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)

Judgment date: Judgment handed down 6 August 1969.

---

Kitto J.: This is a case stated under sec. 198 of the Income Tax Assessment Act 1936 (Cth) in an appeal against an assessment of the income tax payable by the executors of the will of Nevil Shute Norway, who died on 12 January 1960, in respect of income derived in the year ended 30 June 1961.

In that year the appellants, the executors, derived from sources out of Australia income in respect of certain books and a film scenario which their testator had written in his lifetime. They themselves were at all material times residents of Australia within the meaning of the Act, for one of them is a company incorporated in Australia and the other an individual who throughout the year of income resided in Australia (see the definition in sec. 6(1). At no time during the year was any beneficiary presently entitled to any part of the income of the estate (though a very small part of the income was in fact distributed to beneficiaries). This is so because ``presently entitled to any part of the income of a trust estate'' refers not to the availability of any income for payment to him, but to a present title in possession in respect of any income the estate may produce; and in the present case the executorial duties had not been completed when the year ended. The executors were of course not yet trustees of the estate in the ordinary sense of the term; but by force of the definition in sec. 6(1) they were trustees for the purposes of the Income Tax Assessment Act, and it will be convenient to refer to them as such. An assessment of tax was made against them on the footing that the abovementioned income from sources out of Australia formed part of the income upon which, as trustees of the estate, they were liable to be assessed and to pay tax.

It is against that assessment that the appeal is brought in which the case before us has been stated. The question to be decided arises under the provisions made by sec. 99 of the Act in the form which was applicable to assessments in respect of income derived in the relevant year. (I refer throughout this judgment to the Act as it applied to such assessments.) Section 99 is expressed to apply where, as here, there is no beneficiary presently entitled to any part of the income of the trust estate; and it provides that in such a case the trustee shall be assessed and liable to pay tax on ``the net income of the trust estate'' as if it were the income of an individual, and were not subject to any deduction. The expression ``the net income of a trust estate'' is defined by sec. 95 to mean the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except the concessional deductions. (There is another exception but it is not material in the present case.) The expression ``concessional deductions'' is defined by sec. 6(1) to mean the deductions allowable under Subdiv. B of Div. 3 of Part III of the Act, and those are deductions which are allowable only where the taxpayer is a resident (sec. 82A).

The ``assessable income'' of the trust estate (see the definition of ``assessable income'' in sec. 6(1) means all the amounts which under the provisions of the Act are included in the assessable income. By sec. 25(1) a general provision is made as to the inclusion of gross income in the assessable income of a taxpayer, and it is the only such provision that applies in this case. Paragraph (a) of sec. 25(1) includes in the assessable income of a taxpayer who is a resident the gross income derived from all sources whether in or out of Australia; while para. (b) includes in the assessable income of a taxpayer who is a nonresident only the gross income from all sources in Australia. The Commissioner has

---

ATC 4090

taken the view that, as a result of the operation of sec. 95 and 25(1) in combination, the question whether the income of a trust estate from ex-Australian sources is included in the net income of the trust estate for the purposes of sec. 99 is to be answered ``Yes'' or ``No'' according as the trustee is a resident or a non-resident.

This is a sufficiently odd conclusion to make one suspicious of it; for not only is the intention highly unlikely that taxability in respect of a trust estate should depend upon so fortuitous and arbitrary a consideration as the residence for the time being of the trustee, but if that had been the intention some answer would almost inevitably have been provided for the obvious question: ``What if there are several trustees of whom some are residents and some are non-residents?'' The fault in the conclusion seems to me to be that it treats the expression in sec. 95 ``calculated under this Act as if the trustee were a taxpayer in respect of that income'' as equivalent to ``calculated under this Act as if the trustee had derived that income (and no other) beneficially''. This, in my opinion, does less than justice to the precise wording of sec. 95 and pays too little attention to definitions which the Act provides.

In the light of the definition of ``taxpayer'' the expression ``calculated under this Act as if the trustee were a taxpayer in respect of that income" may be expanded to read "calculated under this Act as if the trustee were a person deriving that income''. But the ``as if'' shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by ``a person'' must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him a ``resident'' within the definition of that word in sec. 6(1). Unless a person is a ``resident'' of Australia he is by definition a ``non-resident''. Accordingly, by limiting the meaning of ``the net income of a trust estate,'' for the purposes of (inter alia) sec. 99, to the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except concessional allowances, sec. 95 excludes from gross income all income which sec. 25(1) brings into assessable income in the case only of a taxpayer who is a resident (i.e. income from sources outside Australia), and, as consistency requires, excludes from the allowable deductions to be subtracted from the gross income which remains included in the assessable income those deductions which are allowable only in the case of such a taxpayer.

The process of assessment which on this analysis the Act prescribes for such a case as the present is that which Dixon C.J. supported in
F.C. of T. v. Belford (1952) 88 C.L.R. 589 at p. 602 , though I have followed a slightly different line of reasoning from that which his Honour described. The conclusion treats the three sections, 97, 98 and 99, as giving effect to a harmonious policy, those sections together dealing with three cases: where a beneficiary has a present title in possession to a share of the income of a trust estate - not, be it noticed, to a share of the net income of a trust estate - and is not under any legal disability (sec. 97); where a beneficiary has such a title but is under a legal disability (sec. 98); and where no beneficiary has such a title to any part of that income or there is a part of it to which no beneficiary has such a title (sec. 99). (There is a fourth case, of course, namely the case where a person, though having no present title in possession to the income of a trust estate or any part of it, has a beneficial interest in that income, such as a charge upon it; but that case, is dealt with by sec. 26(b)). The operation of the three sections is only to provide for the taxation of ``the net income of the trust estate'', the need to do so being a consequence of the provision in sec. 96 that, except as provided, a trustee shall not be liable to pay tax upon that income. Their operation is not to define the tax liability of beneficiaries in respect of distributions of estate income, for income which they receive from a trust estate is taxable in their hands by virtue of the general provisions of sec. 25. If from such a distribution a beneficiary, having a present title to income receives more than the amount of his share of ``the net income of the trust estate'' as calculated in accordance with the definition in sec. 95, there will be an overlap between

---

ATC 4091

sec. 97 and 25, just as there may be between sec. 26(b) and 25; but of course the inclusion of an amount in assessable income by force of two provisions is not an inclusion of it twice over. I make these observations simply in order to acknowledge that sec. 99 is to be construed as part of the scheme of legislation which Div. 6 of Part III of the Act embodies, and to show that the construction which I have placed upon that section is consonant with the scheme.

The question in the case stated should in my opinion be answered ``No''.