficiary, presently entitled to the whole of the relevant income and the relevant net income of that trust estate. Pursuant to sec. 97 of the Act, the whole of the net income in dispute was included in the assessable income of the trustee of the Scheme Fund. It follows that the taxpayer was not liable to be assessed, in respect of any of the relevant income, pursuant to the provisions of sec. 99 of the Act.
The appeal should be dismissed with costs.
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