Executor Trustee & Agency Co of South Australia Ltd v Federal Commissioner of Taxation
48 CLR 261932 - 0804A - HCA
(Judgment by: Gavan Duffy CJ, Starke J)
Between: Executor Trustee & Agency Co of South Australia Ltd
And: Federal Commissioner of Taxation
Judges:
Gavan Duffy CJRich J
Starke JDixon 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
Judgment date: 4 August 1932
Sydney
Judgment by:
Gavan Duffy CJ
Starke J
Margaret Pearson died on 15th July 1898, leaving a will whereby she directed her trustee to stand possessed of her residuary trust moneys and her real estate upon trust to pay the income of one equal sixth part to each of her six daughters for life and, from and after the death of her said daughters or any or either of them, to hold the share of the daughter so dying upon trust for the child or children of the daughter so dying as aforesaid, who being a son or sons should attain the age of twenty-one years or being a daughter or daughters should attain that age or marry under that age, in equal shares. The testatrix further directed that her trustee might let any hereditaments for the time being remaining unsold either from year to year or for any term not exceeding ten years at such rent and subject to such conditions as it should think fit, without taking anything in the nature of a fine or premium therefor.
The appellant, the Executor Trustee and Agency Co of Australia Ltd is the trustee under this will. The six daughters survived their mother. Three are still alive, but three died before 1st July 1927. Each daughter married in the lifetime of the mother, and had children who were living on the day of the death of the testatrix. The children of the daughters who had died were alive on 1st July 1927, and had attained the age of twenty-one years or had married. In March of 1928 the Supreme Court of South Australia, notwithstanding the provisions of the will of the testatrix, authorized the trustee to accept a tender for the lease of a certain hotel property, part of the said trust estate, for a term of seven years, at a weekly rental of PD6, and a premium of PD3,300. And it directed that the premium of PD3,300 be treated by the trustee as rent, under the lease, paid in advance, and be apportioned, with interest thereon, over the term of the said lease. A lease of the property was accordingly granted, and the premium of PD3,300 was paid to the trustee on and between 28th March 1928 and 14th May 1928. The Commissioner of Taxes assessed the trustee to income tax for the financial year 1928-1929, based on income derived in the year commencing on 1st July 1927, and he included in such assessment the sum of PD3,300 so received by the trustee.
It is quite immaterial, as it seems to us, to consider whether the Supreme Court had or had not jurisdiction to authorize the lease or whether the lease was within the powers conferred upon the trustee by the will. The sum was in fact received, and was income derived directly from a source within Australia during the twelve months preceding the financial year for which the assessment was made (Income Tax Assessment Act 1922-1928, s. 13. Again, it does not seem material to consider the question whether a fine paid as consideration for the grant of a lease should go to the life tenant or tenants as a casual profit, or should be apportioned between life tenants and remaindermen (see Earl Cowley v Wellesley; [F1] Brigstocke v Brigstocke; [F2] Jarman on Wills, 6th ed. (1910), pp. 1220-1222; Theobald on Wills, 8th ed. (1927), p. 618; Strachan, Law of Trust Accounts (1911), p. 27; Sanger on Wills 1st ed. (1914), p. 119); for the order of the Supreme Court which authorized the lease directs that the sum of PD3,300 be treated by the trustee as rent under the lease paid in advance and apportioned with interest thereon over the term of the lease. It is the duty of the trustee to act upon this direction. The tenant or tenants for life will thus take during the time of his or their tenancy for life the amount so apportioned.
The question is whether the trustee can be assessed to and made liable for income tax in respect of the sum of PD3,300 or any part of it for the financial year 1928-1929, having regard to the provisions of s. 31 of the Income Tax Assessment Act 1922-1928. That section makes provision for the assessment of beneficiaries and trustees of trust estates. The scheme of the section is that in all cases in which any of the beneficiaries of the trust estate are assessable, then the trustees of that estate shall not be assessable or liable to tax, whilst in cases in which the beneficiaries or any of them are not assessable, then the trustees shall be assessed and liable to the tax. Each beneficiary who is under no legal disability and is presently entitled to a share in the income of the trust estate is assessable. A trustee is liable to be assessed and to pay tax in respect of the income of the trust estate of any beneficiary under legal disability or "to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof."
A suggestion has been made that the word "and" in the phrase "presently entitled and in actual receipt thereof" should be read as "or" (Federal Commissioner of Taxation v Higgins), [F3] but even then the sentence is elliptical and some words must be supplied to complete the sense. "Income to which a person is in actual receipt thereof" is somewhat unintelligible English, though it is plain enough that what the section intends is "and income of which no other person is in actual receipt and liable as a taxpayer in respect thereof." So construed, the section-whether the conjunction "and" be read as "or" or not-presents no real difficulties. In such a context, the word "and" introduces a new case or category in which the trustee may be assessed or made liable to income tax. Every reason of convenience, and the mutual relations of the various provisions of the section, support this conclusion; whilst the opposite view might lead to double taxation, or at least to some difficulties in the adjustment of tax between the beneficiaries and the trustee.
The facts already set forth establish that the children of the three daughters who had died were, at the time relevant to this assessment, under no disability, and were presently entitled-that is, entitled in estate or interest-to their mother's shares in the income in question here, namely, three-sixths or one-half of the sum of PD3,300. Consequently, the trustee has been wrongly assessed in respect of that sum. The three surviving daughters of the testatrix are entitled, for life, each to one-sixth share in this premium or advanced rent of PD3,300. The lease was for a term of seven years from 19th April 1928, and these three daughters were entitled to their share of the rent that accrued due between 1st July 1927 and 30th June 1928. The trustee cannot therefore be assessed in respect of any rent or income arising from this lease accruing on and between 19th April 1928 and 30th June 1928. The right of each daughter to any further income or rent depends upon the duration of her life. Therefore, for the financial year 1928-1929, the daughters were not presently entitled to any further part of the premium or rent of PD3,300, and to this extent the trustee can be lawfully assessed to income tax.
The first question stated should be answered in the negative, as to PD1,650 and as to the shares of the three daughters in the premium or rent accruing on and between 19th April and 30th June 1928. The second question stated in the case should be answered in the negative. It asks whether the rate of tax should be applicable to the average taxable income over the preceding five years. All that is necessary on this question is to refer to s. 13, sub-ss. 6 and 13.