Union Fidelity Trustee Co. of Australia Ltd. and Another v. Federal Commissioner of Taxation.
Judges:Barwick CJ
Kitto J
Menzies J
Windeyer J
Court:
High Court (Full Court)
Barwick C.J.:
The case stated for the opinion of the Court by my brother
Kitto
discloses that the trustees of the estate of Nevil Shute Norway, deceased, one of whom is a company incorporated in the State of Victoria and the other a person residing in Australia during the relevant tax year (1960-1961) received in that tax year from sources beyond Australia income to which under the terms of the will of the deceased no person in that year was presently entitled. The trustees disclosed that income in their return of income for that year but claimed that they were not taxable in respect thereof, relying upon the decision of this Court in the
F.C. of T.
v.
Belford
(1952) 88 C.L.R. 589
.
The Commissioner assessed the trustees to tax under Part III, Div. 6 of the
Income Tax and Social Services Contribution Assessment Act,
1936-1961 (the Act), and in particular under sec. 99. An objection to that assessment was disallowed by the Commissioner. It has now been treated at the request of the trustees as an appeal to this Court under sec. 187 of the Act. The question asked in the stated case is whether the trustees are taxable in respect of the receipt of that income in that year of tax.
Division 6 of Part III of the Act is headed ``Trustees'' but its provisions range more widely. It contains three provisions plus a definition which are presently relevant. Section 97 provides that a beneficiary not under any legal disability who is presently entitled to a share of the income of a trust estate shall have that share of the net income of the trust estate included in his assessable income. Section 98 provides that where a ``... beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual...''. Provision is made as to what deductions may be made therefrom. Section 99 provides -
``Where there is no beneficiary presently entitled to any part of the income of a trust estate, or where there is a part of that income to which no beneficiary is so
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entitled, the trustee shall be assessed and liable to pay tax on the net income of the trust estate, or on that part of that net income as the case may be, as if it were the income of an individual, and were not subject to any deduction.''
The definition of ``the net income of a trust estate'' is to be found in sec. 95 and is as follows -
``The net income of a trust estate' means 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, except the concessional deductions and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus.''
``Taxpayer'' is defined in sec. 6(1) of the Act to mean ``a person deriving income.'' ``Assessable income'' means ``all the amounts which under the provisions of this Act are included in the assessable income.'' Section 25 provides that -
``The assessable income of a taxpayer shall include -
- (a) where the taxpayer is a resident -
- the gross income derived directly or indirectly from all sources whether in or out of Australia; and
- (b) where the taxpayer is a non-resident -
- the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income.''
A resident so far as is presently relevant means a person, other than a company, who resides in Australia and a company which is incorporated in Australia or which carries on business in Australia and which has its central management controlled in Australia.
Section 96 of the Act provides that except as provided in the Act a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Other than the provisions in Div. 6 there are none which render the trustee liable as such to pay income tax on the income of the trust estate. It may thus be said that the Division is the exclusive source of liability of a trustee to pay income tax upon the income of the trust estate. But, in my opinion, for reasons which will appear, it cannot properly be said that the Division is the exclusive source of the liability of a beneficiary to pay tax in respect of the beneficiaries' share of the income of the trust estate paid or payable to the beneficiary.
The effect of the definition of the net income of the trust estate in sec. 95 is that the provisions of the Act are to be applied to the actual income of the trust estate as if it were the income of an individual deriving it. From the actual income of the trust estate there is abstracted all sums which can be seen to be assessable income. For the purpose of this abstraction or computation the only fact which is relevantly known is that the trustee, as a taxpayer, has derived the income. The residence of the trustees, or of any one of them, if there be more than one cannot afford a reason for varying the net amount of the income of the trust estate according to the accident of the trustee's residence in the year of tax. Its irrelevance is emphasised when the possibility of diverse residences of several trustees is contemplated.
Income for the relevant purposes of the Act falls into one of two categories - that which is derived from an Australian source and that which is not derived from an Australian source. The scheme of the Act is to bring to tax both kinds of income where the taxpayer deriving it is a resident of Australia but to bring to tax only income of the former kind where the taxpayer is not a resident of Australia. It is therefore clear to my mind that if nothing is known as to the residence of a taxpayer the only income which can certainly be said to be assessable income is the income derived by the taxpayer from an Australian source. Unless it is known that he is a resident, it cannot be said that any other income is to be included in his assessable income.
The net income of a trust estate calculated in accordance with the definition in sec. 95 is the same sum throughout the Division in respect of any given estate in any given year of taxation. The terms of the trust instrument as applied to the particular facts of the year in question will determine which section of the Division is called into play: and the extent of the share of the income
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of the trust estate to which the particular section of the Division is to apply.Both sec. 98 and 99 require where the circumstances are appropriate that the trustee be assessed and be liable to pay tax upon that sum of money which is worked out by the use of the definition of the net income of a trust estate, that is to say, by the computation of that sum which is necessarily assessable income of the trust estate on the footing that a taxpayer had derived the income.
The amount that the beneficiary is required by sec. 97 to include in his assessable income is his share of the net income of the estate as defined. That amount will not vary, in my opinion, according to the residence of the beneficiary. It is the whole of the amount of that share which is to be included and it will be the same amount, in my opinion, whether the beneficiary is a resident of Australia or not. Further, the same is true, in my opinion, of the amount in respect of which the trustee is required to pay tax under sec. 98.
In the case of sec. 99 there is no beneficiary so in any event the question of residence of the beneficiary cannot arise. The only condition relating to the beneficiary which brings sec. 97 and 98 into operation is the entitlement of the beneficiary to a share of the income of the trust estate, just as in the case of sec. 99 it is the circumstance that there is no person presently entitled to the income. The time as at which to determine the assessable income of a taxpayer is in general the concluding day of the taxation year. There is no provision which takes the calculation under sec. 95 in that respect out of the general scheme of the Act.
In applying the provisions of Div. 6 a clear distinction must be maintained between the position of a person who is entitled to receive a share of the estate and one who has been paid the amount of it. When a beneficiary has been paid his share of the income of the estate in respect of a tax year he no longer satisfies the description of a beneficiary who is entitled to a share of the net income of the estate for that year. Thus, if at the close of the taxation year the appropriate share of the income of the trust estate has been already paid to the beneficiary who before the payment was merely entitled to it, the amount so paid to the beneficiary as his share of that income will form part of his assessable income by virtue of sec. 26(b) and not, in my opinion, by reason of sec. 97.
The purpose of these three sections in Div. 6, sec. 97, 98 and 99, it seems to me, is to anticipate the receipt by a beneficiary of the share of the trust income upon the receipt of which, whatever his residence, he would be liable to tax: and to bring the share of that income to tax before it is received by a beneficiary. The beneficiary under sec. 97 must include in the assessable income money which he has not received but which in the year of income he is entitled to receive as his share of the net income of the estate. In the case of a beneficiary under disability but entitled to his share the trustee is to pay the tax, it being assumed that the beneficiary will not receive it in that year of tax because of legal disability, and in the case of sec. 99 as there is nobody at present entitled to receive the amount to which that section applies, the trustee will be required presently to pay tax upon that amount. Where a beneficiary at the conclusion of a year of tax is still entitled to a share of income and, conformably to sec. 97, includes the amount of that share which he has not received in his assessable income for that year, he will not be liable to tax upon the money he subsequently receives as that share any more than a person who has rendered his return of income on a credit basis is liable to pay tax upon the actual receipt of the money which he has already brought to account in computing income upon a credit basis. For the same reason, when the trustee has paid tax under sec. 98, the subsequent receipt of the share of income by the person who was formerly under disability will not attract tax by reason of that receipt. The same will also be true of the person who ultimately becomes entitled to and receives income of the estate which has fallen within sec. 99 and on which the trustees have paid tax in pursuance of that section.
I have already pointed out that the net income of the trust estate, computed in accordance with the definition in sec. 95, is the same sum which is referred to in each of the sections 97, 98 and 99. When computing
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the total assessable income of a taxpayer whose residence is unknown, the only income which can in any event be included in that assessable income is income from an Australian source. Thus, the total assessable income for the purposes of sec. 95 includes, in my opinion, only the Australian sourced income. On that footing, it is only the beneficiary's share of the income of the trust estate derived from an Australian source to which the beneficiary is entitled but which he has not received before the end of the year of tax which is to be included in the beneficiary's assessable income pursuant to sec. 97 of the Act. Equally, it is only the beneficiaries' share of that income which is the subject of tax under sec. 98. The trustee is taxed under sec. 99, in my opinion, only upon the net income of the estate derived from Australian sources to which no person is presently entitled.The scheme of the Act therefore seems to me to be that tax which would be payable by a beneficiary irrespective of the residence of the beneficiary at the time of the receipt of a share of the income of a trust estate will be exacted at the earlier point of time, namely, in the year of tax in which the beneficiary is entitled to but has not been paid a share of such income. Consequently, as it seems to me, contrary to some of the reasoning in one of the judgments of the abovementioned case, there is no room in applying the provisions of Div. 6 of Part III of the Act to have regard to the residence of the beneficiary. The Act in that Division and by virtue of its provisions only proposes to tax so much of the total income of a trust estate as is derived from Australian sources. All the rest, if any, of the income of the trust estate, that is to say, income derived from non-Australian sources, will be brought to tax at the time of its actual receipt by the beneficiary if at that time the recipient is a resident of Australia. Division 6 performs the function, in my opinion, of bringing forward the time for the exaction of tax only upon income of the trust estate which was derived from Australian sources.
I turn now to F.C. of T. v. Belford (supra). In that case the taxpayer received in the year of tax, from the trustees of a will, a distribution of the income of the estate. The taxpayer was an Australian resident. The source of the taxpayer's income was therefore irrelevant: the source of the trustees' income even more so. The only question was whether the income sought to be taxed was income derived by the taxpayer. Clearly it was. Section 26(b) expressly made the receipt by the beneficiary of the money from the trustees of the will income. But the taxpayer sought to have the income treated as exempt because the source of the trustees' income was ex-Australian and the trustees themselves were not residents of Australia. The taxpayer, in my opinion, clearly had no substantial ground of objection. However, some members of the Court took occasion to discuss the provisions of Div. 6. In my most respectful opinion, none of this discussion was necessary for the decision of the case and what was said as to those provisions was entirely obiter. However, I respectfully agree with the view expressed by the majority of the Court that the residence of the trustee in relation to the provisions of Div. 6 is entirely irrelevant, but I am unable to agree that the residence of the beneficiary is in any wise significant or relevant to the determination of the net income of the trust estate as defined by sec. 95 or of the share of that income which has to be included in assessable income under sec. 97 of the amount upon which tax has to be paid under either sec. 98 or 99. I have already expressed my opinion that only Australian source income is to be brought to account in determining the total assessable income for the purposes of sec. 95. Once that sum is determined in accordance with that section, it is the whole or a share, as the case may be, of that sum which is either to be brought into the assessable income of a beneficiary under sec. 97 or on which the trustee must pay tax under sec. 98 or 99. There is, in my opinion, no warrant for apportioning any part of that sum in the case of a beneficiary who is not a resident of Australia.
Earlier I indicated that, in my opinion, Div. 6 cannot properly be regarded as the exclusive source of the liability of a beneficiary to tax upon a share of income of a trust estate. No precise conclusion on that matter in that case was reached by the Court but several opinions upon the matter were expressed. I find no need to canvass
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them. Suffice it for my purposes in this case to say that, in my opinion, it is not necessary to find some construction of Div. 6 which will bring to tax under its provisions all the money to which a beneficiary may become entitled or which he may receive as his share of the income of the trust estate. Once it is realised that the actual receipt by the beneficiary of the proceeds of a share of the income of a trust estate will involve him in tax upon all sums which have not theretofor been brought to tax, either in his own or in the trustee's hands, the need to have regard to the residence of the beneficiary in applying any of the provisions of the division seems to me to disappear.In my opinion, the question should be answered in the negative.
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