LIEDIG v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 4 May 1994

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Hill J

The applicant, Hans Jurgen Liedig, appeals from the decision of the Taxation Appeals Division constituted by a Deputy President which affirmed various objection decisions of the respondent Commissioner of Taxation [Case 36/93,
93 ATC 402]. The appeal is in the original jurisdiction of this Court and is an appeal on, that is to say, limited to, questions of law: s. 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). The appeals concern the five years of income ended 30 June 1986 to 30 June 1990 inclusive.

Mr Liedig was a land broker in the relevant years of income and licensed to practise as such under the provisions of the Real Property Act 1886 (SA). In his returns for these years of income he claimed to have paid to his then wife by way of wages the following amounts:

                  1986           $19,454
                  1987           $22,669
                  1988           $22,533
                  1989           $23,748
                  1990           $25,193.
      

However, after the assessments for the years of income had been issued, disallowing these amounts as deductions, Mr Liedig objected to them on the basis that amounts equivalent to the amounts he claimed to have paid as salary to his wife were not income derived beneficially by him but represented income derived by him as a trustee and assessable to his wife pursuant to the provisions of s. 97 of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Mr Liedig's objections being disallowed he requested the Commissioner to refer them to the Administrative Appeals Tribunal (``the Tribunal'') for review.

Thus the issues before the Tribunal were whether Mr Liedig was a trustee, whether as trustee he derived the income which he said he held for his wife and if so what the income tax consequences were. Mr Liedig's objections did not include a ground that the amounts which he had originally said he had paid to his wife were, if he was not to be taken as deriving the income as trustee of a trust estate, otherwise deductible to him under the provisions of s. 51(1) of the Act. No attempt was made by him to apply to the Tribunal to amend the grounds of objection to permit him to argue this and not surprisingly the matter was not considered by the Tribunal in its reasons.

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At the outset of the proceedings before me counsel for Mr Liedig applied, by way of motion, for orders that Mr Liedig be permitted now to amend his notices of objection to permit him to argue that the amounts in question were allowable deductions under s. 51(1) of the Act. However, counsel rightly conceded that this Court had no power to permit such an amendment. Because the objection decisions were made after 1 March 1992, the provisions of Part IVC of the Taxation Administration Act 1975 (Cth) (``the Administration Act'') were applicable rather than the provisions of s. 190(a) of the Act. Section 14ZZO of the Administration Act confers power on the Court to extend the grounds of objection in an appeal brought directly to it, just as s. 14ZZK of the same Act gives that power to the Tribunal in respect of an objection decision referred to it. But nowhere in the Act is the Court given the power to extend grounds of objection where an application for review has been made to the Tribunal. The Court's jurisdiction, where the matter has been referred to the Tribunal, is limited to that conferred upon it by s. 44 of the Administrative Appeals Tribunal Act, namely, to determining a question of law. Although the Court is empowered by s. 44(4) to make such orders as it thinks appropriate by reason of its decision on that question of law, and the Court has the powers referred to in s. 44(5) of that Act, those powers do not extend to exercising discretions conferred upon the Tribunal by statute and upon the Tribunal alone.

Counsel for Mr Liedig therefore sought to take a different tack. He sought, and was granted, leave to amend the notice of appeal to raise a ground that the Tribunal erred in law in not granting an extension of the grounds of the taxpayer's objection on the basis that it was bound so to do on its own initiative or at least bound to raise the matter and subject to permitting the Commissioner to be heard upon it, to extend the grounds of objection.

It is convenient to deal first with this matter before returning to the questions of law clearly raised on the face of the Tribunal's decision.

The submission commenced with the proposition that the Commissioner, when a matter is before him, is bound to make an assessment in accordance with law, irrespective of the way a taxpayer presents his or her case. That obligation, it is said, extends to the case where the Commissioner considers a taxpayer's objection. So it was said that the Commissioner had an obligation, where the law shows that there is some other reason for upholding the objection than that contended for by a taxpayer, to allow the objection and amend the assessment accordingly.

I do not find it necessary to consider the correctness of these propositions. No doubt the Commissioner has a statutory obligation to collect income tax which is due and no more and no less than that which is due. Whether that translates into the obligations for which the taxpayer contends is a more difficult question. I am prepared to assume, for present purposes, that it does.

Next it was submitted that the Tribunal, for the purposes of the review to it, stands in the shoes of the Commissioner:
Mobil Oil Australia Pty Limited v FC of T (1963) 13 ATD 135 at 145; (1962-1963) 113 CLR 475 at 502 and s. 43(1) of the Administrative Appeals Tribunal Act. So it was submitted that, where it is clear upon the facts that a taxpayer is entitled to a particular deduction, although that deduction is not the subject of the grounds of objection, the Tribunal, like the Commissioner, is bound to apply the law, exercising all the powers of the Commissioner in reviewing the objection decision. Accordingly the Tribunal, in the present case, was bound to allow the objection decision by granting to the taxpayer the deductions which were clearly allowable.

In response to a suggestion from the bench that even if the Tribunal were entitled to act of its own motion to consider whether to extend the grounds of objection under s. 14ZZK(a) of the Administration Act, the principles of procedural fairness would require the Tribunal, at the very least to give the Commissioner a right to be heard on the matter, the submission was altered so as to accommodate such a right. It was said then to be an error of law that the Tribunal had not taken this course and in the result had made an error of law which required the Court to remit the matter back to the Tribunal.

The fallacy in the submission, even if the Commissioner's obligation is as absolute as was suggested, is that the Tribunal does not have all of the powers or obligations of the Commissioner generally. Section 43(1) confers upon the Tribunal the powers and discretions conferred upon the Commissioner but only for the purpose of reviewing the Commissioner's

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objection decision. When it is said that the Tribunal ``sits in the shoes of the Commissioner'', what is meant is indeed what is said by Kitto J in the passage cited below. Speaking of the then Taxation Board of Review in the Mobil Oil case his Honour said (at ATD 145; CLR 502):

``... its function is merely to do over again (within the limits of the taxpayer's objection) what the Commissioner did in making the assessment - not to give a decision affecting the taxpayer's legal situation, but to work out, as a step in administration, what it considers that situation to be.''

(emphasis added)

The Tribunal is a statutory Tribunal. It is empowered to review only those decisions which Parliament commits to it: s. 25(1) of the Administrative Appeals Tribunal Act. Its powers, as s. 25(4) of that Act make clear, are to ``review any decision in respect of which application is made to it under any enactment''. The Administration Act confers upon the Tribunal jurisdiction to review objection decisions: ss. 14ZZ and 14ZZA. Subject to s. 14ZZK, for present purposes it may be said that the task of the Tribunal is to review the decision made by the Commissioner to disallow the objection. That task is therefore purely within the confines of the taxpayer's objection.

It is true that the Tribunal has power under s. 14ZZK on such an application to extend the grounds of objection to which the objection decision relates. But there is no statutory obligation upon the Tribunal to extend the grounds of objection. No doubt if a taxpayer requests it to do so the Tribunal will consider that request and act upon it. It may well be that the Tribunal could suggest to a taxpayer, in an appropriate case, that the grounds of objection should be extended to meet a particular argument which the taxpayer advances. But clearly the principles of procedural fairness would prevent the Tribunal from itself, on its own motion, extending the grounds of objection without hearing both from the taxpayer and the Commissioner.

For the taxpayer to succeed in the present case it would be necessary to show that there was some legal obligation imposed upon the Tribunal, on its own motion, to raise the question of extending the grounds of objection. With respect there is no such obligation. There is conferred upon the Tribunal a power to extend grounds of objection but no obligation is imposed upon it to do so of its own volition. In these circumstances the failure of the Tribunal to consider whether to extend the grounds of objection in circumstances where neither the taxpayer nor the Commissioner has requested it so to do and where the Commissioner has been given no right to advance any argument to the contrary could not involve the Tribunal in having erred in law. This being the case, the amended ground of appeal must fail.

The facts as found by the Tribunal

The reasons for decision of the Tribunal are quite lengthy and replete with extracts of evidence. That is so because the evidence of the taxpayer, only partly corroborated, was in many respects contradicted by the other two significant witnesses in the case, namely the taxpayer's former wife and the taxpayer's former father-in-law. The taxpayer is divorced from his wife and it was clear that there was animosity between the three principal witnesses whose evidence was in conflict. The problem was made more acute by admissions made by Mr Liedig that he had forged various documents and the obvious volte face between the claim for a deduction for salary paid to his spouse shown in the income tax returns and the version of events Mr Liedig presented to the Tribunal. Having perused these extracts from the evidence, a reader might well form the view that the Tribunal would have been uncertain whom to believe and have ultimately concluded that Mr Liedig had not satisfied the onus of showing the assessment to be excessive. This, however, the Tribunal did not do. Rather it made a number of findings of fact favourable to Mr Liedig. Those findings are not challenged by the Commissioner and must accordingly be accepted by me. The question for me to determine is the taxation consequences of the facts as found.

Mr Liedig's former father-in-law was a land broker who, in partnership with Mr Liedig's former mother-in-law, carried on business in South Australia as such. It seems that for some time Mr Liedig worked as an employee of that partnership and received wages based on a minimum share of the profits. His wife also was probably employed by the partnership. In March 1984 Mr Liedig became himself licensed as a land broker under the provisions of the South Australian Real Property Act. As I understand it a licensed land broker performs,

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in respect of land dealings in South Australia, the same type of function as is performed by a solicitor in that State or in those States where solicitors have a monopoly on land dealings. By force of s. 274(1) of the Real Property Act it is clear that a licensed land broker is entitled to charge ``for work done and in reference to applications, transfers, or other dealings relating to land...''.

The Tribunal found that an agreement was reached between Mr Liedig and his father-in- law (one would have assumed that the mother- in-law as a partner might have had some role to play as well) to sell to Mr Liedig the goodwill and other assets of the land broking business carried on by the father-in-law and the mother- in-law. A purchase price of $130,000 was arrived at but $65,000 of that amount was forgiven because the agreement between Mr Liedig and the father-in-law was that Mr Liedig would acquire the business as trustee and thereafter conduct it for the benefit of his wife and himself equally. Little of the balance appears to have been paid, but nothing turns on that here.

The Tribunal's findings are not quite as clear as the above remarks suggest. It found that the father-in-law ``intended W to benefit from the business at all relevant times both as to capital and income...''. It found [at ATC p 423] also:

``... that during the negotiations between T and FL for the transfer of the business, it was expressly agreed between them orally that the income generated by the business would be beneficially owned by T and W in equal shares.... [I] reject FL's vehement denials that the business was sold exclusively to T for $130,000.''

The Tribunal then cited the question to be determined in the following way [at ATC pp 423-424]:

``... assuming that the facts as found by me, i.e. that T acquired Landbrokers on terms that he and W (through her father) expressly agreed that the business would be owned by T and W in equal shares as to both assets and income, so that the relationship between T and W can be said to involve an express trust, will equity regard them as beneficially entitled to the assets and income of the business in equal shares?''

T stands for the taxpayer (the applicant), W for his former wife and FL for his former father-in- law.

These findings, and that is the extent of the relevant findings made by the Tribunal, were accepted by the Commissioner as involving the conclusion that the land broking business formerly carried on by Mr Liedig's father-in- law was acquired for consideration by Mr Liedig, that that acquisition was as trustee for himself and his wife and that thereafter Mr Liedig carried on the business in his trustee capacity for himself and his wife.

The Tribunal's reasons

The Tribunal's reasons were brief. Having found that Mr Liedig operated the land broking business as a sole trader so that the income generated depended upon the services he performed as a land agent, the Tribunal expressed the law in the following terms [at ATC p 424]:

``... it seems to me that, for tax purposes, one cannot use a trust in this case, whether express, implied or constructive, in order to divert income from this taxpayer's personal exertion; the income remains his income, irrespective of the method that may be adopted to dispose of it, and even if there is no intention to reduce the incidence of tax. It follows that such income cannot constitute trust income, not subject to tax in the hands of the trustee in reliance on sec 96 of the Act, which provides:

• `Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.'

... In the result, what is alleged to constitute W's share of the profits from the business was and remains the income derived by T by means of his own exertion, being his earnings as a land broker, and does not constitute the income of an income- producing property or income of a trust estate.

... I have therefore concluded that as I understand the law, T cannot create a right to receive future income from his personal exertion. Whilst he can bind himself to hand over future income, it remains his income for tax purposes.''

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In its reasons the Tribunal recognises that the present case was complicated by the finding that a trust existed in respect of the assets of the land broking business acquired from the father- in-law. On this matter the Tribunal said [at ATC p 424]:

``... on one view, the income flowed in part from the assets and in part from the effort of its sole legal owner. However, this point was not raised in argument. In any event, it seems to me that on the evidence of both T and FL, there was little goodwill and even less equipment, so that the contribution of the assets to the income would not only be insignificant but, in any event, it would be almost impossible to disentangle `income from property' from `income from personal exertion'.''

Perhaps because no argument was addressed to this particular point the Tribunal overlooked evidence reviewed in an earlier part of its reasons where the father-in-law discussed, in cross-examination, the way in which the agreed purchase price was arrived at and where counsel for the Commissioner succeeded, so the Tribunal appears to suggest, in demonstrating that the true value of the business (largely goodwill) was in the order of $100,000.

Is there a special principle of tax law as outlined by the Tribunal?

Underlying the Commissioner's submissions and indeed the decision of the Tribunal is the theory that there is some principle of income tax law which brings about the result that a person acting in the capacity of trustee and carrying on a business which involves the trustee in performing services derives that income beneficially or, at least is not protected from the obligation to pay income tax upon it by force of s. 96 of the Act. That there is such a principle is said to follow from comments to be found in certain New Zealand decisions such as
Spratt v Commissioner of Inland Revenue (NZ) (1963) 13 ATD 308 at 310-311; [1964] NZLR 272 at 277;
Kelly v Inland Revenue Commissioner (NZ) [1969] 1 ATR 380 at 384 and in dicta in various judgments of the High Court particularly that of Kitto J in
Stewart Dawson Holdings Pty Ltd v FC of T (1965) 14 ATD 91 at 92; (1965) 39 ALJR 300 at 301; of Menzies J in
Peate v FC of T (1962) 12 ATD 507 at 509; (1962-1964) 111 CLR 443 at 446 and Gibbs J in
Hollyock v FC of T 71 ATC 4202 at 4204; (1971) 125 CLR 647 at 653-4 and in this Court by Beaumont J in
Tupicoff v FC of T 84 ATC 4851 at 4860-4861; (1984) 4 FCR 505 at 519.

It must, in fairness, be said that the Commissioner conceded that there was no case in Australia which had applied a general principle expressed as broadly as the Commissioner would have it expressed in the present case. At least in the Australian cases it had been unnecessary to decide whether such a principle existed, let alone the boundaries of such a principle. The matter had been the subject of some argument in the High Court in the case of
FC of T v Everett 80 ATC 4076; (1979-1980) 143 CLR 440 where the existence of such a principle was accepted by Murphy J, who dissented in that case. Speaking of an assignment of an interest in a partnership treated as involving an assignment of the fruits of the personal exertion income of the partnership, his Honour said (at ATC 4084; CLR 455):

``In my opinion, the provision dealing with income derived from personal exertion should be read with those dealing with trust income so that what in reality is income from personal exertion is not able to be diverted for tax purposes by a device such as that adopted here.''

A principle expressed in those terms was clearly not accepted by the majority comprising Barwick CJ, Stephen, Mason and Wilson JJ.

The judgment of the majority proceeded upon the basis that the right of a partner to receive a due proportion of partnership profits was not a right separate and severable from his share in the partnership. When a taxpayer assigns his or her partnership share in whole or in a lesser proportion than the totality of that share, the taxpayer assigns the whole or a part, as the case may be, of his or her chose in action, the assignment carrying with it the right to receive the whole or proportion, as the case may be, of the profits attributable to that portion. The assignment in Everett's case brought about the result that the assignment was effective immediately and conferred upon the assignee an immediate equitable entitlement to the income referable to the share assigned as might subsequently be derived. The income derived became net income of the trust estate, within the meaning of s. 95 of the Act and the assignor, as trustee, was not liable to tax upon it. There was an immediate trust established of

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a proprietary right which yielded or earned future income so that the income was accurately described as income of the trust estate.

In the course of their joint judgment in Everett's case the majority considered Kelly's case, the dicta in Stewart Dawson Holdings, the comments of Menzies J in Peate's case,
Parkins v Warwick (Inspector of Taxes) (1943) 25 TC 419 at 424 and the comments in Spratt's case. Of the general proposition that taxation immunity could not be achieved by an assignment of earnings, their Honours said that the Commissioner's argument had not succeeded (at ATC 4082; CLR 453):

``... in identifying the origin of the proposition or, indeed, the precise area of its operation.''

Commenting on the cases their Honours then said (at ATC 4083; CLR 453-454):

``In some instances, as in Parkins and Spratt, the suggestion seems to be that salary and wages so obviously constitute income of the person to whom they are payable that they do not cease to be income in his hands because they have been assigned to another. An allied suggestion is that an assignment of future income from personal exertion is ineffective to deprive the income of its character as assessable income in the hands of the person who earns it. Another suggestion is that the principle is not confined to assignments of future income and that it extends to present assignments of a proprietary right carrying a right to future income if that future income derives from personal exertion, namely partnership profits. Each of these suggestions gives the principle an application which takes it further than sec. 19 of the Act.

Whatever be its true and its precise limits, we do not consider that the principle applies here. The income of the respondent from the partnership was not income from personal exertion in the sense in which that expression has been used in the cases. There, with the exception of Kelly, it has been usually employed to signify income by way of wages or salary under a contract of employment where the contractual right to receive the income had been incapable of present assignment. It would also apply to the income earned by a sole trader who operates a business and a professional man who practises on his own account. In this context it is correct to say that the taxpayer's remuneration is the product of his personal exertion and that all that he has to assign are his future receipts as distinct from any right to receive those receipts. But this is not true of partners in general or of the respondent as a partner in this case.... Accordingly, it is a misnomer to speak of the respondent's share of the income as having been gained by his personal exertion. Even if it were accurate to so describe it, we cannot think that this in itself would constitute a reason for saying that an assignment of a share in the respondent's interest carrying with it the right to a proportionate part of the partnership profits would not be immediately effective to vest the right to future income in his wife for tax purposes.''

It may be remarked that more recently the Privy Council has considered a factual situation, not unlike that in Everett, on appeal from a decision of the New Zealand Court of Appeal and reached a different conclusion:
Hadlee & Sydney Bridge Nominees Limited v Commissioner of Inland Revenue (NZ) 93 ATC 4099. In so doing the Privy Council expressed complete agreement with two propositions, the first with what was said in dictum by Henry J in Spratt's case at 277 and the second, what was said by Richardson J in the New Zealand Court of Appeal in
Hadlee & Sydney Bridge Nominees Limited v Commissioner of Inland Revenue (1991) 13 NZTC 8116 at 8130. The former quotation was expressed in the following terms:

``No taxpayer can, by way of assignment, escape assessment of tax on income resulting from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it.''

The second quotation approved was in the following terms:

``There is no justification in principle for differentiating between salary and wage earners and professionals whose income is the product of their personal exertion. In either case the person whose personal exertion earns the income derives the income.''

The ratio of the decision was, it would seem that, contrary to the decision of the High Court, an assignment of a partnership interest did not

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affect an assignment of a proprietary interest from which income was derived. I am, of course, bound by the decision of the High Court and to the extent that the two propositions quoted correctly state the law of New Zealand, they could only correctly state the law of Australia to the extent that they are not inconsistent with Everett's case.

With respect to those who might have suggested otherwise, it is hard to conceive of some common law of income tax operating outside the terms of the Act itself. The Act is statutory law and must be interpreted no doubt in accordance with its terms and so as to favour the policy that is enshrined in it. But if there is a statutory provision exempting a trustee from paying income tax, such as s. 96, that section must be given effect to if the case falls squarely within it.

Before analysing the so-called common law principle, it is convenient to set out briefly the relevant statutory provisions.

Section 17 operates to charge income tax at the rates declared by Parliament upon the taxable income derived during the year of income by a person. ``Taxable income'' is defined by s. 6(1) of the Act and the definition makes it clear, in a case such as the present, that taxable income is to be calculated by deducting all allowable deductions from assessable income. A person's assessable income is given content to by the Act. For relevant purposes, s. 25 of the Act defines the assessable income of a taxpayer as including, in the case of a resident taxpayer such as Mr Liedig, the gross income derived directly or indirectly by him from all sources, whether in or out of Australia. That section makes it clear that the income in question must be derived by the taxpayer.

Section 19 deems certain income to be derived, although not actually paid to a taxpayer. Importantly, whatever effect that section may have in a particular case, it operates only when the amount in question is ``income'' of the person which, if paid to him or her, would clearly have been derived by him or her: cf
Howell v FC of T 94 ATC 4186.

It may well be doubted whether income received by a person in a capacity as trustee is income derived by that person: cf para [2.41], Parsons, RW (1985), Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting, Law Book Company. It is not necessary to pursue that issue, at least to the extent that the provisions of Pt. III Div. 6 of the Act deal with trust income.

I have discussed the scheme of Division 6 elsewhere, see for example,
Dwight v FC of T 92 ATC 4192 at 4196-7; (1992) 37 FCR 178 at 183-4 and
Prestige Motors Pty Limited v FC of T 93 ATC 5021 at 5023; (1993) 118 ALR 497 at 499-501. Reference may be made as well to the decision of the Full Court of this Court in
FC of T v Totledge Pty Ltd 82 ATC 4168; (1982) 40 ALR 385, particularly at ATC 4171-4172; ALR 389-390; and the decision of the High Court in
Harmer & Ors v FC of T 91 ATC 5000 at 5004; (1991) 173 CLR 264 at 271. At the risk of some repetition I will restate my understanding of the effect of that Division so far as it impacts upon the present problem. In so doing I omit reference to those provisions which concern themselves with residence and source as unnecessarily complicating the discussion.

The key to an understanding of Div. 6 is the definitional section, s. 95. Relevantly that section defines ``net income'' as:

``... the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income... less all allowable deductions...''

The liability for tax under Div. 6 may be a liability to tax upon the trustee under ss. 98 or 99 (with its correlative s. 99A) or upon a beneficiary under s. 97 or in certain cases under s. 99B. Section 100 operates to avoid double tax in the case of a beneficiary under a legal disability. Whether the liability falls upon the beneficiary or upon the trustee depends largely upon whether there is a beneficiary of the trust estate who is ``presently entitled to a share of the income of the trust estate''. The basic legislative scheme is (omitting the case where a beneficiary, not presently entitled, is under a legal disability) that where there is a beneficiary presently entitled to a share of the income of a trust estate, there is included in that beneficiary's assessable income the same share of the ``net income'' defined in s. 95 (see s. 97). To the extent that there is some part of the income of a trust estate to which no beneficiary is presently entitled, then, to the extent of that same share of ``net income'', the trustee will be liable to be assessed and to pay tax upon it.

What is critical here is that the definition of ``net income'' refers to the ``assessable income of a trust estate'' and the provisions of ss. 97,

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98, 99 and 99A, all refer to the ``income of the trust estate''.

The distinction between ``net income'' (calculated in accordance with s. 95) and ``income of the trust estate'' (required to be determined for the purposes of ss. 97, 98, 99 or 99A) is a distinction between a defined concept for tax purposes, the concept in s. 95, and a concept of ``income'' which refers to the trust law income of that trust estate. Authorities which clarify this point include
Union-Fidelity Trustee Company of Australia Limited v FC of T 69 ATC 4084 at 4090; (1969) 119 CLR 177 at 187; FC of T v Totledge (supra at ATC 4174-4175; ALR 394) and the articles and cases discussed in my judgment in
Davis & Anor v FC of T 89 ATC 4377 at 4403.

It is against this background that s. 96 of the Act must be construed. Section 96 was suggested, by Dixon CJ in
FC of T v Belford (1952) 10 ATD 105 at 106; (1952) 88 CLR 589 at 597, to express:

``... a truism, unless it is intended to exclude liabilities if any which might otherwise be imposed by other prior Acts, but a purpose appears to have been found in it of limiting the liabilities of a trustee to those imposed by the express provisions of the Act specifically dealing with trustees as distinguished from the general provisions.''

Webb J agreed with the reasons for judgment of the Chief Justice. Of the other judges in Belford's case, neither Taylor J, with whose judgment Fullagar J agreed, nor Kitto J expressed any opinion on the matter. However, that view receives support from the judgment of Barwick CJ in Union-Fidelity (supra at ATC 4085-4086; CLR 180-181) where his Honour expressed the view that, because there were no other provisions outside Div. 6 which would render a trustee liable as such to pay income tax on the income of the trust estate, Div. 6 was an exclusive source of the liability of the trustee to pay income tax upon the income of the trust estate. If anything the amendments made to the Division by the Income Tax Assessment Act 1979 (Cth) and subsequently, reinforce that position.

Where a taxpayer earning salary or wages, or for that matter who performs services for reward, purports, for consideration, to assign the income which is to arise under a contract of service or a contract for services, there can be no immediate assignment of any property but merely an agreement to assign future property, such agreement operating to transfer the beneficial interest to the purchaser immediately upon the property being acquired but not before:
Holroyd v Marshall (1862) 10 HL Cas 191 at 211 (11 ER 999 at 1007);
Tailby v Official Receiver (1888) 13 App Cas 523;
Re Lind, Industrials Finance Syndicate Ltd v Lind [1915] 2 Ch 345; and
Palette Shoes Pty Limited v Krohn (1937) 58 CLR 1 at 26-27 per Dixon J. Assuming that the income in question is money, it is only when that money reaches the hands of the trustee that equity seizes upon it and binds the conscience of the assignor to hold it for the assignee. The same would be true if the income arose in the form of a debt in the case of an accruals-basis taxpayer.

Although at the point of time that the income is derived by the assignor, the assignor becomes a trustee of it eo instanto with the time of derivation, the income in question will not be ``income of the trust estate''. The trust estate in such a case comprises only the income and nothing else. That income is not income of any trust estate but is corpus of a trust estate. None of the provisions of ss. 96, 97, 98, 99 or 99A would be capable of operation in such a case. The matter would fall outside the provisions of Div. 6 and the income would be derived by the assignor and be assessable income under s. 25(1) of the Act. It is this analysis which was presented by Kitto J in Stewart Dawson Holdings in support of the proposition that income, with respect to which a trust arises at the moment of derivation, does not answer the statutory description of income of a trust estate. As the majority of the High Court said in Everett (at ATC 4082; CLR 452):

``To use the terminology of sec. 95, it is because the income is the `trust estate' that it cannot be `the net income of' that trust estate.''

That explanation suffices to deal with the great majority of cases which have been cited in support of a proposition that a person cannot assign personal exertion income. It does not deal with other cases, such as the present, where income may be derived by a person as trustee of a trust estate. Many were ultimately dealt with by s. 260 of the Act. Thus Gibbs CJ was content to deal with the facts in Hollyock (at ATC 4206; CLR 658) on the basis that s. 260 applied, the Privy Council in
Peate v Commissioner of Taxation [1967] 1 AC 308 similarly found that

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s. 260 applied and the more recent trilogy of cases in the High Court reported as
FC of T v Gulland; Watson v FC of T; Pincus v FC of T 85 ATC 4765; (1985) 160 CLR 55 clearly indicated the application of s. 260 to the use of trusts to derive income which might ordinarily be described as ``personal service or personal exertion income''.

There is no reason to doubt that Part IVA of the present Act, replacing s. 260 in respect of schemes entered into after 27 May 1981, would have the same result where, having regard to the various matters referred to in s. 177D of the Act, a conclusion would be reached that a person who entered into or carried out the scheme or any part of it did so for the purpose of enabling a taxpayer to obtain a tax benefit in connection with that scheme.

However there may well be many cases outside the field of tax avoidance where the issue becomes more difficult. A good example is the case of a solicitor practising on his or her own account who dies appointing another solicitor as his or her executor. That other solicitor may well be under an obligation to carry on the practice for the benefit of the estate until the practice can be sold. The practice might well have goodwill, some small items of equipment such as telephones, computers and the like, and one or two employees acting as a receptionist and secretary. It has never been suggested that in such a case the income derived by the solicitor as trustee was to be assessed for tax, in the hands of the solicitor, as his or her own income aggregated with any other income which he or she may have. Nor, in my view, would it be correct to say that this is the way the Act operated upon it.

In such a case the executor would be trustee of a trust estate. That trust estate would comprise the goodwill, assets and employment contracts, to which reference has already been made. Although the solicitor personally performed legal services in his or her trustee capacity, the income derived would, as a matter of trust law, be income of that trust estate. It would not have the character of corpus of that trust estate. Section 96 would clearly, in such a case, in my view, operate to exonerate the trustee from any other liability that may exist in the Act, or elsewhere, to pay tax. That exoneration would include any liability that might arise under s. 25 of the Act if it be assumed that s. 25 is capable of including, in assessable income, moneys or amounts not derived beneficially by a taxpayer.

The fact that the Act operates in such a way in a case outside the area of tax avoidance, suggests to me that there can exist no general law doctrine, applicable only for tax purposes, to be found somewhere outside the scope of the Act to the effect that in no case can income, which is ``personal service or personal exertion income'', be derived by a person as trustee in such a way as to exonerate that person from a personal liability to tax arising under the Act outside Div. 6.

In Gulland at first instance, reported at
Gulland v FC of T 83 ATC 4352, a question arose where a unit trust had been established to acquire the business of a taxpayer medical practitioner and thereafter the trustee employed that taxpayer, whether the income remained income of the medical practitioner either by reference to the general law or by reference to s. 260. There had in that case, too, been an acquisition of the goodwill of the medical practice. Kennedy J, discussing a problem arising out of the contract of employment between the trustees and the medical practitioner, distinguished the kind of argument discussed in Stewart Dawson Holdings on the basis that the contract did not create a trust of the future income of the appellant. Because the practice was carried on for the beneficiaries of the trust and no contracts were entered into by the appellant beneficially, his Honour was of the view that Div. 6 operated to exclude, but for s. 260 of the Act, the income derived by the medical practitioner as being taxable to him. His Honour said (at 4368):

``In the present case, the trust was properly constituted. There was property the subject of the trust. If the trustees acquired, as such, the goodwill of the medical practice, they utilised it by conducting that practice. For this purpose, they leased equipment and they employed staff. The benefit of contracts entered into by the appellant with patients of the practice was held in terms of the trust. In my view, the income thereby produced was relevantly income of a trust estate. The fact that the income was primarily generated by the personal exertions of the appellant does not appear to me to require a different answer. There may be found many instances in which income has been generated by persons employed by trustees, and it has not

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ATC 4279

been questioned that the income is relevantly that of a trust estate...''

Thereafter the case was fought on the basis of s. 260.

A similar issue arose in Tupicoff. That case concerned a life insurance agent who resigned his appointment as an agent with an insurance company and procured the appointment in his stead of a corporate trustee, being a trustee of a discretionary trust for the benefit of the taxpayer and members of his family. The taxpayer thereafter took up employment and carried out the same activities as he had previously carried out before, not on his own account, but as employee for the trustee. Again, ultimately, the case was one where s. 260 of the Act was held to apply. Beaumont J, with whose judgment Fisher and Jenkinson JJ agreed, dealt with a submission that, independently of the operation of s. 260, the arrangement between the taxpayer and the company should be ignored as ``an ineffective attempt by the taxpayer to assign future gross earnings - the product of his personal exertion''. His Honour, however, distinguished the cases such as Spratt, or the comments made in Peate's case, on the basis that there had been no assignment of remuneration. The legal source of the trustee's income was the contract of agency. Counsel for the Commissioner sought to distinguish the judgment of Beaumont J on the basis that, in the present case, it could not be said that there was any legal source of the trust income here other than the personal exertion of Mr Liedig. But whatever one may say about that submission, clearly the present is also not a case of an assignment to a third party of remuneration under a contract.

The generality with which the Commissioner seeks to assert the general principle contended for raises, in any event, the issue of what is meant by ``personal exertion'' or ``personal service income'' and how that is to be distinguished from property.

In
Bayly v FC of T 77 ATC 4045 a pharmacy owned by a wife was conducted by the husband who was a pharmacist. The wife was not able to own or conduct a pharmacy because she was not a qualified pharmacist. It was held that the income from the pharmacy was her income and not the income of her husband pharmacist. A similar result was arrived at by Bray CJ of the Supreme Court of South Australia in
Jones v FC of T 77 ATC 4058.

The insurance agent in Tupicoff, whose business comprised canvassing prospective customers to enter into policies of insurance, clearly was deriving income from his personal exertion yet that, of itself, did not bring about the result that the income earned was income of the person whose exertion, coupled with the agency contract, enabled that income to be earned. Where is the line to be drawn? It has never been suggested that income earned by the trustee of a trust carrying on business as a milkman or plumber or an electrician is derived by the person pursuing the respective occupation, yet each involves significant personal service or personal exertion.

The Commissioner's answer before me was that the income had to be a result ``substantially'' of the personal exertion of the taxpayer. How that submission squares with the full Court's decision in Tupicoff is difficult to say. Equally it is difficult to relate to the examples given above. Only where no trust property was involved could the distinction become meaningful.

This difficulty was adverted to by the Deputy President who recognised that there were some trust assets, including goodwill, and that income could be said to flow in part from those assets as well as the skill of Mr Liedig. But the problem is not even as simple as that. A land broker, like a solicitor, may, and probably does, enter into a contract with the client for the performance of work. Ordinarily moneys would not be payable under that contract unless and until the work contracted to be performed had been completed. Those contracts, like the service contracts with staff, the physical assets and goodwill, are all assets of the trust estate. Any income is derived by force of those contracts in just the same way as income was derived by Mr Tupicoff from the contract with the insurance company. The income derived in both cases was probably as much dependent upon personal services as upon the relevant contractual arrangements.

As will by now have become apparent I am unable to discern from any binding case law or any provision of the Act a principle of the width and uncertainty propounded for by the Commissioner. If such a principle exist, it must need be propounded by an appellate court dealing with the facts of a case apart from tax avoidance. It is not for a single judge to propound.

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ATC 4280

It follows that I would allow the appeal and set aside the decision of the Tribunal and set aside the objection decisions and instead direct the Commissioner to allow the objections and issue amended assessments in accordance with law. The Commissioner must pay the applicant's costs of the appeal.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The decision of the Administrative Appeals Tribunal be set aside.

3. The objection decisions of the respondent be set aside.

4. The Commissioner be directed to allow the applicant's objections and issue amended assessments in accordance with law.

5. The respondent pay the applicant's costs of the appeal.