Compton v Federal Commissioner of Taxation

(1966) 116 CLR 233
40 ALJR 366

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(Judgment by: Kitto)

COMPTON
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judges: Taylor J.

KittoMenzies
Owen JJ.

Judgment date: 9 February 1966

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Judgment by:
Kitto

1966, November 30.

The following written judgments were delivered:-

KITTO J. The facts of this case are sufficiently set forth in the judgment to be delivered by my brother Owen, and I need not repeat them. In my opinion, consideration of the deed as a whole, and particularly of cl. 28, leads necessarily to the conclusion that the fund here in question was established for the benefit, in part, of the companies referred to in the deed, by enabling them to be indemnified out of the fund against future liabilities for long service leave in respect of employees who might be members of the fund, and also against any expenses they might incur by voluntarily allowing long service leave to employee-members who might not be entitled to it by law. It is, I think, impossible to accept the appellants' invitation to brush aside this benefit to the companies as being insignificant for the purpose of deciding whether the fund answers the description in s. 23 (j) (i). It was established upon the terms of cl. 28 as surely as upon any of the other terms of the deed, and therefore the most that can properly be said is that it was established for the benefit of employees in so far as it might not be absorbed by benefits to the employers. That is not enough for s. 23 (j) (i). The plain truth is that a fund established in accordance with a deed which contains such a provision as cl. 28 combines the purposes of a superannuation fund for the benefit of employees with those of a reserve fund created to meet future contingent liabilities of employers. The exemption from tax which s. 23 (j) (i) provides cannot possibly be intended for income which in some events and to some extent may have to be applied, according to the trusts which govern it, for the benefit of employers. (at p245)

I am content to decide the appeal on this ground, but having regard to the considerations which led Taylor J. to his conclusion against the appellants I am by no means satisfied that if there had been no cl. 28 in the deed the appellants would have been entitled to succeed. His Honour was influenced by the fact that what happened over the creation and administration of the fund was quite different from what one might have expected upon a mere perusal of the deed. The inaugural step was a payment of 800 pounds to the trustees by F. H. Compton & Sons Pty. Limited (which is called the company to distinguish it from its subsidiaries and associates), the payment being made on the terms that it should be allocated as to 200 pounds each for the benefit of F. H. Compton, B. F. Compton, N. J. Compton and R. J. Compton. This was done pursuant to a resolution passed on 16th February 1957 by the directors of the company, who in fact were the same four persons. What was done in this respect was treated, and no doubt correctly, as an implied nomination of the four Comptons to be members of the fund, though no formal nomination was ever made. The company made further contributions at later dates, for the benefit in each instance of the same individuals. These persons continued at all times to be the directors of the company, and it was as such that they authorized the making of the contributions. They were all employees as well as directors, and so were qualified to become members of the fund ; but although there were many other persons who were employees and so equally qualified to become members of the fund none of them was ever nominated either expressly or by the making of any contribution to the fund for his benefit. The only shareholders in the company apart from the four Comptons were their respective wives, and the Comptons themselves were the only shareholders in the associated company mentioned below.

The trustees borrowed moneys and used them to take up newly-created redeemable preference shares in the comp any and one of its associates. On these shares substantial dividends were declared from time to time. The income of the fund was largely credited in the trustees' books to an accumulation fund, the credits to the accounts of the four members growing, in the relevant period, to amounts of the order of 2,500 pounds and 2,700 pounds only. The result was that profits which would have attracted undistributed profits tax if retained by the companies, or income tax in the hands of the four Comptons and their wives if distributed, were paid to a fund the income of which, it was hoped, would be exempt from tax and yet the benefit of which, as to both capital and income, could be made under cll. 25 and 26 to accrue to the four Comptons (or their dependants, etc., in which case there might perhaps be some saving of death and estate duties) and to no one else provided that care was taken not to commit the indiscretion of nominating any other employee to be a member of the fund. (at p246)

This bare outline of the history of the matter will suffice to show that if it had not been possible to dispose of the appeal on the ground of the presence of cl. 28 in the deed serious questions would still have arisen as to whether the fund was in truth constituted or applied as a superannuation fund for the benefit of employees. I am not at all sure that the correct conclusion would not have been that it was constituted and applied as a fund for the benefit of shareholders, that is to say shareholders who happened to be employees but were selected not as being employees but as being persons entitled to participate in distributions of profits of the companies. It was, of course, not the execution of the deed that constituted the fund, but the payment of moneys to the trustees to be credited to nominated persons in the manner provided by the deed. But the power of nomination was given to the directors for the time being of the company eo nomine, and therefore could not be validly exercised otherwise than bona fide for the benefit of the company : cf. Reynolds v. Atherton (1921) 125 LT 690 , at p 693 . This means that a nomination, to be valid, must be made for the reason that the directors considered it to be for the benefit of the company that superannuation provision should be made for its own employees or those of its subsidiaries or associates. One question which suggests itself is whether the payments that were made out of moneys of the company to the trustees of the fund had the effect of establishing a fund in accordance with the deed. Perhaps the true view of the facts is that a fund was established which was not the fund contemplated by the deed, was not really a superannuation fund, and was not for the benefit of employees as such, but was a means of producing for the Comptons themselves advantages fundamentally different in character from employees' superannuation benefits.

Again, the manner in which the fund was administered may be thought to raise a corresponding question, namely whether the purpose which governed the application of the fund throughout the relevant years was not rather the purpose of benefiting the Comptons as individuals than the purpose of providing them with superannuation as employees. Upon these questions, however, it is unnecessary to form a concluded opinion. I would dismiss the appeals. (at p247)