Case U202

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 12 November 1987.

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R.K. Todd (Deputy President)

This is the review of an objection decision disallowing an objection to an assessment the effect whereof was to deny to the trustee of a settlement the benefit of the provisions of Div. 6AA of the Income Tax Assessment Act 1936 ("the ITAA"), under which standard adult rates of tax apply where a beneficiary derives income having a character defined in sec. 102AG of the ITAA, namely that of "excepted trust income".

2. Section 102AG of the ITAA so far as relevant provides:

"102AG(1) Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, this Division applies to so much of the share of the beneficiary of the net income of the trust estate of the year of income as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, in relation to that beneficiary, excepted trust income.

102AG(2) Subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount -

• ...
• (c) is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary -
  • ...
  • (viii) pursuant to -
    • (A) a decree or order of dissolution or annulment of marriage, being a dissolution or

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      annulment that, by reason of the Family Law Act 1975, has effect, or continues to have effect in Australia or is recognized as valid in Australia; or
    • (B) a decree or order of judicial separation or a similar decree or order."

3. In September 1973 X settled a certain sum upon A to be held, together with subsequent additions to the trust fund, upon trust for X and his wife Y, and for their issue. For present purposes it is enough to say that the settlement was a discretionary trust drawn in a familiar form whereunder the trustee was empowered in his discretion to make advances of capital to the beneficiaries, and to apply income for their maintenance, advancement, education and benefit prior to the vesting of the trust fund.

4. By a deed of trust dated 22 May 1975 F. Nominees Pty. Ltd. was appointed trustee in the stead of A, who retired as trustee. Various amendments of detail were effected to the provisions of the former trust deed, but it is unnecessary to go into these. It is enough to say that the trust remained a discretionary trust in favour of X and Y and their issue. As the submission for the applicant stated, the terms of such a trust do not specify any amount or share of capital or income to which any beneficiary is entitled. The entitlement of a beneficiary was: To have the terms of the trust, in particular the discretionary powers conferred upon the trustees, administered in a bona fide manner; to receive on request information as to the administration of the trust, and in particular to have access to the records of the trustee's administration of the trust, often a powerful weapon in the hands of a discontented beneficiary; and other rights, but not including the ability to assert any specific interest in the nature of a legal or equitable right to any particular share of capital or income.

5. The marriage of X and Y was dissolved by a decree nisi granted by the Family Court on 10 July 1978. The former husband and wife came to an agreement as to "matters of maintenance and alteration of property interests in substitution for any rights of the husband and wife under Pt VIII of the Family Law Act 1975" On 2 April 1979 X and Y and F. Nominees Pty. Ltd. executed a deed ("the 1979 deed") whereunder it was agreed, inter alia, including agreement as to custody of and access to the children, that the trustee would pay:

"By way of maintenance for the children the sum of $2,000 each year for each child..."

(subject to an indexation provision)

"School accounts in respect of the children"

(at a particular school . . .)

"In respect of each child, one third of the cost of a family membership in a hospital and medical benefit insurance scheme..."

"Subject to the availability of funds, the reasonable costs in respect to the children of such travel or holidays as is or are agreed upon between the wife and the husband...."

The agreement embodied in the 1979 deed was approved by an order of the Family Court on 6 April 1979.

6. The essentially relevant legislative provisions are found in sec. 102AG(1) and (2)(c)(viii) of the ITAA Act which have been set out above. The contention on behalf of the applicant is that whereas the beneficiaries prior to the 1979 deed had admittedly no right or entitlement to a specific share of income or capital, after the execution of the 1979 deed the position, it was contended, had changed.

7. For the applicant it was said that after the 1979 deed the infant beneficiaries had a right to at least a specific proportion of the income of the trust in each year, a right enforceable through either the Family Court or any other court able to recognise and enforce an equitable interest. That interest, it was contended, was created in such a way that, there being conferred a specific right in the income of the trust to the infant beneficiaries, a fresh (or "sub") trust had been created of property which may rightly be regarded as capable of being transferred. Reference was made to Jacobs' Law of Trusts in Australia (5th ed.) para. 2402 where it was said:

"An equitable interest in realty or personalty may be trust property and the beneficiary under the existing trust may declare himself a Trustee of his equitable interest or may transfer it to trustees upon trust for another. The existing trust continues, at least where the trustee, thus interposed between the `head trustee' and

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ATC 1132

the beneficiary under the new or `sub' trust, has active duties to perform."

Based on this principle, the submission was made that the conferring of a specific right in the income of the present trust to the infant beneficiaries had "created a fresh (or `sub' trust) as to property which may rightly be transferable".

8. Further reliance was placed in support of this proposition on Case U111,
87 ATC 667, a decision of Davies J. in this Tribunal. However, as was conceded, that decision was based on a specific provision of the primary trust deed providing that trust income set aside for any of the beneficiaries was to be held on a separate trust. In that respect reference was made to a provision in the present trust deed (cl. 6(b)) which was as follows:

"All income to which any beneficiary under the age of 21 years is absolutely entitled which is not paid or applied by the Trustee for or towards the maintenance education advancement or benefit of the beneficiary shall be accumulated by the trustee in the way of compound interest by investing the same and the resulting income therefrom from time to time in any of the modes of investment authorised by this Deed. Such accumulations shall be held by the trustee upon trust for such beneficiary absolutely. During the minority of the beneficiary the trustee may at any time he thinks fit apply the accumulations or any part thereof as if the same were income arising in the then current year."

This provision also, it was submitted, created a "sub" trust.

9. It seems clear to me that the submission put on behalf of the applicant cannot succeed. None of the provisions of the trust deeds in question effect any transfer of property to the trustee, as required by sec. 102AG(2)(c) of the ITAA. The provisions referred to above simply constitute a binding assent by the trustee that it would pay a fixed sum at least for the maintenance of each beneficiary in each year and that it would discharge certain accounts. Clause 6(b) of the 1975 deed, referred to in para. 8 above, operates, in the light of the provisions of the 1979 deed, only in respect of income received by the trust in excess of the sums required to be paid out in terms of the 1979 deed. And all that has in truth happened is that the trustee's discretion, formerly at large, to advance income in favour of the infant beneficiaries has become limited to the extent that there are base amounts that have to be advanced as a matter of course. As Mr Trigg submitted for the Commissioner, the 1979 deed makes no addition to the trust fund. No property of the trust was transferred. Contrary to the submission put for the applicant, neither does accumulation of income not paid out constitute a transfer of property of the trust, and no such transfer occurs as an effect of the 1979 deed. I agree that the trustee's power to make payments by way of maintenance is not "property" in any ordinary legal sense, and that the trustee's agreement to exercise that power in a certain manner involves no passage of a right from one person to another. Each infant beneficiary had, before the 1979 deed, a right to call on the trustee properly to administer the terms of the trust. After 1979 that right remained, but there was superadded a right to have the discretion reposed in the trustee exercised in his or her favour to at least a particular extent. That does not however amount to a transfer of property to the trustee, and it is such a transfer to the trustee that is requisite under the legislation.

10. I was referred by both parties to various authorities, but it is unnecessary to refer to them, as the case is in my opinion to be decided by an application of basic principle. Nor is it appropriate to pursue, as I was invited to do, the question of the intention of the legislation, as I detect no ambiguity as to its meaning. I confess that I see very little scope, in so technical a piece of legislation as the ITAA, for application of the principles contained in sec. 15AA and 15AB of the Acts Interpretation Act 1901.

11. I have not overlooked the fact that the case is a somewhat unfortunate one, since the 1979 deed was executed in April 1979, and the legislation in question, which was introduced in November 1979 but was ultimately passed in April 1980, took effect from 1 July 1979, the date as from which the Government on 26 July 1979 announced that the new system would be introduced. Delay would have enabled a deed to be drawn which would have obviated the situation which has occurred, but it is to be noted that the final form of the legislation would not in any event have been available until about 12 months after execution of the

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deed, a telling comment on the procedure now common of announcing intended legislation, to take effect from the day of the announcement, but of leaving persons who may reasonably need to govern their conduct by reference to the terms of the intended amendment in limbo. These considerations however can have no effect on the Tribunal's decision in the present case.

12. The Tribunal will affirm the objection decision under review.