Compton v Federal Commissioner of Taxation

(1966) 116 CLR 233
40 ALJR 366

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(Judgment by: Owen JJ.)

COMPTON
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judges: Taylor J.
Kitto
Menzies

Owen JJ.

Judgment date: 9 February 1966

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Judgment by:
Owen JJ.

OWEN J. The appellants in each of these four appeals are the trustees of the "F. H. Compton & Sons (Superannuation Fund)" (the fund) which was established pursuant to a deed dated 1st December 1956 made between F. H. Compton & Sons Pty. Limited (the company) and three trustees, F. H. Compton and B. F. Compton who were directors of the company and A. W. Moore an accountant. In each of the years ending 30th June 1957, 1958, 1959 and 1960 the income of the fund was substantial and in each year portion of it was credited by the trustees to each of four persons who were the only "members" of the fund. These four persons were the two Comptons mentioned above and two other members of the Compton family who were also directors of the company. All of them were at all relevant times also employees of the company. For reasons which it is unnecessary to set out, however, a large proportion of the income was credited by the trustees to what was called an "accumulation account" and in each of the years in question the respondent Commissioner assessed the trustees to tax upon an amount which, apart from one small adjustment, corresponded with the amount of the income credited in that year to the accumulation account. The appellants appealed against these assessments, claiming that the whole of the income of the fund was exempt from tax under s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act 1936-1957. That section sets out a series of classes of income which are declared to be exempt from income tax, including in par. (j) (i)

"the incomes of the following funds, provided that the particular fund is being applied for the purpose for which it was established -

(i)

a provident, benefit or superannuation fund established for the benefit of employees;

(ii)

. . . .

(iii)

. . . . "

The appeals were heard by Taylor J. who dismissed them on the ground that if the fund in question was a provident, benefit or superannuation fund established for the benefit of employees, it was not being applied for the purpose for which it was established. Against that decision these appeals are brought.

It is clear that, in order to qualify for the exemption from tax for which s. 23 (j) provides, two conditions must be fulfilled. The fund must be a provident, benefit or superannuation fund established for the benefit of employees and it must have been applied for the purpose for which it was established. The first question then is whether this fund was a provident, benefit or superannuation fund established for the benefit of employees and this necessitates an examination of the deed under which the fund was established and, in particular, an examination of one of its clauses, cl. 28, to which the attention of Taylor J. was not drawn. (at p250)

Clause 1 of the deed contains a number of definitions. "The Company" is defined to mean F. H. Compton & Sons Pty. Limited and "The Constituent Companies" to mean that company and any of its subsidiary or associated companies. "Member" is defined as "an employee of one of the Constituent Companies nominated by the Directors of the Company for inclusion in the Fund". There are also definitions of "Dependants of a Member" and "Retiring Age". The deed goes on to vest the fund and its control and administration in the trustees and to provide, by cl. 4, that any employee of the constituent companies nominated by the directors of the company should become a member. The general scheme set up by the deed is as follows: The fund was to consist of such contributions as might be made from time to time by the company for the credit of such individual members as the directors of the company might determine, together with such other amounts as might be received by the trustees and interest or profits arising from investments made by them. The directors of the company were required to determine what portion of any contribution made by the company to the fund should be credited to a particular member and to do so before making the contribution. An account was to be opened by the trustees in the name of each member and all contributions made by the company for the credit of that member were to be credited to his account, along with interest and profits derived from the investment of the moneys standing to his credit. Losses arising from such investments were to be debited to the member's account. In the event of the resignation or dismissal of a member from the service of the company before reaching the retiring age, the trustees could, in their discretion, pay the whole or some part of the amount standing to the credit of that member's account to him.

Any amount not so paid was to be credited to the fund and, if the trustees thought fit, divided among the remaining members in proportion to the amount standing to the credit of each. When a member reached the retiring age he was to be paid, either by way of lump sum or in such manne r as the trustees might think fit, the amount standing to his credit. If a member died while still a member, provision was made for the payment of the amount standing to his credit to such of his dependants and in such manner as the trustees might determine. The company might at any time determine that the fund should be wound up and, in that event or if the company should go into liquidation, any moneys in the fund not standing to the credit of individual members was to be distributed amongst all or any of the other members in such proportions as the trustees should think just and equitable. (at p251)

Clause 28 was in these terms: "Notwithstanding any other provisions contained in This Deed if a Member shall have received or be entitled to receive from any of the Constituent Companies a period or periods of long service leave or any payment in respect of or in lieu of the same whether ex gratia or pursuant to the provisions of any statute, award, Industrial agreement, agreement inter partes or otherwise and whether before or after he became a member then upon request from the Constituent Companies paying or liable to pay the same the Trustees shall out of the moneys standing to the credit of the Member's account pay to such Constituent Company a sum equal to the amount paid or payable to the Member during or in respect of such period or periods of long service leave or paid or payable in lieu of the same. Should the amount standing to the credit of the Member be insufficient to pay such sum in full then the Trustees shall as further sums are credited to the Member's account pay the same or so much thereof as may be necessary for that purpose to the Constituent Company concerned until the amount due has been fully paid and satisfied." (at p251)

By cl. 29 the trustees were given wide powers to amend the deed with the consent of the company but subject to a proviso that no such amendment should "reduce vary or otherwise limit the amounts due or payable to the Members" as at the date of the amendment "except with the written consent of all the Members or the Member whose benefit is to be so reduced varied or limited". (at p251)

Having regard to the terms of cl. 28 the first difficulty that faces the appellants is, it seems to me, to show that the fund was one established for the benefit of employees. If an employee becomes entitled to long service leave or to payment in lieu thereof, whether that right is given by statute such as the Long Service Act, 1955 (N.S.W.) or by an industrial award or industrial agreement or agreement inter partes, his employer is bound, by law, to accept all the obligations which are therby involved and which necessarily involve payments to the employee. Clause 28, however, enables a constituent company which is obliged to make such payments to a member or becomes liable to make them to request the trustees to pay to it out of moneys standing to the credit of that member's account in the fund the amount required by it to meet its long service leave obligations to that member and the trustees are bound to comply with such a request. Under the clause the employer may therefore insist that it be paid so much of the amount standing to the credit of a member's account in the fund, which would otherwise have been paid to the latter on reaching the retiring age or to his dependants should he die, as may be necessary to make good payments which it has made or is liable to make in respect of the long service leave benefits to which the law entitles that member. Such a provision is, in my opinion, one for the benefit of the employer and not for the benefit of the employee. (at p252)

Counsel for the appellants submitted however that, because the right to long service leave is of benefit to an employee, a provision such as cl. 28 is also for his benefit because it affords him some assurance that his right to long service leave benefits will be satisfied. But, for the reason I have stated, this submission cannot be sustained. He contended further that when the deed is read as a whole it appears that its dominant or principal purpose was to establish a provident, benefit or superannuation fund for the benefit of employees and that this is sufficient to satisfy the requirements of s. 23 (j). That paragraph does not speak of a fund established for the "exclusive" or "sole" benefit of employees, and it is enough, it was said, if the benefit of employees was its main purpose. I do not agree with these submissions. In the first place, it seems to me to be impossible to say upon an examination of the deed that the establishment of a fund for the benefit of employees was its principal purpose. But even if this could be ascertained from its terms, the observations of Windeyer J. in Randwick Corporation v. Rutledge (1959) 102 CLR 54 , appear to me to be in point. The Court was dealing in that case with the question whether certain land vested in trustees was "used for a public reserve" and was therefore not ratable. But in the course of his judgment, with which Dixon C.J. and Fullagar and Kitto JJ. agreed, his Honour said: "A trust under which the trust property might, at the discretion of the trustees, be wholly applied to a non-public purpose cannot properly be called a trust for public purposes - that is only to say that a trust cannot be called a charitable trust if the trustees could, without breach of trust, apply the trust property to non-charitable purposes. So expressed the proposition is familiar law" (1959) 102 CLR, at p 95.

Applying that general principle to the present case, I am of opinion that a fund cannot properly be described as having been established by an employer for the benefit of his employees if under its terms the trustees are required, in certain events, to apply the whole or some part of the trust property for the benefit of the employer, thereby reducing or extinguishing the benefits which the trust instrument would otherwise have given to the employee and it is, in my opinion, impossible to treat cl. 28 as being merely incidental or ancillary to the other provisions of the deed which are directed to the provision of benefits to employees. (at p253)

In these circumstances I think it unnecessary to discuss the other weighty matters to which my brother Kitto has drawn attention in his judgment. (at p253)

I would dismiss the appeals. (at p253)