CASE Z35
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
KL Beddoe (Senior Member)
The applicant seeks review of an objection decision made by the respondent in respect of the year of income ended 30 June 1989. The question to be decided is whether the applicant, as a beneficiary in a trust estate, is to be deemed to be carrying on the primary production business carried on by the trustees of the trust estate.
2. Sub-section 157(3) Income Tax Assessment Act 1936 (``the Act'') provides that for the purposes of determining whether a person is carrying on a business of primary production, a beneficiary in a trust estate shall, to the extent to which he is presently entitled to the income or part of the income of that trust estate, be deemed to be carrying on the business carried on by the trustees of that trust estate.
3. The operation of sub-section 157(3) is subject to sub-section 157(3A) of the Act inserted into the Act in 1978 following the High Court's decision in
Cridland v FC of T 77 ATC 4538; (1977) 140 CLR 330; (1977) 8 ATR 169. The sub-section provides that sub-section 157(3) does not operate to deem a beneficiary in a trust estate who is presently entitled to the income or part of the income of that trust estate to be carrying on the business carried on by the
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trustees of the trust estate in a year of income unless:- (a) the share of the income of that trust estate of the year of income to which the applicant is presently entitled is not less than $1,040; or
- (b) the Commissioner (and therefore this Tribunal - s. 43 of the Administrative Appeals Tribunal Act 1975) is satisfied that the interest of the applicant in the trust estate was not acquired by, or granted to, the applicant for the purpose or primarily for the purpose, of enabling the provisions of Division 16 to apply in respect of income derived by the applicant.
4. Sub-section 157(1) restricts the operation of Division 16 (Averaging of Incomes) to income derived by a primary producer. Primary producer is defined by sub-section 157(2) to mean a person who carries on a business of primary production in Australia. Primary production is defined by sub-section 6(1) of the Act. It was not suggested in this case that the trustees of the trust estate were not carrying on a business of primary production.
5. I turn now to the facts. On 1 August 1972 a deed of trust was executed appointing the applicant as trustee of the A Family Trust. A copy of the executed deed forms part of Exhibit A. Subsequently in 1974 A Co Pty Ltd was substituted as the trustee. An unexecuted copy of the deed of appointment is also included in Exhibit A. Nothing was made of the fact that the copy document does not evidence the execution of the original and I accept the applicant's evidence that the company was, in fact, appointed trustee.
6. The company, as trustee, has carried on a primary production business since 1976. It seems that one of the applicant's sons has the day to day conduct of the operation but those operations seem to have been continuous and conducted for the purpose of deriving assessable income.
7. It has been the practice of the trustee to resolve each year that the income of the primary production business be distributed to the applicant to the exclusion of the other beneficiaries. That practice appears to accord with the terms of the trust deed.
8. Exhibit G is copies of income tax returns for the A Family Trust in respect of the years of income ended 30 June 1985 to 30 June 1989 inclusive. Those returns show that throughout that period the trustee carried on a business of farming and property ownership. That business resulted in losses being made by the Trust for the years of income ended 30 June 1985 to 30 June 1988 inclusive.
9. In respect of the year ended 30 June 1989 the net income of the trust from the farming activity disclosed in the return was as follows:
Gross Income from Primary
Production $51,322
Deduct Business deductions
incurred in carrying on the
farming business 27,374
------
Net Primary Production
Income $23,948
------
In calculating the net income a further deduction was apparently allowed for losses of prior years leaving a net income from primary production of $10,522. Those figures have been arrived at after providing that the gross income derived on one paddock on the farm is paid to the son of the applicant who has the day to day conduct of the farm. That amount is paid to him in lieu of wages.
10. The applicant submitted that there was no basis for the Tribunal not to be satisfied in terms of paragraph 157(3A)(b) of the Act on the basis that there has been a continuous business of farming carried on by the trustee since 1976 and the applicant has been a beneficiary under the terms of the trust since execution of the trust deed in 1972. Furthermore, says the applicant, he has been presently entitled to primary production income of the trust for each of the years ended 30 June 1985 through to 30 June 1989 inclusive.
11. In his submission the applicant relied in particular upon the decision of the High Court in
Taylor & Anor v FC of T 70 ATC 4026 for the proposition that present entitlement to a share of the net income of a trust estate was determined by:
- (a) whether the income was legally available for distribution;
- (b) whether the beneficiary had an absolute vested interest in the whole of the income; and
- (c) whether the beneficiary could give a valid discharge to the trustee.
He referred to clause 2 of the trust deed which provides for the trustee to distribute the income
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of the trust to the beneficiaries in the absolute discretion of the trustee.12. The applicant placed at the forefront of his argument a proposition based upon the reasoning in Taylor's Case. That proposition is that present entitlement to the income of a trust estate depends upon the criteria already set out above and not on whether there was a profit for the relevant year of income. In the applicant's submission it matters not that the net income available for distribution amounted to nil. It followed, said the applicant, that as the trustee had made a resolution each year in his favour as a beneficiary it followed that he was a beneficiary presently entitled to a share of the income of the trust estate in each year of income irrespective of whether there was a net income for distribution.
13. The applicant spent some time on submissions about the nature of trusts and equitable obligation. He relied in particular on the Federal Court decision in
FC of T v Totledge Pty Ltd 82 ATC 4168; (1982) 40 ALR 385 and
Charles v FC of T (1954) 10 ATD 328; (1953-1954) 90 CLR 598; (1954) 6 AITR 85. In the latter case the High Court distinguished a share in a company from a unit in a unit trust by describing the unit as conferring a proprietary interest in all the property which for the time being is subject to the trust established by the trust deed. It followed, said the Court, that the character of a distribution is to be determined by the character of the moneys in the hands of the trustee before the distribution is made, an entirely different situation to the payment of dividends to shareholders in a company. That proposition is a fair statement of the ratio decidendi in Charles.
14. The applicant also submitted that as part owner or part-beneficiary under the trust he was carrying on the business in equity. In making that submission he acknowledged he was not relying on sub-section 157(3).
15. He also submitted that payment is not the test of present entitlement. Nor is the amount to which the beneficiary is presently entitled determined by the amount of a payment. The applicant also sought to distinguish the decision of this Tribunal in Case W95,
89 ATC 795. The applicant criticised this decision in a number of its aspects. In that case, which raised the same issue as the present case, the trustees passed resolutions each year (it seems) applying the income of the trust estate for the benefit of the taxpayer and his wife. That income was derived from primary production income. However, in certain years there was no net income of the trust and, it seems, no payment made to the beneficiaries. On that basis the Tribunal found that as the trust incurred a loss in certain years and there was therefore no income for distribution to the beneficiaries named in the resolution, the beneficiaries were not presently entitled to any income of the trust estate. The Tribunal's decision is based upon dicta from the High Court in Taylor's case in particular and also a decision of Taxation Board of Review No 3 Case T21,
86 ATC 214. Unfortunately there is nothing in the Tribunal's reasons to indicate affirmatively that income from a business of primary production was derived in each of the relevant years of income by the business conducted by the trustees.
16. The applicant also relied upon the accepted construction of section 97 of the Act for the proposition that the provision is concerned with the present vested right to demand and receive payment of the whole or part of the income derived by the trustee in the conduct of the business which income retains its character in the hands of the beneficiaries, whether the right be to gross income or net income, bearing in mind that sub-section 157(3) refers to ``income'' and not ``net income''.
17. The respondent referred to the definition of ``net income'' in section 95 of the Act and submitted that entitlement to income of a trust depends upon there being net income as defined capable of distribution. It follows, says the respondent, that there can be no present entitlement even where, as in this case, losses carried forward from prior years convert a profit into a loss for taxation purposes. Furthermore the fact of income from primary production being derived in the trust business is not the determinative factor. These views are said to be supported by the decision of the High Court in
Doherty v FC of T (1933) 2 ATD 272; (1933) 48 CLR 1. The issue in that case is clearly set out by Starke J at page 273 in these words:
``Under s. 31 of the Income Tax Assessment Acts, 1922-30, the executor and executrix were not as such liable to pay tax in respect of income arising from the carrying on of the pastoral properties, but each beneficiary to whom those properties were given was assessable in her individual capacity in
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respect of her individual income from the trust properties remaining after allowing all the deductions under the Act, except the deduction under s. 24, and, where the beneficiary had no beneficial interest in the corpus of the estate, except the deduction under s. 26 in respect of any loss required to be met out of corpus. But the loss exceeded the income, and the question is whether the taxpayer's share of the loss can, under s. 26, be carried over and deducted from any other income derived by her separately (s. 31 (1)(b)), that is, otherwise than from the trust estate.''
18. As Mr B. submitted, the net income is to be determined as if the taxpayer were a taxpayer, subject to certain qualifications not relevant here. It follows, in the light of the decision in Doherty that the carry forward losses ``stay in the trust'' and are not allowable deductions in the hands of the beneficiaries. I agree with that proposition.
19. It seems to me that the respondent's case failed to distinguish the difference between income and ``net income'' as used in section 157. Neither term is defined by the Act for the purposes of Division 16. Income is not defined in the Act at all and must therefore be given its ordinary meaning. In
Scott v FC of T (NSW) (1935) 3 ATD 142 at 144-145 Jordan CJ said:
``The word `Income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income...''
20. This confusion in the respondent's case probably arose out of the requirement for including in the assessment of taxable income of the beneficiary that beneficiary's share of the net income of the trust i.e. the amount determined in accordance with the definition of net income in section 95 of the Act calculated as if the trustee were a taxpayer in respect of the derived assessable income. In effect this means that a beneficiary who is presently entitled to a share of the income of the trust estate shall be treated as presently entitled to the same proportion of the net income for assessment of income tax (
Begg v FC of T (1937) 4 ATD 257).
21. The law on this aspect was carefully explained by Kitto J in
Union Fidelity Trustee Co of Australia Ltd & Anor v FC of T 69 ATC 4084 at 4089; (1969) 119 CLR 177 at 185 in these words:
``At no time during the year was any beneficiary presently entitled to any part of the income of the estate (though a very small part of the income was in fact distributed to the beneficiaries). This is so because `presently entitled to any part of the income of a trust estate' refers not to the availability of any income for payment to him, but to a present title in possession in respect of any income the estate may produce;...''
22. In FC of T v Totledge 82 ATC 4168 at 4173-4174; (1982) 40 ALR 385 at 393 the Federal Court (Bowen CJ, Deane and Fitzgerald JJ) explained a beneficiary's entitlement to income in these words:
``A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate 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 interest as beneficial `ownership' subject to a charge in favour of the trustee (see, for example, per Lord Wrenbury,
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
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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.'''
23. The evidence before the Tribunal, although less than complete, has satisfied me that it is more likely than not that each year the trustee made a resolution declaring all or part of the income derived from the primary production business in favour of the applicant. Clause 2 of the deed of trust provided for the income to be paid or applied to the benefit of any one or more of the beneficiaries named at the absolute discretion of the trustee.
24. It seems to me on the material before the Tribunal that the trustee has acted in accordance with that clause and its resolutions were therefore effective to apply the relevant primary production income of the business for the benefit of the applicant (
Re Baron Vestey's Settlement, Lloyds Bank Ltd v O'Meara [1951] Ch 209 and
CIR v Ward [1970] NZLR 1).
25. If there be any doubt or ambiguity in the statutory provisions, which I do not think there is, it is necessary to consider the purpose or object of the statutory provisions. In this case the provisions which, on the respondent's submissions, may be thought to be ambiguous are sub-sections 157(3) and 157(3A).
26. My researches indicate that sub-section 157(3) first appeared in the Income Tax legislation in the Income Tax Assessment Act 1936, as originally enacted. The provision was amended to recognise the insertion of sub- section 157(3A) but has not been otherwise amended since its introduction. The mischief sought to be overcome is not easily ascertained but the sub-section apparently overcomes a perceived possible effect of the High Court decision in Doherty v FC of T (supra). That decision is not directly in point because, as already noted, it concerned a claim by a beneficiary for a deduction for her share of the loss incurred by the trustee in carrying on a business. The essence of the case is sufficiently explained by the quotation set out in paragraph 17 above. What is a reasonable inference in the circumstances is that the Parliament enacted sub-section 157(3) to make it clear that the decision in Doherty did not apply to Division 16 by deeming the beneficiary to be carrying on the business of primary production for the purposes of Division 16. That seems to be reasonable and the only explanation.
27. What the Parliament clearly sought to do was to assimilate a beneficiary presently entitled to income of a business of primary production carried on by a trustee with a member of a partnership carrying on a business of primary production. The benefits of averaging were to be made available to a beneficiary who was presently entitled to income in the same way as a partner entitled to a share in the net income of a partnership carrying on business as a primary producer.
28. The scheme of Division 16 in its application to taxpayers is set out in sections 151, 152 and 153 of the Act. In particular section 153 provides that any year in which the taxpayer was carrying on business but had no taxable income shall be capable of being an average year. Sub-section 157(3) has the effect of deeming the beneficiary who is presently entitled to primary production income to be carrying on the business conducted by the trustee so that the beneficiary has the benefit of
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the provisions of Division 16 unless excluded by sub-section 157(3A). The result is the one contemplated by Division 16.29. In regard to sub-section 157(3A) I am satisfied that the present case is one where the interest of the applicant in the trust estate was not acquired or granted for the purpose of enabling the provisions of Division 16 to apply. The trust is a family trust set up many years ago to conduct the family business. The special situation in the applicant's family involving children not capable of looking after their own affairs made the trust arrangement almost essential and certainly the appropriate way to conduct the business of this family.
30. I turn now to the decision in Case W95,
89 ATC 795. In that case this Tribunal decided that the taxpayer was not entitled to averaging because the trustees incurred a loss from primary production activities in certain years and there was therefore no net income for distribution among the beneficiaries. It followed, it was said, that the taxpayer was not presently entitled to any income of the estate. The learned Deputy President referred to various authorities but did not cite the decision in Totledge nor the decisions in Re Vesty and Ward. I assume they were not brought to his attention. Insofar as the decision relies on the decision in Case T21,
86 ATC 214, I think, with respect, that the reasons of the Board of Review have been misconstrued and in any case the Board was not called upon to distinguish between the beneficial interest in income as opposed to net income. At page 216 I made the following comments which I adopt for the purposes of this application:
``It might be thought by some to be a strange result that a taxpayer could be regarded as presently entitled to an amount of net income not presently ascertained. Certainly the taxpayer's case embraced such a contention. However, at the relevant time the state of the law was that where a beneficiary, sui juris, had a vested and indefeasible interest in the income of a trust estate and there was no legal impediment to the beneficiary calling for and receiving payment of her share of the net income then that beneficiary was presently entitled to that share of the income of the trust estate. See
F.C. of T. v. Whiting and Others (1943) 68 C.L.R. 199; (1943) 7 A.T.D. 179 and F.C. of T. v. Totledge Pty. Ltd. 82 ATC 4168.''
I regret therefore that I am unable to follow the decision in Case W95.
31. It will be apparent that the respondent has argued this matter on a basis inconsistent with his published Taxation Ruling IT 286.
32. For these reasons the objection decision under review will be set aside and substituted therefor a decision allowing the objection.
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