• The impact of this case on ATO policy is discussed in Decision Impact Statement: Murdoch v Commissioner of Taxation (Published 23 July 2008).

MURDOCH v FC of T

Members:
Lindgren J
Stone J
Jacobson J

Tribunal:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2008] FCAFC 86

Decision date: 28 May 2008

---

Lindgren, Stone and Jacobson JJ

Introduction

1. The issue in this appeal from the Administrative Appeals Tribunal (Tribunal) is whether the Tribunal erred in law in deciding that a payment of $85,087,176 (Lump Sum) to the applicant in the year ended 30 June 1995 (1995 year) pursuant to a Deed of Release and Agreement dated 28 November 1994 (Settlement Deed) constituted income of the applicant within the meaning of s 25(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) so as to form part of her assessable income for the 1995 year.

2. According to a notice of contention, the respondent (Commissioner) contended that if the Court should find in favour of the applicant on that issue, it should hold that the Lump Sum was included in the applicant's assessable income because it was a capital gain under Pt IIIA of the ITAA 1936, and was included in her assessable income by s 160ZO of that Act. In view of its decision in favour of the Commissioner under s 25(1), the Tribunal did not consider that issue. In the event, the Commissioner did not press the contention before us.

Facts

3. The primary facts are not in dispute. The following account of them is taken from the applicant's submissions (the submissions wrongly use "appellant" and we have substituted "applicant"):

• "(1) In 1936 and 1937, the applicant's late husband, Sir Keith Murdoch, established eight inter vivos settlements for his eldest three children being Helen, Mr Rupert Murdoch (Rupert Murdoch) and Anne. Sir Keith Murdoch provided for his youngest child, Janet, by a testamentary trust which is not presently relevant. Under each of these trusts (the Trusts), the applicant was either the sole income beneficiary for her life or was one of several income beneficiaries (the others being her children) for her life. The remainder interest was held by either one or more of the applicant's children or their issue. The gift of income under each of the Trusts was in substantially the same form. In the case of the Trust created by the Deed of Settlement dated 15 February 1936 under which the applicant was a life tenant and Rupert Murdoch the remainderman, the gift of income was as follows:

  'THE Trustees shall hold the trust fund IN TRUST to pay the income arising therefrom to the wife for life for her own use and benefit absolutely and upon the death of the wife IN TRUST as to both the capital and income of the Trust Fund for the son conditionally upon his attaining the age of twenty-five years.'

• (2) Until 1983, The Trustees Executors and Agency Company Ltd was the trustee of each of the Trusts. In that year it was replaced as trustee by the applicant, Rupert Murdoch and Jack Kennedy. In 1991 the applicant and Jack Kennedy were replaced as trustee by Actraint No 119 Pty Ltd (a company the shareholders and directors of which at all material times were the applicant and Jack Kennedy).
• (3) Throughout the period from the death of Sir Keith Murdoch in 1952 to the date of execution of the Reorganisation Agreement referred to below, the principal assets of each of the Trusts were shares in Cruden Investments Pty Ltd (Cruden Investments), which in turn held shares in News Ltd, and from 1979, The News Corporation Ltd (News) when it became the ultimate holding company of News Ltd. Rupert Murdoch has at all material times been the Chief Executive Officer of the News group of companies.
• (4) On 8 November 1991 a Reorganisation Agreement was entered into between, among others, the applicant, Actraint No 119 Pty Ltd and Rupert Murdoch, under which the applicant surrendered her life interests under each of the Trusts except for four of the trusts in which Rupert Murdoch held the remainder interest (the Subject Trusts).
• (5) In around April 1994, Mr Atanaskovic was asked to advise on whether the applicant may have a valid claim against Rupert Murdoch and the other trustees of the Trusts as a result of the investment policy adopted by them in their capacity as trustees of the Trusts. Mr Atanaskovic sought advice from Mr D. Heydon QC (as he then was) and the Wyatt Company Pty Ltd, a firm of consulting actuaries (Wyatt).
• (6) On or about 7 June 1994 Mr Heydon provided a written opinion (first opinion) regarding the nature of a potential claim by the applicant against the trustees of the Trusts based upon his instructions that the applicant had derived much less income by virtue of her life interest than if the trust fund had not been invested in News shares because the dividend yield on News shares had been very low relatively to the earnings of blue chip shares in industrial companies quoted on the Stock Exchange, though there had been a considerable rise in the value of the News shares.
• (7) It subsequently became apparent that the instructions concerning the income derived by the applicant on which Mr Heydon had advised were incorrect. In July 1994, Wyatt provided a report which concluded that 'in all periods the accumulated value of the actual gross income received from [the Trusts] is well in excess of the gross income we estimate could have been received had a 'typical' investment policy been applied since mid 1952 instead of the actual investment policy'. This was because despite the relatively low dividend yield on News shares over the period since 1952, there was substantial growth in dividend income due to the increase in the number of shares on issue resulting from bonus or new shares issues.
• (8) On 10 October 1994, Wyatt provided a further report which dealt only with the Subject Trusts (Wyatt Report) and concluded that the relative interest of the applicant as tenant for life under the Subject Trusts, compared to that of Rupert Murdoch as the remainderman, was significantly less than could be expected at various dates had a more 'typical' investment policy been followed by the trustees of the trusts.
• (9) On 11 October 1994 Mr Heydon provided a further written opinion (second opinion) in which he advised on the likelihood of success of a claim by the applicant in light of the analysis contained in the Wyatt Report. Mr Heydon advised that:
  • (a) 'the disparity now appearing between the relative position of the income beneficiary under the actual [investment] policy and the relative position of the income beneficiary under the notional [investment] policy, if it resulted wholly or partly from breaches of trust by the trustees, can be described as analogous to overpayment of one beneficiary at the expense of another within the principles discussed on pages 20-21 of [the first opinion]';
  • (b) the problem referred to in para (a) ' is also a problem which may be the result of the trustee/remainderman having had goals which made investment policy adopted desirable, and having persuaded the other trustees (at least since 1983 and perhaps earlier) of the merits of that policy, or having not intervened with them to change it';
  • (c) if the evidence in contested litigation supported this view, the principles discussed on pages 22-23 of the first opinion 'may operate not merely to permit an action for breach of trust against the trustees, but to create a charge in the nature of a constructive trust over the interest of the remainderman in the capital, being a charge capable of being enforced by sale';
  • (d) there was 'a real possibility that the adoption of the [investment] policy was at various points a breach of trust induced by the remainderman' with the consequence that it would need to be 'accounted for by him and held by him in trust for the other beneficiaries, even though the gain could not have been made by lawful means, and even though the conduct in question has caused the other beneficiaries to be better off than they otherwise would have been:
    Phipps v Boardman [1967] 2 AC 46';
  • (e) the analysis in the Wyatt Report 'shows that the gain made by the trustee/remainderman is, on his assumptions, $193m for the first two [Subject Trusts] and $83m for the other two';
  • (f) in the circumstances it would not be unreasonable for the applicant to seek to settle the potential dispute in relation to the Subject Trusts on terms involving a payment to the applicant of $85 million or a transfer of assets of that value in consideration for her giving a release of all claims against the trustee/remainderman for the past breaches of trust and consenting to the maintenance by the trustees of the current investment policy.
• (10) The applicant was subsequently advised, on the basis of the opinions provided by Mr Heydon and the Wyatt report, that she had 'an entitlement to make a claim on the capital of the trust' but was not advised at any time that she had 'any right to claim for loss of income' and 'did not believe that any decision of the trustees caused me to lose income'.
• (11) On 28 November 1994, the applicant and the persons who were or had been trustees of the Subject Trusts since 1983 (being Rupert Murdoch, Mr Kennedy and Actraint No 119 Pty Ltd) entered into the Settlement Deed and the applicant was paid the lump sum on the same day by cheque.
• (12) As contemplated by the Settlement Deed, the trustees funded the payment of the lump sum by the realisation of shares in Cruden Investments forming part of the corpus of the Subject Trusts. This was done pursuant to a court approved reduction of capital. The shares, which were the very assets which Mr Heydon advised that the applicant may have an interest in, were assets acquired by the trustees in the Subject Trusts before 20 September 1985."

The Settlement Deed

4. The Settlement Deed contained, inter alia, the following recitals:

• "I. The trustees of the Trusts from time to time since the death of the Settlor have followed an investment policy of investing the funds the subject of the Trusts almost exclusively in shares in companies, Cruden Investments Pty Limited ('Cruden Investments') and Cruden Holdings Pty Limited, which are not authorised trustee investments under Australian legislation relating to trustees (such investment policy being referred to below as the 'Investment Policy').
• J. Dame Elisabeth has claimed that:
  • (i) the pursuit of the Investment Policy by the trustees of the Trusts:
    • • has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the Trusts; and
    • • involved significant risk for the beneficiaries of the Trusts, which risk was not properly rewarded in the case of Dame Elisabeth to the extent that she only had an income interest under the Trusts;
  • (ii) in pursuing the Investment Policy, the trustees of the Trusts from time to time have since the death of the Settlor breached their trust duties to Dame Elisabeth as a life tenant;
  • (iii) Mr Murdoch, a man generally regarded as being of outstanding ability and force of personality with an extraordinary record of business success, as a trustee of the Trusts and holder of the whole of the remainder interest in the Subject Trusts, had substantial responsibility for such breaches of trust since May 1983 because he was pursuing goals not properly goals of the Trusts, but which goals required the Investment Policy to be pursued and inter alia had the effect of improving Mr Murdoch's financial position as beneficiary in remainder under the Subject Trusts; and
  • (iv) that in the premises, a constructive trust has arisen in respect of eighty per cent or more of the beneficial interest in the assets of the Subject Trusts, constituting the advantage to Mr Murdoch of the Investment Policy having been pursued in lieu of a more appropriate investment policy, and/or Dame Elisabeth has the benefit of a charge over the assets of the Subject Trusts which Dame Elisabeth is not entitled to be paid as income of the Subject Trusts accompanied by a right to have sufficient of the corpus of the Subject Trusts sold to compensate Dame Elisabeth for the breach of trust and/or to ensure that the benefit of such advantage is made over to her and does not flow to Mr Murdoch.
• K. The Current Trustees (including Mr Murdoch) and Mr Kennedy do not, and Mr Murdoch as beneficiary in remainder under the Subject Trusts does not, admit any such breach of trust or the existence of any such constructive trust, or charge, or right of sale. With a view to avoiding unnecessary disputation and any need for litigation, however, the Current Trustees (including Mr Murdoch) and Mr Murdoch as such beneficiary in remainder are desirous of compromising the claims made by Dame Elisabeth.
• L. It has therefore been agreed that Dame Elisabeth, as the life tenant under the Subject Trusts, having shared in the risk of investing in the investments of the Subject Trusts, and in consideration of her releasing:
  • (i) The Current Trustees and any former trustees under the Trusts from any claims by her against them for breach of trust or otherwise in relation to following the Investment Policy in relation to the investments of the funds of the Subject Trusts and of the other of the Trusts; and
  • (ii) The assets of the Subject Trusts and the other of the Trusts (being assets which Dame Elisabeth is not entitled to be paid as income of the Trusts) from any claims Dame Elisabeth has or may have upon or in respect of them other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she may have in the capital and income of the other of the Trusts,

  should be entitled to the following:

  • (iii) that the ordinary shares in Cruden Investments (the 'Cruden Investments Shares') comprising the assets of the Subject Trusts should be in whole or in part realised (by way of sale of some of such shares or partial return of capital on all of such shares) to raise $85,087,176 in Australian currency; and
  • (iv) that such $85,087,176 be paid to Dame Elisabeth or as she may direct as the absolute property of Dame Elisabeth to deal with as she in her full and complete discretion may determine."

5. The operative provisions of the Settlement Deed contained the following provisions:

• "2. LIFE TENANT RELEASES, AUTHORITIES AND REQUESTS
  • 2.1 Subject to the other provisions of this deed, Dame Elisabeth, in her capacity as the Life Tenant, hereby releases and discharges each other party hereto from any claims, proceedings, obligations to account and other liabilities for or in relation to (including without limitation any loss arising to or profit of or other benefit to any other party hereto in respect of) any or all of the following which, had this deed not been entered into, such party would have had against such other party or such other party may have had against such party as the case may be:
    • (a) the pursuit of the Investment Policy in relation to the investment of the funds of the Trusts and the failure of the Trustees at any time and from time to time to consider pursuing to pursue another policy or otherwise to realise, convert and reinvest the funds of the subject of the Trusts or to consider doing so;
    • (b) any breach by the Trustees of the duties owed by the Trustees to the beneficiaries under the Trusts;
    • (c) any right of action, whether at law or in equity, Dame Elisabeth has or may have against Mr Murdoch as a beneficiary of any of the Trusts in relation to any of above; and
    • (d) any right of action Dame Elisabeth has or may have upon or in respect of the Trust assets other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she has or may have in the corpus or income of the other of the Trusts according to the express terms of the documents creating or recording the terms of the Trust.
  • 2.2 Dame Elisabeth hereby authorises and requests the Trustees to continue to carry on the Investment Policy and undertakes not to bring any claims or proceedings against any of the Trustees in respect thereof.
• 3. TRUSTEE UNDERTAKINGS

  The Current Trustees hereby undertake:

  • (a) promptly to raise the Settlement Amount by selling some of the Cruden Investments shares or participating in a reduction and return of capital by Cruden Investments on and in respect of the Cruden Investments Shares; and
  • (b) to pay to Dame Elisabeth the Settlement Sum on the Settlement Date.
• 4. REMAINDERMAN REQUEST AND AUTHORITY

  Mr Murdoch, as beneficiary in remainder under the Subject Trusts, requests and authorises the Current Trustees to observe and perform their undertakings in clause 3 hereof."

The expression "Settlement Amount" was defined in the Settlement Deed to mean $85,087,176 in Australian currency, that is to say, the Lump Sum.

The reasons of the Tribunal

6. Under the heading "Governing principles", the Tribunal stated:

• 18. Whether a receipt of money is income or capital is determined by the character of the receipt in the hands of the taxpayer (
  Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J;
  GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136-137).
• 19. Where a taxpayer provides consideration, "the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not" (
  Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 472 per Brennan J). Where the consideration is discharging a cause of action, the character of the cause of action determines the character of the receipt (Federal Coke at 472;
  Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1989) 20 FCR 288 at 309). Compensation or damages generally acquire the character of that for which it compensates (
  Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540).
• 20. In determining the nature of a payment under an agreement, both the agreement itself and the circumstances surrounding its execution, its operation and the receipt of the money in question must be examined (Federal Coke at 460 per Bowen CJ; Allied Mills at 309-310).
• 21. If a payment is received on revenue account, the position will not be altered merely because the source of the payment is capital, including the capital of a trust (
  Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608, especially at 627 per Dixon J).

7. The Tribunal concluded that the lump sum was income on the basis that it was "compensation for lost income". The learned President stated (at [1]):

"Although the lump sum was paid out of capital, I have decided that it was received as income. The only entitlement of the taxpayer was an entitlement to income and the payment remained income, or compensation for lost income, though paid out of capital."

His Honour also stated (at [9]):

"I have concluded that the taxpayer's claim must fail and that the receipt of the lump sum was correctly assessed as income. The taxpayer's only entitlement under the trusts was to income. Any charge or constructive trust arising out of any failure of the trustees to properly administer the trust could only be compensation for lost income. This must be so, even if the amount of the lump sum was calculated by reference to the swelling of the capital value of the trusts' investments and not by reference to income not paid. Accordingly, the lump sum was received as income and not as capital."

and (at [35]):

"The passages in the Queen's Counsel's first opinion suggest that any remedy for breach of trust flowing from improper exercise of the power of investment would reflect lost income. In that I think he was right. As compensation for breach of trust, the lump sum payment can only reflect lost income. Accordingly, the payment was received by the taxpayer on income or revenue account."

8. In support of his conclusion that the Lump Sum was a substitute for income, the learned President referred to the following matters:

• (a) The consideration supplied by the applicant for the Lump Sum was described in the recitals and specified in the operative provisions of the Settlement Deed, and was said to be supplied by her "in her capacity as the Life Tenant", and the only claims she might have had in that capacity were claims in respect of the obligations owed to her in relation to her entitlement to income (at [24]);
• (b) The two opinions of Mr Heydon QC, while they provided some evidence of the circumstances surrounding the execution of the Settlement Deed, were of little relevance (at [17]);
• (c) The decision in
  Phipps v Boardman [1967] 2 AC 46, relied on by Mr Heydon QC (as his Honour then was) in his second opinion, did not assist the applicant for two reasons: first, the conduct giving rise to the charge or trust was quite different in that case; and, second, no question of a charge or trust directly in favour of a beneficiary arose in that case (at [33]).

The parties' submissions on the appeal

9. The applicant did not challenge the correctness of the passages set out at [6] above as general statements of principle. Rather, she challenges the Tribunal's application of them.

10. It is common ground that the Lump Sum is not assessable under s 26(b) and Div 6 of Pt III of the ITAA 1936. The only question is whether the Lump Sum formed part of the applicant's income according to ordinary concepts and therefore formed part of her assessable income within s 25(1) of the ITAA 1936. The applicant submits that the Tribunal wrongly characterised the Lump Sum as compensation for lost income. She submits that according to the Settlement Deed, and the surrounding circumstances consisting of the content of the second opinion of Mr Heydon QC and the Wyatt Report, she was not making, and did not give up, a claim in respect of a shortfall in the income to which she was entitled as Life Tenant. Rather, the claim that she was making and gave up was a "
Phipps v Boardman claim", being a claim that Rupert Murdoch, as trustee/remainderman, account to her for a benefit he had obtained in breach of trust, and a consequential claim that she was entitled to the benefit of a constructive trust or charge over the assets constituting the trust estate.

11. The Commissioner, on the other hand, defends the Tribunal's reasoning. The Commissioner emphasises that the capital nature of the source of the payment of the Lump Sum is irrelevant to its characterisation in the applicant's hands. The Commissioner submits that whether or not Mr Heydon QC was correct to conclude that the applicant had the benefit of a constructive trust by way of charge on Mr Murdoch's interest in the corpus of the trust estate, the applicant did not become, and the Lump Sum was not paid to her as, a corpus beneficiary. Rather, with the assent of the corpus beneficiary, monies for which the trustees (of whom the corpus beneficiary was one) were accountable to him were applied to discharge the in personam obligations of the trustees to the applicant. Those obligations were in respect of income.

Consideration

12. It is important to note that:

• • the Commissioner does not contend that the bargain expressed in the Settlement Deed was illusory or a sham;
• • the case is not one of a determination by the Commissioner under Pt IVA of the ITAA 1936; and
• • it is common ground that where a taxpayer provides consideration in the form of a release of a claim, the consideration, that is to say, the release, "will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not":
  Federal Coke Co Pty Ltd v Federal Commissioner of Taxation 77 ATC 4255; (1977) 15 ALR 449 at 472 per Brennan J;
  Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation 89 ATC 4365; (1989) 20 FCR 288 at 309.

13. With respect, we do not think that the Lump Sum was compensation for the release of a claimed entitlement to that which would have been assessable income: cf
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540;
Federal Commissioner of Taxation v Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199;
Federal Commissioner of Taxation v Rowe 97 ATC 4317; (1997) 187 CLR 266 at 276.

14. The claim made by the applicant appears in recital J and cl 2.1 of the Settlement Deed (set out at [4] and [5] above, respectively). We think it fair to characterise the claim given up as a
Phipps v Boardman claim.

15. In
Phipps v Boardman, the House of Lords applied a principle that it had recognised in
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (
Regal (Hastings) Ltd v Gulliver is reported as a note to
Phipps v Boardman [1967] 2 AC 134) following a line of cases perhaps led by
Keech v Sandford (1726) Sel Cas T King 61 (25 ER 223). In summary, that line of authority is to the effect that a trustee or other fiduciary is accountable for a profit he or she has made from a breach of fiduciary duty, even though the profit is one that the beneficiary to whom the trustee or other fiduciary is liable to account could not have made.

16. In
Keech v Sandford a lease of the profits of a market was held by a trustee for the benefit of an infant. Before the expiration of the term, the trustee sought a renewal of the lease for the benefit of the infant. The renewal was refused. The trustee then sought and obtained a lease in favour of himself. Lord Chancellor King held that the trustee held the lease upon trust for the infant. His Lordship ordered that the trustee assign the lease to the infant and account to the infant for the profits made since the lease had been granted to the trustee, and that the trustee be "indemnified from any covenants comprised in the lease" (at 62 (ER 224)). The ground of the decision was the general public interest in the strict enforcement of the duties of trustees. The Lord Chancellor said (at 62 (ER 223)):

"Though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that the rule should be strictly pursued, and not in the least relaxed …"

17. Similarly, in
Ex parte James (1803) 8 Ves Jun 337 (32 ER 385), a solicitor to the Commission of Bankruptcy purchased an estate of a bankrupt from the surviving assignee. Lord Chancellor Eldon stated (at 345 (ER 388)):

"This doctrine as to purchases by trustees, assignees, and persons having a confidential character, stands much more upon general principle than upon the circumstances of any individual case. It rests upon this: that the purchase is not permitted in any case, however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases."

The solicitor and the assignee were held to be not entitled to buy for their own use dividends forming part of the estate in bankruptcy. Lord Eldon LC referred to
Keech v Sandford (although not by name).

18. In
Regal (Hastings) Ltd v Gulliver, Regal (Hastings) Ltd (Regal) sued five former directors (and its former solicitor, Garton) of Regal for an amount representing profits made by them upon their acquisition and sale of shares in Regal's subsidiary, Hastings Amalgamated Cinemas Ltd (Hastings). Regal was successful (except against Garton, who was held to have acted with the knowledge and consent of Regal, and one of the directors, Gulliver, referred to below, who did not himself make any profit) even though it could not itself have made those profits.

19. The reason Regal could not have made the profits was that essential to the making of them was the finding of funds to enable leases of two cinemas to be taken by Hastings. Regal could see its way clear to subscribe only £2,000 for shares in Hastings. However, it was agreed that each of four of the directors and Garton would apply for £500 worth of shares in Hastings, and that the fifth director, Gulliver, would "find" people to take up £500 worth of shares, thereby enabling Hastings to take the leases. This enured to the benefit of both Regal, the four directors (that is, the directors other than Gulliver) and Garton. It enabled the shares held by the four directors and Garton in both Regal and Hastings to be sold at a profit. It was when Regal was under the control of a new board of directors that it sued the five former directors and Garton.

20. We come now to
Phipps v Boardman. The facts are complex and we need not summarise them in detail. The case concerned a fully administered deceased estate. The trustees held shares upon trust to pay an annuity to the deceased's widow and the residuary estate for his children in specified proportions. Boardman was the solicitor for the trustees. Thomas ("Tom") Edward Phipps was one of the children. Boardman and Tom Phipps, using information that Boardman had obtained in the course of representing the trustees, acquired some of the shares with the consent of the other residuary beneficiaries (the widow had died). The result was that Boardman and Tom Phipps made a substantial profit. But so did the trust, since the trustees remained shareholders too.

21. The plaintiff, John Anthony Phipps, was entitled to 5/18ths of the trust assets. He sought a declaration that Boardman and Tom Phipps held the shares which they had acquired as constructive trustees, as to 5/18ths for him, and an order for an account of the profits they had derived from the transaction. He succeeded before the primary Judge, the Court of Appeal and the House of Lords (by a 3:2 majority), although Boardman and Tom Phipps were entitled to payment on a liberal scale for their work and skill.

22. The following passage from the speech of Lord Cohen captures the view that prevailed (at 104):

"I desire to repeat that the integrity of the appellants is not in doubt. They acted with complete honesty throughout and the respondent is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as the result of the action taken by the appellants in March, 1959, in purchasing the shares at their own risk. As the last paragraph of his judgment clearly shows, the trial judge evidently shared this view. He directed an inquiry as to what sum is proper to be allowed to the appellants or either of them in respect of his work and skill in obtaining the said shares and the profits in respect thereof. The trial judge concluded by expressing the opinion that payment should be on a liberal scale. With that observation I respectfully agree."

Lord Hodson, also in the majority, stated (at 112):

"I agree with the decision of the learned judge and with that of the Court of Appeal which, in my opinion, involves a finding that there was a potential conflict between Boardman's position as solicitor to the trustees and his own interest in applying for the shares. He was in a fiduciary position vis-à-vis the trustees and through them vis-à-vis the beneficiaries. For these reasons in my opinion the appeal should be dismissed; but I should add that I am in agreement with the learned judge that payment should be allowed on a liberal scale in respect of the work and skill employed in obtaining the shares and the profits therefrom."

23. The rule recognised in
Phipps v Boardman has been accepted as forming part of the law in Australia. After referring to, inter alia,
Phipps v Boardman, Deane J said in
Chan v Zacharia (1984) 154 CLR 178 at 199:

"Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see
Keith Henry & Co. Pty. Ltd. v Stuart Walker & Co. Pty. Ltd. [(1958) 100 CLR 324 at 350]. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed."

(See also
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 392-395 per Gibbs J;
Warman International Ltd v Dwyer (1995) 182 CLR 544 at 556-562; and
Maguire v Makaronis (1997) 188 CLR 449 at 468-469.)

24. In his second opinion, Mr Heydon QC thought the principle recognised in
Phipps v Boardman was arguably applicable to the circumstances of Mr Murdoch's dealings with the trust estate. Mr Murdoch clearly stood in a fiduciary relationship to the applicant. If the applicant could prove the matters recited in paras (i), (ii) and (iii) of Recital J of the Settlement Deed (see [4] above), a
Phipps v Boardman claim for an accounting would be made out. It may be that there would have to be a substantial allowance to Mr Murdoch, as there was to Mr Boardman and Tom Phipps.

25. The Commissioner relies on the reference to the applicant's status as Life Tenant in the Settlement Deed but we do not think this is to the point. That reference merely explains the basis of the existence of the fiduciary duty. What the applicant would have received would have been a sum representing the profit or gain made by Mr Murdoch, notwithstanding that she would have had no entitlement to it under the terms of the trust.

26. We say nothing about the likelihood of success of the claim that the applicant made: it is not disputed that she made it, and it is not disputed that it is the character of that claim and its notional fruits that determine whether the Lump Sum (being the consideration for release of that claim) was income derived by the applicant.

27. In our respectful opinion, the Tribunal erred in failing to characterise properly the character of the claim that the applicant gave up and, therefore, the character (income or not) of the Lump Sum that she received for giving it up. The applicant's claim was to an accounting for a capital profit or gain made by Mr Murdoch and to an entitlement to a constructive trust over the assets of the trust estate, and she was paid the Lump Sum in satisfaction of those claims. The Lump Sum was not income.

Conclusion

28. For the above reasons, the appeal should be allowed and the orders sought in the application should be made.