Truesdale v. Federal Commissioner of Taxation.Judges:
Menzies J.: The appellant is the trustee of the Kevin Phillip King Trust and of the Harvey James King Trust and, as such trustee, has been assessed to income tax under sec. 102 of the Income Tax Assessment Act for the year ended 30 June 1966. In each case the assessment was on the footing that J.W.B. King, the father of Kevin Phillip King and Harvey James King, who were infants and unmarried, is the person who created the trust. The objection in each case was that J.W.B. King did not create the trust and that, if he did, the income of each trust, although paid by the trustee to the beneficiary, was not in the year of income ``payable to'' the beneficiary within the meaning of sec. 102. The appeals have proceeded upon the footing that the trustee was, under the deeds of trust, entitled to do as he did and in the year of income pay the beneficiaries the income which the trustee received from the trust property. I propose to decide the appeals upon this footing.
The facts as I find them are as follows. J. W. B. King, being a man of considerable wealth, and being in particular the dominant figure in King's Holdings Pty. Ltd., was minded in 1963 to follow a course that would subject certain shares that would be issued by King's Holdings Pty. Ltd. to trusts in favour of his three children, including Kevin and Harvey. Despite some evidence that the idea of the establishment of trusts in favour of the children of J. W. B. King came from one K. J. Ellis, an accountant employed by King's Parking Co. Pty. Ltd.-a subsidiary of King's Holdings Pty. Ltd.-I am satisfied that the appellant, who was financial adviser to J. W. B. King and a business associate of his, devised the scheme that was adopted and followed, and K. J. Ellis played a minor, but what was hoped would be a decisive role, in what was done. Furthermore, the object of what was to be done-as J. W. B. King well knew, although he did not otherwise understand the legal moves that were made-was to provide his children with income that would otherwise have been, in part at any rate, his. What happened was this. Three deeds of trust were prepared by J. W. B. King's solicitors upon the instructions of the appellant and at the expense of J. W. B. King. They were in identical form, the only difference being in the name of the beneficiary. In each case K. J. Ellis was the settlor, the appellant was the trustee and a child of J. W. B. King was the beneficiary. The settled fund was £10 paid by K. J. Ellis to the appellant ``together with any other property or moneys which come into the hands of the Trustee on Account''. The trust deeds were executed on 23 April 1963. On the same day K. J. Ellis paid to the appellant as trustee three cheques each for £10 and drawn upon his account with the Commercial Bank of Australia. On 24 April £30 was paid in cash into that account in order that there would be funds to meet the cheques. K. J. Ellis gave evidence that the money so paid into his account was his own and that he did not receive any
ATC 4058refund in respect of that payment or of the cheques given by him to the appellant and debited to that account on 29 April. Neither the appellant nor J.W.B. King was questioned about this matter and, despite some suspicion, I think I should proceed on the footing that this was so. On 22 April the appellant had opened three trust accounts with the A.N.Z. Bank and on 24 April he paid the three cheques which he had received from Ellis into these trust accounts; £10 into each account. Earlier, on 17 April, and at the time when the course to be followed had been determined and the terms of the trust deeds had been settled, there had been a meeting of the directors of King's Holdings Pty. Ltd. at which both J. W. B. King and the appellant were present and it was arranged that three lots of 50 shares in the company should be issued to the appellant, as trustee of the three trusts to be constituted, at a price which the appellant had determined by valuation, i.e. $11 a share-a very conservative valuation as events were to show. On the same day J. W. B. King signed three cheques drawn upon his account with the Commercial Bank of Australia Ltd., each for £555 and each payable to one of the appellant's trust accounts opened as aforesaid. These cheques were given to the appellant on, or shortly after, 17 April. On 29 April the appellant paid each cheque into the trust account in favour of which it had been drawn. On the same day he paid three cheques for £555, one drawn upon each of the three trust accounts, into the account of King's Holdings Pty. Ltd. at the A.N.Z. Bank Ltd. Each of these cheques was dated 17 April. Each cheque was to pay for 50 shares in King's Holdings Pty. Ltd. which were issued to the appellant as trustee. On each 50 shares so issued the trustee received during the year ended 30 June 1966 a dividend of $2,000 which he paid into a trust account upon which he then drew a cheque for $2,000 in favour of one of the beneficiaries. It is upon the $2,000 so received as trustee of the Kevin Phillip King Trust and the Harvey James King Trust that the appellant has been assessed under sec. 102 at the rate of tax which would have been payable by J. W. B. King if he had received that sum in addition to any other income derived by him.
The only question for me is whether sec. 102 applies.
So far as directly relevant it is as follows-
``102(1.) Where a person has created a trust in respect of any income or property including money) and-
(b) income is, under that trust, in the year of income, payable to or accumulated for, or applicable for the benefit of a child or children of that person who is or are under the age of twenty-one years and unmarried,
the Commissioner may assess the trustee to pay income tax, under this section, and the trustee shall be liable to pay the tax so assessed.
(2.) The amount of the tax payable in pursuance of this section shall be the amount by which the tax actually payable on his own taxable income by the person who created the trust is less than the tax which would have been payable by him if he had received, in addition to any other income derived by him, so much of the net income of the trust estate as-
(a) is attributable to the property in which he has power to acquire the beneficial interest;
(b) represents the income, or the part of the income, in which he has power to acquire the beneficial interest; or
(c) is payable to or accumulated for, or applicable for the benefit of, a child or children of that person who is or are under the age of twenty-one years and unmarried.''
This provision cannot apply unless, in the circumstances stated, J. W. B. King ``created'' the trusts under which the dividends of $2,000 became payable to the appellant as trustee of the two lots of shares which yielded the dividends.
What J. W. B. King did in each case was to pay £555 to the appellant as trustee for Kevin and as trustee for Harvey. I cannot determine the precise date upon which J. W. B. King handed the cheques to the appellant, but the evidence satisfies me that this was done before 23 April, the date upon which K. J. Ellis executed the trust deeds. Trust accounts had been opened by the appellant on 22 April and I find that on that date he already held the three cheques for £555 signed by J. W. B. King and dated 17 April. It becomes, therefore, a threshold question whether, upon the cheques being handed to
ATC 4059the appellant, he held them then and there as trustee for Kevin and Harvey respectively, or whether he held the cheques with a mandate from J. W. B. King to pay them into the trust accounts when the trust deeds that had been decided upon were completed and executed by K. J. Ellis. I have little doubt that I should come to the latter conclusion. It would be contrary to the plan that the appellant devised, and K. J. Ellis and J. W. B. King accepted, that the appellant should become a trustee for Kevin and Harvey when the cheques were handed to him by J. W. B. King. What was intended was that when the appellant became trustee under the deeds to be executed by K. J. Ellis, he should pay the cheques into trust accounts and then hold, as trustee, the moneys standing to the credit of the accounts and the shares to be bought with such moneys. As the appellant said accurately enough in cross-examination, he had told J. W. B. King that he would be looking for a gift from him when he had become trustee of the trusts that had been set up by somebody else. It is true that sometimes well-laid plans go awry, but looking at all that occurred I think I should regard what happened prior to 23 April, when the trust deeds were executed, as preparatory to the establishment of the trusts. It would not have been a breach of trust if the whole scheme had been abandoned on 22 April and the appellant had then handed the cheques back to J. W. B. King. Before the execution of the trust deeds he held the cheques upon a mandate from J. W. B. King. I have reached the conclusion, therefore, that no relevant trust was created before the execution of the trust deeds by K. J. Ellis.
It still has to be considered, however, whether, when the appellant paid the cheques given to him by J. W. B. King into the trust accounts and did so according to the mandate given by J. W. B. King, J. W. B. King then created a trust in respect of the amounts of the cheques. It is, of course, true that J. W. B. King did, by giving the cheques to the appellant with a mandate which was carried out, subject the cheques and their proceeds to trusts, but the difficulty is whether I should conclude that by having the appellant pay the cheques into the trust accounts into which K. J. Ellis' cheques had been paid in accordance with the trust deeds executed by him, J. W. B. King created a trust in respect of the proceeds of the cheques. The words ``created a trust'' in sec. 102 are not, I think, apt to describe the payment of money to a trustee to hold under a trust already constituted. There is an obvious difference between creating a trust in respect of property, on the one hand, and, on the other, transferring property to a trustee to hold upon the terms of an established trust. To read the section as if it applied to such a transfer would be, in the absence of a context, to expand it. Such a reading would be tantamount to saying that the transfer to the trustee of property to be held as part of the assets of an already constituted trust would be to create a second trust, whereas, from the point of view of both the trustee and of the beneficiary, there would be but one trust and the property transferred would be nothing more than an addition to the property subject to the trust.
Moreover, the language of sec. 102(1) gives the impression that the person who ``has created a trust'' is the person who constitutes the trust and has fixed its terms and is in the position, by those terms, to reserve power to himself under the trust.
There is, however, one provision in sec. 102 which causes me to doubt whether the limited construction of subsec. (1), which, on its language, I favour, was that which the legislature intended. This provision is sec. 102, subsec. (2), and an example will serve to show the difficulties in the application of this subsection to which the foregoing limited construction of subsec. (1) could give rise. Suppose A, the father of an unmarried infant C, were to constitute a trust under which the annual income of the trust estate was to be paid to C, and, as part of the constitution of the trust, A transferred property X to the trustee to hold upon the trust; suppose further that B, the mother of C, were to transfer property Y to the trustee to hold upon the terms of the trust constituted by A; suppose finally the trustee were, in the year, to receive income from property Y and property X and to pay the whole net income to C. Clearly enough, in the circumstances supposed, sec. 102(1) would apply and would apply seemingly to the ``net income of the trust estate''. But how should the section as a whole be applied? Should the whole income of the trust estate be brought into the calculation directed by subsec. (2)? Literally, yes! If so, should that income be regarded as the additional income of A for the purpose of fixing
ATC 4060the tax payable, or should what was derived from property X be treated as an addition to A's income, and what was derived from property Y be treated as an addition to B's income for the purpose of determining the tax payable? The latter would seem to be a possible solution only if the analysis of what had happened was that B, as well as A, had created a trust. Problems of this kind do complicate the application of sec. 102. Difficulties could also arise if a stranger were to add to the trust estate of a trust created by a parent of an unmarried infant. It would certainly make for simplicity in application to treat contributions to the trust estate by different persons as the creation of separate trusts.
In New Zealand there is authority in favour of construing a section like sec. 102 as if an addition to a constituted trust did itself amount to the creation of a trust. See
Tucker v. Commr of I.R. (N.Z.) (1965) N.Z.L.R. 1027; 14 A.T.D. 113.
However, the difficulty of the application of sec. 102(2), in circumstances that might be thought untypical, hardly supplies a sure basis for construing sec. 102(1) expansively, and a careful examination of Tucker v. Commr of I.R. (N.Z.) (supra) has not persuaded me that I should follow what was there decided.
Upon the whole I have come to the conclusion that I should not expand the meaning of the words ``created a trust'' to cover the making of contributions to a trust already created. This seems to me to be one of those cases where, to use the language of Lord
Cairns in Partington v. A.-G. (1869) L.R. 4H.L. 100 at p. 122, the tax as assessed is within the spirit but outside the letter of the Act. Such a case is one for the Parliament, not the Courts. As Rowlatt J. once said to encourage judicial restraint: ``There is no equity about a tax'' (
Case Brandy Syndicate v. I.R. Commrs. (1921) 1 K.B. 64 at p. 71).
It was argued for the Commissioner that I should adopt the bold course of treating K. J. Ellis as no more than a lay figure in the dramatis personae; a figure manipulated by the appellant and J. W. B. King, so that he should be altogether disregarded as an independent participator. Although I do not think that what K. J. Ellis did he did on his own initiative, I do not feel myself free to treat what he did, on the initiative of others, as amounting to the acts of those others.
The appellant had a further ground for challenging the assessment. It was argued that, even if J. W. B. King did create trusts in respect of the moneys represented by the cheques which he gave the appellant, the dividends received by the trustee were not in the year of income ``payable to or accumulated for or applicable for the benefit'' of the children beneficiaries. The submission was that
Hobbs and Anor v. F.C. of T. (1957) 98 C.L.R. 151, so decided. The income there in question, however, was with regard to accumulated income which might never reach the unmarried child beneficiary because that beneficiary was only contingently entitled. The actual decision, therefore, does not control this case. Counsel for the appellant did, however, rely upon general statements which, read by themselves, might suggest that the section had no application if the trustee, in the absence of an obligation to pay income to a beneficiary, did no more than exercise his power as a trustee to do so. However, the court said expressly: ``If you have the case of a payment to the child authorised by the trust deed that of course satisfies the provision.'' That is just what happened here on the basis upon which the appeals were argued. Accordingly, had I reached the point of having to determine whether the income paid by the appellant to Kevin and Harvey was, under the trusts, payable to them I would not have regarded Hobb's case as requiring a conclusion that it was not. My earlier conclusion, however, disposes of these appeals which, in my opinion, must be allowed and the assessments set aside. In each case the order of the court will be: Appeal allowed with costs. Assessment set aside.
Appeals allowed with costs. Assessments set aside.