JL Burke Ch
RC Smith M
RE O'Neill M
No. 1 Board of Review
J.L. Burke (Chairman) and R.C. Smith, Q.C., and R.E. O'Neill (Members): Taxpayer in these references, which relate to the three years ended 30 June 1966, 1967 and 1968, is a beneficiary under the will of a close relative which provided, inter alia, for the setting apart for her benefit of the sum of £9,000 ($18,000) to be paid to her by quarterly instalments over a period of 15 years (or to death if earlier) in the manner therein set out. Payments having been made accordingly to her during the years under review, the Commissioner has brought the same to tax as assessable income. Taxpayer claims that such payments were payments of capital and therefore not subject to tax.
2. The relevant provisions of the will are in the following terms -
``4. I DIRECT that my Trustee shall appropriate and set apart in any of the investments hereby authorised the sum of Nine thousand pounds (£9000.) and shall invest the same and apply the same to or for the benefit of the said (taxpayer) aforesaid in the manner hereinafter mentioned.''
``9. THE sum of Nine thousand pounds (£9,000.) given to (taxpayer) shall (if she shall so long live) be provided for in priority to all other legacies and be paid by quarterly instalments spread equally over fifteen years and payable as to the first of such instalments three months from the date of my death whether the amount directed to be set aside in cl.4 hereof shall have been so set aside or not and thereafter during the life of the said (taxpayer) or until the said legacy shall be satisfied by four quarterly payments in each year during the life of the said (taxpayer) or until the amount of the said legacy of Nine thousand pounds ($9,000.) has been by the said quarterly payments exhausted. My Trustee shall invest the said legacy or so much thereof as remains undistributed in any of the investments hereby authorised and with the payment of each quarterly payment on account of the said instalments the interest earned by the investment of the funds representing the said legacy or the unpaid balance thereof shall also be paid. If the said (taxpayer) shall predecease me or having survived me shall die before payment to her in full of the said instalments the unpaid balance of the said legacy and any interest earned from the investment of such unpaid balance shall so far as is necessary be applied in or towards payment of the several other legacies given by this my Will and subject thereto fall into and form part of my residuary estate hereinafter disposed of.''
``10. I DIRECT that my Trustee shall hold all the rest residue and remainder of my real and personal estate as a reserve fund for the said annuity given under cl.4 hereof so as to make up the full amount if there shall be any shrinkage or loss over the years of the amount so set aside or the investments representing the same AND WHEN the payment directed to be made in cl.4 hereof shall have been fully paid and satisfied I DIRECT my Trustee to divide the balance of my estate equally between the following charities:''
3. Reference was made during argument to the fact that the sum of £9,000 was, in cl.9 of the will, referred to as a ``legacy'' whilst in cl.10 the same sum is referred to as an ``annuity''. Nothing however, turns upon these words since, as Wilberforce J. in
Postlethwaite v. Commr. of I.R. (1963) 41 T.C. 224 said at p. 230, ``...mere nomenclature cannot determine the nature of a payment''.
4. The determination whether periodical payments spread over a number of years represent instalments of capital or payments by way of an annuity has, where such payments arose out of contract, caused considerable difficulty and the cases thereon (which are in the main collected in
Atkinson v. F.C. of T. (1951) 84 C.L.R. 298) are not easy to reconcile. In the present matter the
ATC 252payments were made pursuant to the terms of a will which have to be construed in order to ascertain the nature of the payments and the relevant decisions of the Courts on this aspect do not seem to be in conflict with each other.
5. It is necessary, in our opinion, to refer only to the three latest of these cases, two comparatively recent, where the provisions there construed were substantially similar to those contained in the present will in that the sums to be paid to the several beneficiaries were directed to be paid out of capital.
6. The first of these cases was
Jackson's Trustees v. Commrs. of I.R. (1942) 25 T.C. 13. By his will the testator (Sir Arthur Jackson) after certain specific gifts, devises and legacies, devised and bequeathed all the residue of his estate to trustees upon trust to sell, call in and convert into money and stand possessed of the residue (thereinafter called ``the Trust Fund'') and of the income thereof, upon certain trusts and subject to certain powers and provisions.
7. The relevant provisions of the will under consideration were contained in cls.8 and 9 which were as follows -
``8. Upon every first day of January after my death during the remainder of the life of my Wife upon which my daughter Margaret shall be living my Trustees shall raise the clear sum of £250 free from all deductions in respect of death duties of any kind, income tax, costs or otherwise out of the capital of the Trust Fund and pay the same to my daughter Margaret and upon every such first day of January upon which my daughter Patricia shall be living they shall similarly raise the like clear sum of £250 and pay the same to my daughter Patricia. 9. Subject as aforesaid the income of the Trust Fund shall be paid to my Wife so long as she shall remain my widow.''
In addition the daughters had a contingent interest which was to arise either if their mother were to remarry or die during the lifetime of one or other of them; but nothing turned on these provisions.
8. In accordance with the provisions of cl.8 above the trustees in December 1940 sold certain securities forming part of the trust fund to raise the two sums of £250 and paid the same to the deceased's daughters, Margaret and Patricia; and the assessment under appeal was made upon the trustees in respect of such payments under Rule 21 of the General Rules, as amended by sec. 26 of the Finance Act, 1927.
9. It was contended on behalf of the Appellants -
(1) That the sums paid were not annuities or other annual profits or gains charged to tax under Schedule D of the Income Tax Act, 1918.
(2) That the amounts so paid were capital in the hands of the two daughters.
(3) That the trustees were accordingly not liable to account for Income Tax Under Rule 21 in respect of these payments, and that the assessment should be discharged.
10. It was contended on behalf of the Commissioners of Inland Revenue (inter alia) that the sums paid to the two daughters in pursuance of cl.8 of the will were annual payments chargeable to Income Tax under Schedule D, and that the trustees were therefore liable to be assessed in respect thereof under the said Rule 21, as amended, and that accordingly the assessment was correctly made and should be confirmed.
11. Wrottesley J., who decided the case, said at p.16 of the report -
``The whole question at issue in this case, and this is clear from the Case and the arguments that have been addressed to me, is whether, in the circumstances, this particular gift described by the testator in the will was in the hands of the recipients' capital or income. It is quite clear that the testator took this precaution, that he directed his trustees not to pay income to his daughters but to raise the clear sum of £250 `free from all deductions in respect of death duties of any kind, income tax, costs or otherwise out of the capital of the Trust Fund', and to pay that to his daughter Margaret, and upon the same date to pay a similar sum of £250 to his daughter Patricia to be raised in the same way. That is quite clear. If, by the words of his will, the late Sir Arthur Jackson could have ensured that the sums which reached his daughters under his will were always to retain the nature of capital, he did his best, and if that were conclusive there would be an end of the matter. It is quite clear that that is not the end of the matter and that a person can neither by giving a sum nor by giving a sum in his will permanently endue it with the character of capital or income so as to be conclusive for the purpose of the Income Tax Acts.''
And at p.17, having discussed the reference in cl.8 of the will to ``income tax'' said, as to the inclusion of those words -
``I do not count that in any sense as an argument to indicate that there was an intention on the part of the giver to give or of the receiving daughter to receive this as income.''
12. He then goes on to discuss two earlier cases where moneys had been raised out of the capital of a trust fund and, adopting the approach taken in those cases, he said, at p.18 -
``It must be clearly understood, therefore, and I have to remember this, that I am not to be guided, and I am certainly by no means to be concluded in this matter, by the fact that the money is raised from capital.''
13. Construing cl.8 of the will before him in the light of those considerations he then goes on to find that the sums in question were but ordinary income, an ordinary annuity and nothing whatever to do with capital, at any rate, in the hands of the recipient.
14. The next case is that of Postlethwaite v. Commrs. of I.R. (supra). This was a case concerning a settlement whereby the trust fund was divided into two parts, one of which, namely, 40% in value, was called the ``general fund''. The trusts of the ``general fund'' were defined in cl.5 of the settlement as follows -
``The Trustees shall hold the General Fund Upon Trust during the period of Fifteen years calculated from the date of this Deed (a) To pay to the said Ella Postlethwaite in each of the next Fifteen years after the date of this Deed during her life the capital sum of £1,000 out of the capital of the General Fund Provided However that the Trustees may if they consider it desirable in their absolute discretion make all or any of such payments at an earlier date or earlier dates And Provided Further that if the said Ella Postlethwaite dies before she has received the total sum of £15,000 then the balance of such sum which is unpaid at the date of her death shall be paid to her children living at that date and if more than one in equal shares absolutely.''
15. It will be seen that these trusts bear striking similarities to the trusts at present before us. Two points arose on that appeal but only the first of these is here relevant and it is apposite to quote in extenso the reasons of his Lordship (which appear at pp. 230-231) for finding that the payments did not have a capital character; he expressed himself thus -
``There are two points which arise on the appeal. The first point is whether the £1,000 payments provided for by the settlement were capital payments or payments having the character of income. It was not argued before the Special Commissioners that the payments were capital payments, but the point has been taken here on notice, and an argument has been addressed to me by Mr. Rees, on behalf of the taxpayer, seeking to establish that the payments had a capital character. If that is so, of course, that is an answer to the appeal and no other question arises. Now, Mr. Rees does not found his argument merely on the fact that the settlement describes the payments to be made to Mrs. Postlethwaite as a capital annuity; mere nomenclature cannot determine the nature of a payment but he does draw attention to the following features about the annuity, which are three. First of all, he says that there is a predetermined sum of £15,000 contemplated in cl.5 as a sum to which Mrs. Postlethwaite is to be entitled over the period; then there is also a provision for acceleration of the £1,000 payments which it is suggested are in the nature of instalments of the capital sum - they can be, at the trustee's discretion, paid to Mrs. Postlethwaite before the 15 years comes to an end; and, thirdly, it is pointed out that if Mrs. Postlethwaite dies, then the balance of the £15,000 fund goes to her children not as an annuity or annual sum but as a capital sum, and that indicates the character of the provision made for Mrs. Postlethwaite herself.
In support of that argument I have been referred to some of the numerous cases in which it has been held that, where on the sale of a business there is a purchase price fixed of a certain amount and then a provision providing for the payment of that price by annual instalments, this does not attach to the instalments the character of income. One of the best-known cases of this kind is
Commrs. of I.R. v. Ramsay, 20 T.C. 79, where the Court of Appeal held that they were concerned with a payment of that character, and Romer L.J., drew attention to the dividing line, a narrow one in many cases, between a provision for the payment of an annual sum and a provision for the payment of a sum, that sum to be distributed by annual instalments. Now, I am not convinced that the cases as between vendors and purchasers, where there is a fixed consideration are really apposite in this connection. It may be that similar principles may apply in the case of a settlement or a trust created by a will, where provision is made, in the first instance, for a lump capital sum; and it might be that cases could be found where a provision of that kind, followed by provision for the payment of annual instalments, might be held to give rise to capital sums rather than sums in the nature of income. Whether that is so or not, it does not seem to me that this could be said to be a case of this kind. It seems to me that the provision for Mrs. Postlethwaite was essentially one of an income character. It was expressed to be, right from the beginning, a provision to extend over 15 years. It was
ATC 254described as an annuity, and the figure of £15,000 is only produced at a subsequent stage in order to indicate that, should she die during the 15 years the balance might be paid to her children. The provision for acceleration of the payments, again, does not seem to me to support the argument that the payments were to have a capital character; but, speaking more generally, I think that, looking at the framework of this clause, we are faced with what is essentially an income payment which happens to be related to a capital sum by reason of the fact that it is to be paid for a fixed period, and therefore I have come to the conclusion that I cannot accept the first argument on behalf of the taxpayer that these payments have a capital character.''
16. The final case is that of
Inchyra (Baron) v. Jennings (1966) 1 ch.37. This was a case of a will whereby a second codicil thereto provided
``By item XII of my said last will and testament dated June 23, 1948, I have created a trust of my residuary estate for the benefit of my husband. Rene de Marees Van Swinderen, my daughter, Elizabeth Hoyer Millar, and my lineal descendants, as primary beneficiaries.
Deeming it expedient and necessary for my daughter, Elizabeth Hoyer Millar to have available to her, after my death, more than income from the trust estate, I hereby amend item XII to provide and do hereby provide and direct that on each anniversary of my death the trustees under item XII of my said last will and testament shall compute the value of the capital of the trust estate, excluding however real estate and taking into account only cash, stocks, bonds, and other personal securities, and shall distribute to my said daughter, as soon as possible after each such anniversary, a sum of money or personal securities in kind, as she may desire, equivalent to one per cent, of the value of such cash, stocks, bonds, and other personal securities as so determined. This shall be done for 20 anniversaries, or until her prior death, whichever shall be first accomplished in order of time.''
17. The testatrix died on 16 November 1950 and the trustees, as well as distributing the income of the estate as directed under the will, made regular yearly payments to Lady Inchyra (Elizabeth Hoyer Millar), each being equivalent to one per cent, of the value of the residuary estate exclusive of real estate, as provided by the second codicil. The first such payment was made on 16 November 1951 and each payment was at her request distributed in cash rather than kind. By the law of the District of Columbia (in which District the testatrix was domiciled at her death) these payments constituted an interest in the capital of the trust estate payable at intervals. A power to advance principal in emergent circumstances was contained in item XII of the will but had never been exercised.
18. The primary question which arose was whether those yearly payments represented income in the hands of Lady Inchyra.
19. There was no dispute that the nature of Lady Inchyra's interest under the will must be determined by the law of the District of Columbia and that according to that law her interest was one in the capital of the trust estate. It was further contended, however, for the taxpayer that one must ascertain in accordance with the law of the District of Columbia, not only the nature of her interest but also the quality of the receipts in her hands as capital or income. For the Crown it was contended that, having ascertained the nature of her interest under the law of the District of Columbia, one must determine the character of her receipts as capital or income in accordance with the law of England.
20. His Lordship, having found that the character of the receipts in the hands of Lady Inchyra was to be decided according to the law of England and not that of the District of Columbia went on to say, at pp.53-54 -
``It remains, then, to consider whether, under English law, these periodical payments out of capital under the will of Mrs. Van Swinderen are to be regarded as capital or income in the hands of Lady Inchyra. It is well established that a payment may be made out of capital of the payer and yet be income in the hands of the recipient. This principle has been applied by a long line of decisions to the position where a will or settlement makes provision for payment to a beneficiary of a series of recurrent payments over a substantial period of time and where those payments fall to be made out of capital. The position is, as a rule, particularly clear where the series of recurrent payments falls to be made over a period related in some way to the life of a beneficiary: see, in particular, in this connection,
Brodie's Will Trustees v. Commrs. of I.R. (1933) 17 T.C. 432;
Jackson's Trustees v. Commrs. of I.R. (1942) 25 T.C. 13; and Postlethwaite v. Commrs. of I.R. 41 T.C. 224. The last two cases are especially in point here inasmuch as there the yearly sum was directed to be paid exclusively out of capital.
It seems to me impossible, having regard to that line of cases, to hold that in the present case the series of annual payments which fell to be made to Lady Inchyra during the period of
ATC 25520 years or her earlier death represents anything but income in her hands. Indeed, the present case is a fortiori the most recent decision - that in Postlethwaite (supra) - since there the periodical payments were expressed as instalments of a lump sum, and any balance of the lump sum was made payable on the death of the beneficiary. Mr. Miller does not seek to draw any distinction for the present purpose between a provision for payment of a lump sum payable by annual instalments and a provision for an annual sum representing a percentage of capital.
Mr. Miller placed some reliance on the express power in item XII of the will to `advance principal in any emergent circumstances affecting' to Lady Inchyra. He contends that the existence of this discretion indicates that the provision in the second codicil is not intended as an augmentation of income. I do not myself think the existence of the power affords any significant guide to the character of the provision.
On this issue, then, it seems to me that the decision of the commissioners was correct, and I dismiss the appeal.''
The second issue involved in the case related to another matter.
21. Considering the terms of cls.4, 9 and 10 of the will here under consideration in the light of the above decisions we find it impossible to hold otherwise than that the yearly payments of £600 ($1,200) received by the taxpayer thereunder were of an income nature and constituted assessable income even though they were payable out of the capital of the testator's residuary estate.
22. In respect of the original assessment for the year of income ended 30 June 1966 a further question arose, namely, whether the taxpayer had taken a valid objection thereto within the time limited by sec.185 of the Assessment Act. That assessment, which issued on 20 May 1968, had included as assessable income, inter alia, the sum of $2,400 being the total of the amounts received by taxpayer in respect of payments due to her out of the $18,000 fund. This sum included arrears for the previous year which were paid in the subject year. Had we decided that the payments under review were, in the hands of the taxpayer, capital, and not receipts of an income nature and so assessable to tax, this question would have been of considerable importance, but in view of our finding on this matter as expressed above it is unnecessary to be dealt with and we make no finding thereon.
23. We uphold the Commissioner's decisions on the objections and confirm the respective notices of amended assessment for the years ended 30 June 1966 and 1967 and the notice of assessment for the year ended 30 June 1968.