Fermanis v. Cheshire Holdings Pty. Ltd.

Judges:
Murray J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 9 March 1990.

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Murray J.

In the principal action the plaintiff recovered judgment on 12 July 1989 against the defendant, which led to a total liability to the plaintiff in the sum of $139,788.57 comprising the amount claimed of $105,000, interest of $20,942.46 and costs now taxed out at $13,846.11. The formal judgment of the Court ordered that the sum of $105,000 paid into court pursuant to an order made by Master Staples on 18 April 1988 be paid out of court, together with any accrued interest thereon. In the ordinary course the moneys paid into court had been transferred to the Public Trustee for investment under the rules contained in the Third Schedule of the Rules of the Supreme Court. Upon the presentation to the Public Trustee of the necessary documentation he was required to pay the money ``to be paid out... to the person entitled thereto'' under r. 9. Rule 12 provides the machinery for payment out and on about 27 July 1989 a sum of $109,024.83 was paid by the Public Trustee to the credit of the plaintiff, a final trust statement being provided which

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showed the breakup of the moneys in question to include a sum of $8,000 retained by the Public Trustee as a reserve for trust income tax for the financial year 1988/89.

It is evident from the above that at that point there was still an unsatisfied judgment debt amounting to $30,763.74. A writ of fi. fa. was issued against the defendant in an attempt to recover the balance outstanding, but that effort was unsuccessful. The defendant had no other assets available and the sheriff declined to execute as against the $8,000 and interest thereon held by the Public Trustee, taking the view that he was precluded by law from doing so by reason of the fact that the moneys were held in trust.

The plaintiff has therefore issued a summons for an order directed to the Public Trustee by way of execution of judgment that the Public Trustee shall pay the sum of $8,000, together with any interest which has accrued thereon to the plaintiff's solicitors. When the matter came on I was satisfied that the defendant in the action did not wish to appear or take any part in the proceedings, although the application was brought pursuant to general liberty to apply reserved in the order made by his Honour Nicholson J. In any event, as I understand it, the Public Trustee's situation was that because he held the moneys in trust, he would, under the Rules of the Supreme Court O. 46 r. 5, be liable to the same process for enforcing obedience to the judgment as if he were a party. The Public Trustee appeared before me and filed an affidavit explaining his situation.

He asserted no entitlement to the money in question, but explained that the reserve was created because of the practice of the Federal Commissioner of Taxation to assess the Public Trustee for income tax in respect of interest earned on funds paid into court and invested by the Public Trustee. In this case the Public Trustee would have thought that there was no tax liability, having regard to a recent decision given by French J. in the Federal Court, to which I shall shortly refer. However, the Public Trustee was aware that the decision was under appeal by the Commissioner and in fact by the time the matter came on before me an assessment notice had been issued to the Public Trustee as trustee for the ``Peter Fermanis Court Trust'', which showed that, putting to one side an assessment for provisional tax, the total tax liability including a Medicare levy was $4,644.10. The assessment in that amount was issued on 23 February 1990. The Public Trustee informed the Court that he proposed to appeal against that assessment, but none the less recognised an obligation in law to pay the tax pending the outcome of the appeal, which would be related to the result of the Federal Commissioner's appeal against the decision of French J., to which I shall shortly refer.

In argument before me it was put simply for the Public Trustee that he was obliged by law to retain sufficient moneys to meet the trust's tax liability pursuant to the provisions of the Commonwealth Income Tax Assessment Act sec. 254(1) which would clearly apply to the position of the Public Trustee as a trustee, as the section also applies with respect to agents. The section is in the following terms:

``254(1) With respect to every agent and with respect also to every trustee, the following provisions shall apply: -

• (a) He shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him in his representative capacity, or derived by the principal by virtue of his agency, and for the payment of tax thereon.
• (b) He shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.
• (c) If he is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.
• (d) He is hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.
• (e) He is hereby made personally liable for the tax payable in respect of the

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  income, profits or gains to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.
• (f) He is hereby indemnified for all payments which he makes in pursuance of this Act or of any requirement of the Commissioner.
• (g) Where as one of 2 or more joint agents or trustees he pays an amount for which they are jointly liable, the other or others shall be liable to pay him each his equal share of the amount so paid.
• (h) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as he would have against the property of any other taxpayer in respect of tax.''

A trustee within the meaning of the section includes by sec. 6(1) a person constituted as a trustee by order, declaration of a court or by operation of law. There is no contest that the Public Trustee would be governed by sec. 254. Under sec. 254(1)(a) and (b) the trustee would clearly be required to furnish tax returns and to retain out of the moneys he receives as trustee, an amount sufficient to pay the tax which may become due in respect of the income of the trust. Section 254(1)(b) makes it clear that the liability is connected with the administration of the trust because the return of income the trustee is to make is ``in his representative capacity only''. Section 254(1)(d) is quite specific in not only authorising, but requiring the trustee to retain sufficient trust moneys to defray a liability to pay tax; and under sec. 254(1)(e) the trustee may be made personally liable for the tax payable, not only to the extent of any retained moneys but also to the extent of such moneys as he should have retained against the tax liability of the trust.

What is clear about that provision is that it creates of itself no tax liability, which is to be otherwise derived from the provisions of the Act, so that if a tax liability is not otherwise to be drawn from the statute, none will be created by sec. 254 (
D.F.C. of T. v. Brown (1958) 11 A.T.D. 374 at pp. 376-377; (1958) 100 C.L.R. 32 at p. 42).

It is clear, I think, that the provision operates as a machinery provision to facilitate tax collection in relation to liable trust income, when the liability is otherwise imposed than by sec. 254. That appears to have been the conclusion of the High Court in relation to a predecessor of this provision, being the Income Tax Assessment Act 1922 sec. 89, in the case
Howey v. F.C. of T. (1930) 1 A.T.D. 139 at p. 142; (1930) 44 C.L.R. 289 at p. 294 in the joint judgment of Rich and Dixon JJ.:

``Sec. 89 enables the Commissioner to assess a trustee, but it is not easy to say precisely in respect of what income. It is perhaps doubtful whether it operates to impose upon a trustee any liability for tax which is not provided for by s. 31, and it is by no means clear what is the relation between s. 89 and s. 31. Possibly, so far as it affects trustees, s. 89 should be regarded as a `collecting section and not a taxing section' to borrow the language used by Lord Parker in
Drummond v. Collins (1915) A.C. 1011, at p. 1019). If so, it does no more in respect of trustees than provide machinery for carrying out the provisions of s. 31. This view would mean that, unless the appellant could be assessed under s. 31, he ought not to be assessed at all.''

That is perhaps to say no more than that sec. 254(1)(d) expresses clearly a requirement to retain money so as to enable payment of ``tax which is or will become due in respect of the income''.

As to the liability for tax, the case in point to which I have already obliquely referred is the decision of French J. in
Harmer & Ors. v. F.C. of T. 89 ATC 5180. That case relevantly concerned an amount paid into court in interpleader proceedings. The Court further ordered that the moneys paid into court be invested in a building society account in the names of the solicitors for the parties to the litigation, to be held by them in trust pending the determination of the proceedings. Ultimately, final orders were made and then the solicitors were assessed as trustees in respect of interest earned on the moneys invested prior to the final orders of the Supreme Court which established which of the parties was beneficially entitled to the moneys. The Commissioner's contention before French J. was essentially simple. It was that in respect of

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the income years in question, there was no beneficiary presently entitled to the moneys in the sense that any such person was ascertained and therefore could be said to have a vested and indefeasible interest in any of the trust income.

The contention which found favour with French J. however was that of the solicitors concerned, who argued that if they were trustees they were not assessable under the Act because at the times in question the beneficiaries were presently entitled to the trust income, although their identity was not ascertained, so that those beneficiaries and not the trustees were assessable under the Act upon the basis of a present entitlement to the income of the trust estate, their capacity to actually receive it being merely postponed until the judgment of the Court which identified them.

It will be seen that this interesting decision was not at all concerned with the effect of sec. 254(1)(d), but with the determination of the question whether it was the trustee or the beneficiary who was liable to pay tax in respect of assessable trust income for any given tax year. The decision proceeds upon the basis that the relevant provisions of the Act, discussed at length in the case, established that the general scheme of the Act was that the trustee was only liable to pay tax as specifically provided by the Act and that otherwise each beneficiary presently entitled to a share of the income was to be assessed in his individual capacity. One can see immediately that that may have an effect upon the rate of taxation, but as French J. analysed the provisions they would seem to have the effect that the liability to pay tax imposed upon trustee or beneficiary, may in fact be divorced from the actual receipt of the income. In the case of the beneficiary, he may be liable to pay tax upon the basis of a present entitlement, even though the income may not have been paid over to him or to his account. However that may operate in a case where the identity of the beneficiary is ascertained so that he may be assessed for tax in advance of receipt of the income, the difficulty of the Commissioner's position under the judgment of French J. is highlighted by his observation (at p. 5191) that the ``beneficiaries may not have been known but they were certain, albeit a process of judicial inquiry was necessary to determine who they were''.

However that may be, it does not fall to me in the context of these proceedings to pass upon the correctness or otherwise of the reasoning in the decision under discussion. I am told it is presently under the process of appeal, but it is persuasive as to the present state of the law and applying it to the facts of this case would establish that the liability to pay taxation is that of the plaintiff, the present applicant before me and not that of the Public Trustee in that representative capacity. I know not how that would affect the ultimate rate of taxation upon the income in question, as opposed to the rate applicable to the present assessment of the trustee. But all of that is a distraction from the question for my decision. I have simply to decide whether at the time the Court ordered payment out of court of the principal sum in question and interest, that obligation which devolved under the rules upon the Public Trustee was subject to the requirements of the law, if it be the case, which obliged him to retain certain moneys for a specified purpose.

The plaintiff points out that the Public Trustee makes no application for a stay of execution pursuant to the Rules of the Supreme Court O. 47 r. 13, which empowers the Court to stay execution inter alia upon the basis that by reason of special circumstances it is inexpedient to enforce the judgment or order. Convenient recent authority was cited to me upon the effect of that rule in the judgment of Malcolm C.J. in
State Bank of Vic. v. Parry & Ors (1989) W.A.R. 240. There, in an application before the Court, reliance was placed upon the existence of special circumstances in a case which was factually dissimilar from this, being concerned with the defendant's capacity to pursue third party proceedings claiming an indemnity. The general discussion which that case contains is enormously helpful in the circumstances to which it applied, but in my respectful opinion, the judgment does not assist me in the circumstances thrown up by this application.

The question before me is stark in its simplicity. It may be expressed in the following terms. Having regard to the discussion above, I conclude that the Income Tax Assessment Act sec. 254(1)(d) is a machinery provision which requires a trustee in possession of trust income to retain out of such income received by him in his representative capacity moneys sufficient to pay tax which is, or will become due, in respect of the income. Clearly, if he has been notified by an assessment in relation to past income

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periods what moneys the Commissioner contends are required to meet an existing tax liability, his obligation is clear. As I understand the scheme of the Act, a quite separate question may then arise which may have an effect upon the amount of tax finally ascertained to be payable, which is a question concerning whether trustee or beneficiary bears the statutory liability for payment. But I can see nothing in the section to support the submission made to me for the plaintiff that sec. 254(1)(d) only operates in circumstances where the tax is or will become payable by the trustee in his representative capacity. There seems to be nothing in the general scheme of the Act or in the context of sec. 254 itself to support that conclusion.

The question then is, upon this application, what is the meaning and effect of the final order for payment out of court in aid of the execution of which this application is brought under general liberty to apply. If it means that the principal amount paid in and any interest earned upon that sum are to be paid out of court to the plaintiff, without exception, then clearly this application should succeed. But in my view, the order made should not be so interpreted. In a case where moneys are paid to the Public Trustee for investment, then, although not under the relevant Rules of the Supreme Court themselves, legitimate deductions before payment out are the prescribed fees and expenses under the Public Trustee Act sec. 38 and 39(1) and other ``expenses incurred'' by the Public Trustee in respect to ``the control, management or administration of any trust... property'' which are ``charged against and payable out of that trust... property''.

A fortiori the Public Trustee submits he cannot be required by the order to pay out to the plaintiff what the law requires him to retain and although no authority was cited to me upon the point, and I have discovered none by my own researches, I am of the opinion that the point is good. Even if the money retained is not an ``expense incurred'' under the Public Trustee Act, sec. 39(1), the order for payment out of court must be interpreted in my view, in the circumstances of this case, to be exclusive of any sum which by reason of the circumstances of the payment in and the administration of the fund according to law, is required to be held back. Put another way the money ``to be paid out'' under the Rules of the Supreme Court, Third Schedule, r. 9 is less the sum required to be retained by law. Indeed, I think it to be the case that the plaintiff does not contend to the contrary.

The effect then is that, by reason of the maximum liability to tax of the relevant income now being known from the assessment recently notified to the Public Trustee, that is the sum which should be retained, and the balance of the $8,000 and interest thereon, should be remitted at once. The application succeeds to that extent. It will be seen that the basis of my decision is not dependent upon a conclusion in terms of the Public Trustee's entitlement to a stay of execution, had he sought that by application. My conclusion is dependent simply upon the proposition that the order for payment out operates upon such moneys as are available by law, having been paid into court and dealt with according to law since then. No doubt it is the case that the process of objection to the assessment foreshadowed, which may be protracted and may concern the ultimate establishment of the person upon whom the liability to pay tax falls, as well as the quantum of that liability, may produce a further adjustment in the amount available to be paid out under the order of the Court. I will hear the plaintiff and the Public Trustee as respondent to this application, upon the final form of my order and costs.