Case V105

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 July 1988.

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Purvis J.

Generally - the issue

The references in this matter are five in number. Four relate to the 1983 financial year and one to the 1984 financial year. The point at issue in each reference is the same, namely, as to whether the trustee of a relevant trust estate and a beneficiary should be assessed and liable to pay tax in respect of a beneficiary's share of a distribution of trust income under Div. 6AA of the Income Tax Assessment Act (income of certain children) as eligible income or whether the same was excepted trust income to which subsec. 102AG(2)(c)(viii)(B) of the Act applied.

The references were all heard together.

It was stated by the taxpayers in a schedule accompanying the relevant income tax returns that ``the income derived by the trust had been derived from the investment of property settled on... children beneficiaries as a result of the dissolution of marriage of their parents'' and was thence excepted income and subject to tax at normal, that is, general resident individual rates. In fact the marriage of the parents had not, at the time of the investment, and in the relevant years been dissolved; they had however separated.

Section 102AG(2)(c)(viii)(A) of the Act relates to amounts derived from the investment of property transferred to a trustee for the benefit of a beneficiary pursuant to a decree or order of dissolution or annulment of marriage and sec. 102AG(2)(c)(viii)(B) to amounts so derived pursuant to a decree or order of judicial separation or a similar decree or order, and categorises such amounts as ``excepted'' trust income.

The respondent Commissioner contends that the amounts so included in the taxpayers' assessable incomes for the years in question were not ``excepted'' trust income but were ``eligible'' income attracting taxation at the prescribed rate.

Factual situation

The factual situation out of which the issue above identified arises was as agreed between the parties and as found by the Tribunal is as follows.

In about June 1982 M and W agreed that their marriage had broken down, that they should separate, and in due course seek a divorce. In July 1982 M left the former matrimonial home with the intention of not returning. At 30 June 1983 and at 30 June 1984 M had not so returned, nor had an application been made seeking a decree for dissolution of the marriage.

At July 1982 there were three infant children of the marriage of M and W. Having in mind the possible psychological effects of a divorce on the children, it was agreed between M and W that neither one would seek a decree of dissolution of their marriage until such time as the children were older. It was not until June 1986 that W filed her application for divorce in the Family Court of Australia, a decree nisi for dissolution of the marriage being pronounced on 6 August 1986.

Some time after M and W decided to separate they discussed, with the aid of legal advisers, the matter of appropriate financial provision being made for the children and W. An agreement was negotiated and incorporated in a deed, the same being executed by the parties under date 29 May 1983. The deed was registered in the Family Court of Australia pursuant to sec. 86 of the Family Law Act, as it then was (amendments to the section were made by Act 181 of 1987 sec. 46, the same not being relevant to these reasons) which section, so far as it is here relevant provided:

``(1) A maintenance agreement other than an agreement to which section 87 applies may be registered, as prescribed by the Rules of Court, in any court having jurisdiction under this Act.

(2) Where a maintenance agreement is so registered in a court, the court may, in relation to the agreement, exercise any of the powers conferred on the court under section 83 as if the agreement were an order of the court.''

A maintenance agreement is defined in sec. 4 of the Act to mean:

``an agreement in writing made whether before or after the commencement of this Act..., between the parties to a marriage, being an agreement that makes provision with respect to financial matters, whether or not there are other parties to the agreement and whether or not it also makes provision with respect to other matters, and includes

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such an agreement that varies an earlier maintenance agreement.''

The agreement contained in the said deed, recited inter alia that ``the parties separated on 31 day of July 1982 AND WHEREAS the marriage has broken down irretrievably and the parties intend at the appropriate time to seek a dissolution of their marriage...'', detailed the interests in property of M and W, and continued by reciting that ``a trust has been established known as `The B... Children Separation Settlement Trust' for the purpose of the provisions of the fund for the day to day support and future maintenance, welfare and education of the children AND WHEREAS the parties have agreed on matters relating to property settlement and maintenance''.

The relevant operative clauses of the deed provided:

``16. The Husband shall settle upon the Wife as Trustee for the three children of the marriage, herein before referred to, the sum of $25 each child, such sum to be settled within one month of the date hereof. The parties shall procure that each such child invest the said sum of $25 settled upon him or her, as the case may be, in respect of the acquisition of 25 B class units of $1.00 each in the B... Children Separation Settlement Trust.

(b) The husband shall ensure and for that purpose hereby covenants that sufficient income is received by the B... Children Separation Settlement Trust of an amount which would be sufficient to enable a distribution of a clear amount of $3333 annually to be made to each of the unit holders of the trust, such amount to be increased by annual adjustments based on increases in the Consumer Price Index All Groups Sydney, but provided that the foregoing provisions hereof shall not in any way be construed so as to derogate from or to constitute an amendment of, any of the provisions of the deed establishing the B... Children Separation Settlement Trust and without limiting the generality of the foregoing, in particular clause 4.1 hereof, together furthermore with an additional provision representing one half of the payment of the children's school and tuition fees, such aggregate amount in respect of each unit holder to be received by the B... Children Separation Settlement Trust until such unit holder either:

• (i) leaves the care and control of the wife,
• (ii) completes a graduate course of tertiary education or technical course, and/or
• (iii) attains the age of 23 years,

whichever event first occurs.''

The deed establishing the B... Children Separation Settlement Trust was made some weeks later and [executed] on 20 June 1983. It recited that:

``1. The marriage of M... and W... has irretrievably broken down and M... and W... intend at the appropriate time to seek a dissolution of their marriage.

2. M... and W... intend to enter into and execute a deed pursuant to section 86 of the Family Law Act in order that provision may be made for, inter alia, the financial support and maintenance of their children.

3. It is intended by these presents to establish a trust styled the `B... Children Separation Settlement Trust' in order to make further provision for the children of M... and W...

4. Under and pursuant to the terms and provisions of the deed to be entered into and executed by and between M... and W... being the deed more particularly referred to in recital 2. hereof, certain moneys will be paid to the children of M... and W... in order that the children of M... and W... may subscribe for certain B Class units (as hereinafter defined) in the B... Children Separation Settlement Trust.

...''

The deed thereafter provided for the establishment of the trust fund, its capital, application of income and division of beneficial interests. Other provisions conferred upon the trustee necessary powers to administer the trust and appropriately structured the trust.

On 20 June 1983, the date on which the trust deed was executed, and consistent with the provisions of the deed of 29 May 1983, necessary funds were settled on W... as trustee for the children. The trustee with such funds acquired units in the Settlement Trust; each child became the holder of the 25 B Class units

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in the trust as envisaged by cl. 16 of the deed of 29 May 1983.

In each of the financial years the subject of these applications income was received by the Separation Settlement Trust sufficient to discharge the obligation resting on M pursuant to cl. 16(b) of the deed of 29 May 1983.

On 30 June 1983 the trustee of the Separation Settlement Trust resolved:

``...

that the income of the B... Children's [sic Children] Separation Settlement for the year ended 30 June 1983 as has not hereto been paid or applied pursuant to Clause 4 of the trust deed be dealt with as follows: -

• 1. By the first $9000 being applied pursuant to Clause 4 of the Trust Deed for the maintenance and education of the beneficiaries listed below in the proportion appearing beside their names.
  • G... L... B... $3000
  • G... S... B... $3000
  • M... A... B... $3000
• IT WAS FURTHER RESOLVED that this sum be paid to M..., the father of the children, as a refund of amounts expended by him on behalf of the children during the year ended 30 June 1983.
• 2. By the balance, if any, of the income of the Trust fund to 30 June 1983 being invested on behalf of the infant beneficiaries in equal proportions in W... Holdings (Australia) Pty. Limited.''

On 28 June 1984 the said trustee resolved:

``...

that the income of the B... Children's [sic Children] Separation Settlement for the year ended 30 June 1984 as has not hereto been paid or applied pursuant to Clause 4 of the Trust Deed be dealt with as follows: -

• (i) By the first $700 being applied pursuant to Clause 4 of the Trust Deed of [sic for] the maintenance and education of the beneficiaries listed below in the amounts appearing beside their names.

              G. . .       L. . .       B. . .       $400
              M. . .       A. . .       B. . .       $300
                

• (ii) By one hundred percentum (100%) the balance of it being applied pursuant to Clause 4 of the Trust Deed for the maintenance and education of the beneficiary listed below: -
  • G... S... B... 100%.''

The amounts distributed by the settlement trust to or on behalf of the children totalled $13,500 in the 1983 financial year and $10,700 in the 1984 financial year. The income was returned accordingly. The trustee was assessed pursuant to Div. 6AA and sec. 98 of the Income Tax Assessment Act and at a rate of 46% of the taxable income as returned.

Objection on a number of grounds was initially taken to each of the various assessments, the sole ground of objection however relied upon at the hearing being as earlier identified and expressed on behalf of the applicants as follows:

``For the purposes of this hearing it is agreed that the application of section 102AG(2)(c)(viii)(B) is the sole point at issue, that is, the only question is whether the distribution made by the settlement trust is `in terms of a decree or order of judicial separation or a similar decree or order', in other words, whether the deed recording the agreement and subsequently registered pursuant to section 86 of the Family Law Act 1975 as amended is `a similar decree or order to a decree or order of judicial separation'.''

Division 6AA of the Income Tax Assessment Act

The section of the Income Tax Assessment Act germane to the issue in these applications, sec. 102AG is one of the sections contained within Div. 6AA.

A taxpayer to whom the Division applies, a ``prescribed person'', is liable by virtue of the Division and the Income Tax (Rates) Act to pay tax, subject to a number of exceptions and deductions, on the ``eligible assessable income''.

It was this latter income which was, in the subject instances, assessed by the respondent at the special rate of tax of 46%.

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Where a person is a ``prescribed person'', and the children in these references were such prescribed persons, the Division applies to the whole of the assessable income other than what is described as ``excepted assessable income'' or ``excepted trust income'' within the meaning of sec. 102AG.

Section 102AG of the Income Tax Assessment Act

Section 102AG so far as it is relevant to these reasons provides:

``(1) Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, this Division applies to so much of the share of the beneficiary of the net income of the trust estate of the year of income as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, in relation to that beneficiary, excepted trust income.

(2) Subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount -

• ...
• (c) is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary -
• ...
  • (viii) pursuant to -
    • (A) a decree or order of dissolution or annulment of marriage, being a dissolution or annulment that, by reason of the Family Law Act 1975, has effect, or continues to have effect in Australia or is recognized as valid in Australia; or
    • (B) a decree or order of judicial separation or a similar decree or order;
    • ...''

Was then the amount as included in the assessable income of the trust estates of the subject beneficiaries, in the 1983 and the 1984 financial years, excepted trust income? That is, were the said amounts derived by the trustee from the investment of property transferred to the trustee for the benefit of the children beneficiaries pursuant to a decree or order similar to a decree or order of judicial separation.

Decree or order of judicial separation or a similar decree or order

It was conceded on behalf of the applicants that the transfer of property was not pursuant to ``a decree or order of dissolution'' within the meaning of subpara. (viii)(A). As the relevant financial years pre-date by some time the filing of the application for a divorce, the concession is wholly proper and justified.

What then as to the registration of the deed of 29 May 1983 pursuant to sec. 86 of the Family Law Act and the transfer of the property thereunder, from the investment of which property the relevant income was derived? Was such transfer pursuant to a decree or order similar to a decree or order of judicial separation?

Judicial separation as a relief available to married persons is no longer apposite in Australia. The Family Law Act 1975 by sec. 8 thereof stipulated that proceedings for a decree of judicial separation ``shall not be instituted or continued after the commencement of this Act''. The relief was available under the repealed Matrimonial Causes Act 1959-1973 which Act provided so far as is here relevant:

Section 54

``A decree of judicial separation relieves the petitioner from the obligation to cohabit with the other party to the marriage while the decree remains in operation, but, except as provided by this Division [Division 3 - Judicial Separation] does not otherwise affect the marriage or the status, rights and obligations of the parties to the marriage.''

Section 55(1)

``While a decree of judicial separation is in operation either party to the marriage may bring proceedings in contract or in tort against the other party.''

Section 55(2)

``Where a party to a marriage dies intestate as to any property while a decree of judicial separation is in operation, that property shall devolve as if that party had survived the other party to the marriage.''

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Can it be said then, that the subject property was transferred to the trustee for the benefit of the children beneficiaries pursuant to a decree or order ``similar'' to a decree or order of judicial separation?

``Similar'' is defined by the Concise Oxford Dictionary as meaning:

``Like, alike; having mutual resemblance or resemblance to; of the same kind, nature or amount;... thing resembling another...''

What then is it that is alleged to have been so similar, of the same kind or nature or of resemblance to a decree or order of judicial separation? It cannot be the deed of 29 May 1983 itself, for parties, even be it they agree as is set forth in cl. 9 of the subject deed namely, ``that the terms and conditions of this agreement are to be deemed to be orders made by the Family Court of Australia'', are nevertheless not able to bind the court by deeming terms and/or conditions of an agreement to be orders; the agreement is only enforceable as such inter partes.

On registration however of an agreement pursuant to sec. 86 of the Family Law Act, as it then was, before the 1987 amendment, a different situation arose. Thence, whilst the agreement was still inter partes, the court in relation to the agreement could exercise any of the powers conferred on it under sec. 83 of the Family Law Act ``as if the agreement were an order of the court''.

The powers conferred under sec. 83 related to modification of maintenance orders and enabled a court to discharge or suspend the operation of an order, to revive a suspended order, or to vary the same. Section 83 did not itself empower the court to enforce orders or to enforce terms and/or conditions of a registered agreement when so registered ``as if'' the terms and conditions were orders of the court. It was only in relation to the relief available pursuant to sec. 83 that the maintenance agreement and its terms and conditions were, on registration, able to be deemed or regarded as orders of the court.

Thus, on registration of the subject deed, the court could, on application by a party modify or discharge, suspend, revive or vary a term or condition of the deed referable to maintenance of the wife or any one or more of the children as if the agreement as to the term or condition was an order of the court. The act of registration did not cause the agreement itself to become an order of the court. Registration under sec. 86 did not confer upon the terms of an agreement the essential characteristics of an order of the court. ``All that registration does in appropriate cases is to attract the operation of sec. 83 and 88... even though those terms (of the agreement) deal with matters of property it would be a mistake to regard them as orders under sec. 79 and indeed agreements approved under sec. 87 possess. They have not been arrived at by an exercise of the Court's discretion. Indeed, they have been arrived at without any exercise of the judicial process...'' (
Sykes (1979) FLC ¶90-652 at p. 78,446).

What the Family Law Act did by sec. 86 was to enable the court to act under sec. 83 in relation to such an agreement as to maintenance. Any order then so made would be as to a term or condition, ``a provision of'', the maintenance agreement, the agreement being, for this purpose, deemed to be an order of the court and not to any order previously in fact made by the court.

It is this deeming, or ``as if the agreement were an order of the court'', for the statutory purpose of modification, discharge, suspension, revival, or variation of a term or condition of the agreement that must be then said by the applicants to be similar to a decree or order of judicial separation.

I do not see a similarity. Even if the effect of sec. 86 was to render the terms and conditions of a maintenance agreement, orders, which I do not so find, I do not see even then a relevant similarity to a decree or order for judicial separation. I do not see situations of the same kind or nature or ones that in any way resemble each other.

Conclusion and decision

So far as it may be necessary to give purpose and effect to sec. 102AG(2)(c)(viii)(B) of the Income Tax Assessment Act, it is intended to relate to decrees obtained prior to the repeal of the Matrimonial Causes Legislation and financial arrangements then made and continuing and decrees or orders made in other jurisdictions they having a similar effect to a decree or order of judicial separation, that is, decrees or orders which enable parties whilst still married to live separately and apart from

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each other and financial arrangements referable to child beneficiaries made pursuant thereto.

It was submitted on behalf of the taxpayers that the Legislature by inserting sec. 102AG into the Income Tax Assessment Act was seeking to isolate the income of some beneficiary children, they then not having to pay taxation at ``penal rates'' on moneys received by them in the nature of maintenance consequential on a breakdown of a marriage. If a breakdown of marriage resulted in a relevant decree or order of dissolution or annulment of marriage or of judicial separation, or a decree or order similar to that of judicial separation and the relevant income was derived from the investment of property transferred for the benefit of a child beneficiary pursuant to, or conformably to, such decree or order, then the same would be excepted income within the meaning of sec. 102AG. The only relevant decree or order in these references was the decree of dissolution made in August 1986. The subject transfer was not made and the consequential income was not derived pursuant to that decree.

The act of making provision, by way of establishing a trust, for the benefit of children and their maintenance in an agreement and having the same registered in accord with sec. 86 of the Family Law Act does not of itself enable an amount included in the assessable income of a trust estate so established to be excepted trust income in relation to the beneficiary.

For the reasons hereinbefore set forth. I do not consider the relevant incomes to have been derived in accord with the provisions of sec. 102AG(2)(c)(viii)(B) of the Income Tax Assessment Act and to have been ``excepted'' income.

Accordingly I affirm the assessment decisions under review.