Executor Trustee & Agency Co of South Australia Ltd v Federal Commissioner of Taxation

48 CLR 26
1932 - 0804A - HCA

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(Judgment by: Rich J)

Between: Executor Trustee & Agency Co of South Australia Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Gavan Duffy CJ

Rich JStarke J
Dixon J
Evatt J
McTiernan J

Subject References:
Taxation and revenue
Income tax
Trustee
Will
Life tenant and remainderman
Direction that premium be treated as rent
Whether trustee liable for tax for any part of the premium

Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - s 13; s 31

Hearing date: Melbourne 15 March 1932
Judgment date: 4 August 1932

Sydney

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Judgment by:
Rich J

This is a case stated by Starke J. on an appeal from the Board of Review under the Income Tax Assessment Act 1922-1929.  The Board of Review confirmed the Commissioner's assessment and overruled an objection made by the taxpayer to the inclusion in the assessable income of a premium taken upon the grant of a lease.  The appellants are trustees under a will and the assessment was made upon them in purported pursuance of s. 31 (2) of the Income Tax Assessment Act 1922-1929.  Under the trusts upon which they held the leased land the beneficial interest is as to one moiety vested in possession absolutely and as to the other moiety it stands limited in succession to the life tenant and remaindermen.  The power of leasing did not permit the trustees to "take anything in the nature of a fine or premium" for a lease.  But the trustees applied ex parte under s. 69 of the Administration and Probate Act 1919-1922 (S.A.) for an order authorizing them to accept a tender for a lease at a rent of PD6 per week and a premium of PD3,300.  This statutory provision has the same effect as Lord St. Leonard's Act and the Amendment Act of 1860 in providing protection for the trustees, but an order made under it, at any rate when made ex parte, cannot bind the rights of the beneficiaries inter se.  It does not appear what were the circumstances relied upon in support of the application for an order authorizing a lease outside the power, but apparently the facts were considered strong enough to warrant an application of the doctrine of In re New ^[F4] (compare In re Weate; Weate v  Weate; ^[F5] In re Higgins; Higgins v  Higgins), ^[F6] for no statutory power has been drawn to our attention.

In New South Wales, however, provision has been made in s. 36 (5) of the Trustee Act 1925 empowering a trustee to take a bonus or fine in respect of the lease of licensed premises and authorizing the apportionment of the bonus or fine over the period of the lease as if it were rent.  The order made in this case empowered the trustee to accept the premium, and directed that it should be treated as rent under the lease paid in advance and apportioned with interest over the term.  The result clearly enough was to enable the trustees to accept a premium and, the premium being accepted, the rest of the order properly expressed the apportionment or distribution of the premium which on ordinary principles must be made between life tenant and remaindermen.  The life tenant is entitled to all the casual and current profits which arise before the determination of his estate except in so far as the trust instrument otherwise provides, but in the absence of particular provision he is not entitled to immediate payment of moneys representing consideration given for the future use of the land possibly extending beyond the duration of his estate, for a premium involves a reward to the lessor for the grant of the particular interest or benefit obtained by the lessee (Australian Mercantile Land and Finance Co  v  Federal Commissioner of Taxation, ^[F7] at p. 153).

In this particular case, for a seven years' lease, PD3,300 was paid in cash, although the rent reserved was only PD312 per annum.  If the premium had been spread over the term as rent the annual revenue for the land would have been more than doubled.  It is obvious that a life tenant, who might die tomorrow, could not be permitted to receive the premium representing, as it largely would, the future value of the land which would otherwise enure to the remainderman.  The application of these principles may be difficult in cases where a settlement includes estates or hereditaments which, apart from the powers of the trustees, have incident to them the irregular but recurrent payment of fines:  Such a case was Brigstocke v  Brigstocke, ^[F8] which appears to have occasioned some difficulty among text-writers (see the note on p. 28 of Strachan, Trust Accounts (1911)), but which has been sufficiently explained by the observation made in the course of argument by Jessel M.R. himself, namely, that the lease was perpetually renewable. ^[F9]

But the present case is a plain case in which a large sum of money representing the consideration in advance for the future use of the land over a long term has been taken by the trustees themselves under an authority based upon the supposed necessity of conserving the interests of all concerned.  It follows, therefore, that as to one moiety of the premium it was uncertain at the time it was taken how much would fall to remaindermen and how much to life tenant.  It was paid to the trustees during the year of income upon which the assessment was based, and the  Commissioner included the amount of the premium except so much as was referable to the few months which elapsed between its receipt and the end of the year of income.  He did this, acting under par. (b) of sub-s. 2 of s. 31 of the Income Tax Assessment Act 1922-1928, presumably upon the ground that in view of the order the premium, subject to the exception mentioned, was income of the trust estate to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof.  As to one moiety of the estate he was clearly right, because at the end of the year of income it was not ascertained whether life tenant or remaindermen would receive any or how much of the premium.  But as to the other moiety the beneficiaries in whom an absolute interest had vested in possession were presently entitled.

Being presently entitled, they were by virtue of sub-s. 1 liable as taxpayers in respect thereof; for s. 16 (d) of the Income Tax Assessment Act 1922-1928 gives the premium the character of income for the purposes of the tax.  But the Commissioner contends that the trustees are also liable in respect of this moiety because par. (b) of sub-s. 2 of s. 31 requires the inclusion in their assessment of income of the trust estate unless it can be said of it not only that some other person is presently entitled thereto and liable as a taxpayer in respect thereof but also that that other person is in actual receipt thereof.  In justification of this construction the Commissioner fastens upon the copulative "and," which he says must mean that some other persons should be both presently entitled, in actual receipt and liable as a taxpayer in respect of the income, before it can be excluded from the trustees' assessment.  On two previous occasions I have had an opportunity of considering the difficulty occasioned by this conjunction: see Federal Commissioner of Taxation v  Higgins ^[F10] and Howey v  Federal Commissioner of Taxation. ^[F11]   In the former case I expressed the opinion, at p. 305, that a confusion had occurred and that the disjunctive "or" was probably intended.  The argument in the present case has confirmed this opinion.

Nothing is more common than a confusion between "and" and "or" in cumulative conditions, particularly when a negative form of statement is adopted.  The reasons for this construction are sufficiently stated in the argument of counsel in Higgins' Case ^[F12] (which is well reported).  Accordingly I am of opinion that as to one moiety of the premium the Commissioner's assessment was wrong.  Another question which was argued was whether the averaging provisions contained in s. 13 should be applied to the assessment.  The trustees neither carried on a business nor were assessable to income tax in previous years.  I do not think they can rely upon the inclusion in their beneficiaries' assessments of the income which passed through the hands of the trustees.  In my opinion it follows from sub-ss. 6 and 13 of s. 13 that the provisions of s. 13 cannot apply.

I answer the first question in the case stated: Not in respect of the whole sum of PD3,207 but in respect of a moiety thereof only.  I answer the second question: No.