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

48 CLR 26
1932 - 0804A - HCA

(Judgment by: Dixon J)

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

Court:
High Court of Australia

Judges: Gavan Duffy CJ
Rich J
Starke J

Dixon J
Evatt J
McTiernan J

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

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

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

Sydney


Judgment by:
Dixon J

During the year ended 30th June 1928 the beneficial interest in the trust property, as to three undivided one-sixth parts, stood limited to tenants for life and remaindermen, and, as to the other three undivided one-sixth parts, stood vested in possession in remaindermen indefeasibly.  The trustee was empowered by the trust instrument to lease realty for terms not exceeding ten years at such rent as the trustee should think fit without taking anything in the nature of a fine or premium therefor.  The trust estate included some licensed premises for which the trustee received a tender for a lease of seven years at a weekly rent of PD6 and at a premium of PD3,300.  Such a lease was outside the power (see Booth v  a'Beckett, [F13] at p. 684; Clark v  Smith, [F14] at p. 369; Bowes v  East London Water-works, [F15] at p. 875; In re Mallen.) [F16]   However, upon an ex parte application, made apparently under s. 69 of the Administration and Probate Act 1919-1922 (S.A.), the trustee obtained an order that in the circumstances shown it be authorized to accept the tender notwithstanding the provision in the trust instrument that the trustee might let the hereditaments without taking anything in the nature of a fine or premium therefor, and that the premium be treated by the  trustee as rent under the lease paid in advance and be apportioned with interest thereon over the term of the lease.

The order operates as a full protection to the trustee, but, in my opinion, it does not bind the rights of the beneficiaries inter se.  This circumstance, however, is unimportant, because the direction that the premium should be treated as rent and be apportioned over the period of the  lease is a correct application of the principle upon which the actual rights of life tenant and remaindermen are adjusted. The apportionment concerns only the three one-sixth interests that remain limited in succession to tenant for life and remainderman.  The three shares the remainders in which have become vested in possession are  unaffected.  The beneficiaries are indefeasibly entitled to these  interests, and no facts appear upon the case stated which would  disable them from demanding at once their shares of the actual net  revenue of the estate.

On the other hand, a tenant for life is not entitled as of course to a premium paid by a lessee.  "The fine is merely the purchase-money of the land for a term of years (Shepheard v  Beetham), [F17] paid in advance instead of being spread over a number of years as  rent" (Farwell on Powers, ch. XVII., s. 16, 3rd ed. (1916), at p. 660).  The premium was paid as consideration for the grant of the lease.  In effect, it was rent paid in advance which the remainderman might otherwise have received.  Accordingly, so much of it as is attributable to the shares settled in succession should be apportioned between the life tenants and the remaindermen (Strachan, Law of Trust Accounts (1911), p. 27; see per Younger J. in In re  Wix; Hardy v  Lemon, [F18] at pp. 287, 288 and compare In re Baring; Jeune v  Baring, [F19] at p. 69; per Buckley L.J. in In re Lacon's Settlement; Lacon v  Lacon, [F20] at p. 23, and per Parker J., In re Rodes; Sanders v  Hobson, [F21] at p. 818.  The premium is not a casual recurrent profit of the estate which cannot be regarded as the consideration for the future use of the land, as the fines and heriots in Brigstocke v  Brigstocke. [F22]

These fines and heriots were payable under a covenant requiring successive tenants for life each to grant a perpetually renewable lease for ninety-nine years if the tenant for life granting it so long lived, the fines and heriots being payable on the dropping of each life.  Again the premium does not form part of the income of a business conducted by trustees like the brewer's business in In re Mallen. [F23]   It follows that the tenants for life were not in 1928 presently entitled each to one of the three one-sixth shares in the premium.  The extent to which each would become entitled to moneys arising from the premium would depend upon the duration of her life.  On the other hand, the remaindermen in whom three one-sixth shares of the trust property had become indefeasibly vested in possesson were in 1928 presently entitled to the other three one-sixth shares in the premium.

Section 16 (d) of the Income Tax Assessment Act 1922-1928 provides that the assessable income of any person shall include money derived by way of consideration in the nature of premiums demanded and given in connection with leaseholds.  There can be no doubt that the premium of PD3,300 answered this description.  For the financial year succeeding the twelve months in which the trustee received the premium, the Commissioner made an assessment upon the trustee in which the whole of the premium was included as assessable income. In doing so he purported to apply s. 31 (2).  This sub-section enacts that a trustee shall be separately assessed and liable to pay tax in respect of that part of the income of the trust estate which, if the trustee were liable to pay tax in respect of the income of the trust estate, would have been (in effect) the taxable income of the trust estate "and (a) which is proportionate to the interest in the trust estate of any beneficiary who is under a legal disability; or (b) to which no other person is presently entitled and in actual receipt thereof and liable as  a taxpayer in respect thereof."  Except for a very small proportion of the premium, which was attributable to the unexpired period of the year ended 30th June 1928, no person other than the trustee was either presently entitled to three-sixths of the premium or actually in receipt thereof So much of the premium was therefore rightly included in the assessment upon the trustee.  But the inclusion of the remaining three one-sixth parts of the premium raises a question of construction upon par. (b) of s. 31 (2).

The beneficiaries interested in these shares were presently entitled thereto, and therefore, notwithstanding that they had not received actual payment, they were liable under s. 31 (2) to be assessed in their individual capacities in respect thereof.  It does not appear from the case stated whether upon this footing the assessments of each of the beneficiaries sharing in these three one-sixth parts of the estate would, or would not, result in a taxable income.  But no point was made of this, and I think we are entitled to assume that if, in ascertaining the assessable income of each beneficiary, his interest in the premium was included he would be liable to assessment in respect  of a taxable income.  If so, the beneficiaries unquestionably answer the description of the words of par. (b) of s. 31 (2) "other person...liable as a taxpayer in respect thereof."  Accordingly the question arises whether, upon the true construction of s. 31 (2) (b), a trustee is liable to be separately assessed and to pay tax in respect of that part of the income of the trust estate of which no other person is in actual receipt although beneficiaries are presently entitled thereto and so liable as taxpayers in respect thereof.

Section 31 (1) provides that a trustee shall not be liable to pay tax as a trustee, except as provided by the Act, but each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate shall be assessed in his individual capacity in respect of his individual interest in what may be described as the taxable income of the trust estate, that interest being aggregated with his other income.  Sub-s. 2 of s. 31 proceeds to impose upon the trustee a liability to assessment and payment of tax.  It might be expected to deal  with the remaining income only of the trust estate.  Income will be taxed twice if par. (b) means to include in the trustee's assessment income of which it cannot be said that there is another person presently entitled who is in actual receipt thereof and liable as a taxpayer in respect thereof.  For, if this is its meaning, a beneficiary who is presently entitled but not in actual receipt of the income would be liable to assessment and payment of tax in respect of the income under sub-s. 1 of s. 31, while at the same time the trustee would be liable under par. (b) of sub-s. 2 to assessment and payment of tax in respect of the same income because there is no person is actual receipt thereof.  No interpretation  of a taxing Act should be adopted which results in the imposition of double taxation unless the intention to do so is clear beyond any doubt.  The arrangement and the substance of the provisions contained in sub-s. 1 and in sub-s. 2 of s. 31 suggest very strongly that they were intended to be complementary and mutually exclusive.  The object of sub-s. 1 is plainly to define the liability of the beneficiary in order to ensure that, whether it reaches his hands or not, all income to which a person is presently entitled  shall be included in his assessment so that it may not escape aggregation.

Under sub-s. 3 special provision is made to prevent even persons under a legal disability escaping aggregation notwithstanding their exclusion from sub-s. 1, but sub-s. 3 contains a special proviso to avoid double taxation.  Persons who actually receive income are liable to be taxed under s. 13 whether they are, or are not, presently entitled thereto in point of law. It is not unreasonable to suppose that in par. (b) the actual receipt of income is mentioned in order to exclude from the trustee's assessment income which would be taxed upon this ground in the hands of the person who received it.  It is true that sub-s. 4 provides specially that recipients of income under discretionary trusts shall be deemed to be presently entitled, but it may have been considered desirable to make it clear that such persons came within the sub-section. The difficulty in par. (b) of sub-s. 2 lies in the fact that literally it appears to require the inclusion in the trustee's assessment of all income of which it cannot be said that there is some other person who  is not only presently entitled thereto but also in actual receipt thereof and liable as a taxpayer in respect thereof.  To avoid this, it is suggested that it should be read:

"to which no other person is presently entitled and (no other person is) in actual receipt thereof."

It should then be understood to mean to include in the trustee's assessment that income only which another person is neither presently entitled to nor in actual receipt of.  Another explanation of the provision is that the word "and" was used instead of the word "or", after the words "presently entitled".  This explanation was given during the argument in Federal Commissioner of Taxation v  Higgins, [F24] and it certainly seems to resolve all difficulties.  The word "and" has been construed as "or" in order to avoid a harsh and unreasonable interpretation where it appeared probable, as it does here, that a confusion had occurred between the two conjunctions.  See Golden Horseshoe Estates Co  v  The Crown, [F25] at pp. 487, 488.  But, whichever explanation be adopted, I am clearly of opinion that the provision does not mean to make the trustee liable in respect of income to which a beneficiary is presently entitled as a taxpayer in respect thereof.  It follows from this opinion that the assessment erroneously included so much of the income of the trust estate consisting of the premium as represents the three one-sixth interests of the remaindermen which have become vested in possession.

I think the first question in the case should be answered:

"Not in respect of the whole sum, but in respect of one-half part thereof."

The second question should, in my opinion, be answered: "No"; because, assuming that sub-ss. 2 to 13 of s. 13 otherwise apply, yet sub-ss. 6 and 13 make it impossible for the trustee to rely upon any previous years.