Case E47
Judges:AM Donovan Ch
GR Thompson M
RK Todd M
Court:
No. 2 Board of Review
A.M. Donovan (Chairman); G.R. Thompson and R.K. Todd (Members): These references come before the Board at the request of a taxpayer company, A & Co. Nominees Pty. Ltd., which was incorporated in 1965. It had no income in the year ended 30 June 1965, and the years of income with which we are concerned are those ended 30 June 1966 and 1967 respectively.
2. The taxpayer company is the trustee appointed pursuant to the provisions of three deeds of trust which were executed in April 1965, and we shall refer to it as ``the trustee''. It has no other interests or activities other than as trustee in relation to the trusts created by the deeds of trust referred to.
3. The provisions of the three deeds of trust are interlocking. They may, with the background to the creation of the trusts, be explained and summarised as follows: A and his wife had three children, X, Y and Z. At all material times for the purposes of these references these children were all under the age of 21. Their aunt, C, decided to settle upon each of them the sum of £25. Pursuant to the provisions of each deed of trust one of the three children was referred to as the ``primary beneficiary''; that primary beneficiary and his or her brothers and sisters, their spouses and children, the children of such brothers and sisters, and also any additional persons named in a schedule to the deed were referred to as the ``general beneficiaries'', with the father and mother of the children being named as such ``additional persons''; a ``vesting day'' was nominated by the schedule to each deed as being the date of death of the survivor of the father and mother. The deeds were entered into between C, as settlor, and the trustee.
4. The primary beneficiary under each deed of trust was different, each of the three children, X, Y and Z, taking his or her place accordingly as one of such beneficiaries, but having regard to the definition of ``general beneficiaries'' those general beneficiaries are the same in the case of each deed of trust. The provisions of the deeds are otherwise identical.
5. Paragraph 3(i) of each deed provided as follows -
``The Trustees (sic) shall in each year until the Vesting Day pay apply or set aside the whole or such part (if any) as they shall think fit of the net income of the Trust Fund of that year to or for the benefit of all or such one or more exclusive of the others or other of the General Beneficiaries living from time to time in such proportions in such manner and subject to such terms limitations and provisions as the Trustees in their absolute discretion shall think fit.''
6. It was next provided by each deed that from the vesting day, the trust fund, together with income thereof which should by then have been accumulated (the power to so accumulate having been given) was, in substance, to be held for the general beneficiaries in such proportions and for such interests as the trustee might appoint and in default of appointment for the primary beneficiary, with contingent provisions dealing with a situation in which the primary beneficiary should not have survived to the vesting day.
7. The effect for present purposes of the provisions referred to is that the trustee, until the vesting day, holds the income of each of the three trust funds upon a discretionary trust to pay or apply as much of such income as it thinks fit for the benefit of the general beneficiaries.
8. In the 1966 year, the first year with which we are concerned, the trustee received rents from the letting of a building which it owned in common with one B. There was no other income. In the 1967 year rent was again received from this source, but in addition income was derived from a building partnership in which the trustee engaged with one C and there was also an item of rental arising from the letting of a factory which the trustee had built on land acquired by it.
9. The substantial amounts of capital necessary for pursuing the three activities from which income has been derived was obtained from loans made to the company by A or by some one or other business enterprise of his. The trustee banked the greater part of the original settlement monies
ATC 387
in savings bank accounts, but these were not accounts opened by the trustee but were accounts in the name of ``A and E as trustees'' for each of the three children respectively which had been opened as far back as 1961 as a consequence of the creation of three other trusts each for the benefit of the same children. E was and is the accountant for A, his family and his various businesses. On 1 June 1966, most of the sums outstanding in these three latter accounts, some $940 in all, were advanced to the trustee, leaving remaining only the sum of $37.92 in each of two of the accounts, sum of $24.21 in the third account.10. The initial question which arises in each reference is whether any beneficiary was in the relevant years presently entitled to a share of the income of the trusts: sec. 98 of the Income Tax Assessment Act. In view of the terms of the trusts, whereunder the trustee has a discretion to pay or apply some or the whole of the income of the trusts to or for the benefit of one or more of the beneficiaries, a finding of present entitlement is dependent upon a finding that sec. 101 of the Act applies. That section provides as follows -
``For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.''
11. It is therefore necessary to decide whether the trustee in the instant circumstances paid income of the trusts to any beneficiary or applied income for his or her benefit.
12. In the 1966 year, at a meeting of directors of the trustee held on 20 June 1966, the following was resolved -
``That the income of the Company under 3 Deeds of Trust created by (C) on 13 April 1965 for the benefit of the family of (Mr. and Mrs. A) be set aside and apportioned for and shall belong to the following beneficiaries as follows -
Income derived as rent from the building owned in common with (B) and situated at -
to (X) one-third of the net income
to (Y) one-third of the net income
to (Z) one-third of the net income.''
13. On 22 June 1966, the sum of $590 was paid by the trustee to the credit of each of the three savings bank accounts to which we have referred. In each case however the sum in question was immediately lent back to the trustee as an interest-free unsecured loan. This appears to have been effected simply by an informal decision by A and E as self-appointed ad hoc trustees. There seems no valid reason to suppose that they ever held these sums pursuant to the 1961 trust, the use of the savings bank accounts which had originally been opened for the purpose of that earlier trust being a matter of convenience only.
14. A ``profit and loss statement'' contained in the accounts lodged by the trustee with the return for the 1966 year set out the following -
``Share in Partnership (trustee and B) 1972.03
Rates and taxes refunded 8.59
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1980.62
less Bank charges 6.45
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NET INCOME of Trustee for year: 1974.17
Paid out to Beneficiaries as follows -
on 22nd June 1966 to (X) 590.00
(Y) 590.00
(Z) 590.00 1770.00
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Unpaid Balance: $204.17
----------
ATC 388
15. In the 1967 year a substantially similar course of conduct was followed, though the terms of the resolution passed by the directors may be said to have been strengthened somewhat. That resolution was carried at a meeting held on 25 June 1967. It was preceded by a resolution of an administrative nature which recorded that ``the trust fund constituted by 3 Deeds... whereby (C) established trusts for the benefit of the family of (Mr. and Mrs. A) be known for administrative purposes as the `(A) Family Trust'.'' The substantive resolution was as follows:
``That the income of the (A) Family Trust for the year ended 30 June 1967 be set aside and apportioned for and shall belong to the following beneficiaries as follows -
(a) As to the income derived by the Trust as rent from the building owned in common with (B) and situated at...: -
- to (X) one-third of the net income
- to (Y) one-third of the net income
- to (Z) one-third of the net income.
(b) As to the income derived by the Trust from the building partnership with (C):
- to (X) one-half of the net income
- to (Y) one-half of the net income.
(c) As to the balance of the income, being income derived by the Trust as rent from the (factory) property situated at...: -
Firstly: -
to Z an amount equal to the amount set aside and apportioned to each of X and Y as their share of the partnership carried on with (C)
and Secondly
to X one-third of the balance remaining hereafter
to Y one-third of the balance remaining hereafter
to Z one-third of the balance remaining hereafter.
That the shares of income aforesaid be credited to each beneficiary respectively in the books of the Company as soon as ascertained and that each such share be paid forthwith to the beneficiary entitled to it or be applied for the benefit of such beneficiary by being paid to the credit of the beneficiary's bank account, less any amount which may already have been thus applied.''
16. It will be seen that the last portion of the resolution goes further in its terms than did that of the previous year. It is also to be noted that the concluding words of it reflect the fact that amounts had already been paid to each child. On 23 May 1967, the sum of $2,000 had been paid into each of the savings bank accounts and had again been immediately withdrawn and lent back to the trustee as loans by the three children upon the same basis as before.
17. The ``profit and loss statement'' for the 1967 year ran as follows -
``Share in Partnership (trustee and C) 1574.71
Share in Partnership (trustee and B) 5266.34
Rent received 2145.00
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8926.05
less: Bank Charges 26.55
Insurance 24.05
Accountancy 107.00
Rates 54.24
Repairs 75.00 286.84
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The sums of $2,639.21 and $204.17, making up the total of $2,843.38 described above as ``Unpaid Profits'', were in fact distributed to the beneficiaries in equal shares on 25 March 1968.
18. The Commissioner assessed the trustee upon the whole of the net income of the trusts in respect of the year ended 30 June 1966, namely the sum of $1,974, upon the basis that no beneficiary was presently entitled to any share of such income, and upon the further basis that he was not of the opinion that it would be unreasonable for sec. 99A of the Income Tax Assessment Act to apply. He took the same view, in respect of the year ended 30 June 1967, in relation to the sum of $8,639. The trustee contends that each of the beneficiaries was presently entitled to a one-third share of the sums in respect of which the Commissioner has assessed the trustee.
19. The argument for the trustee proceeded in three stages: First, it was said that the resolutions which were passed at the meetings of the directors of the trustee were of their own force sufficient to amount to an effective application for the benefit of each beneficiary within the meaning of sec. 101 of the Act. Second, the payments actually made were payments to the beneficiaries within the meaning of sec. 101 of the Act. Third, if both the first and second arguments should fail, it would be unreasonable for sec. 99A of the Act to apply.
20. A trustee who has a discretion, whether the same be conferred by the trust instrument or by an applicable statute relating to trustees, to pay income of the trust to an infant beneficiary or to apply such income for his benefit, has some problems if he is, as he ought to be, directing his mind to the nature of the income tax liability which will be incurred as a result of the action he takes. If he has free income during the year he can make a payment to a beneficiary, or make an application of money for his benefit, as by paying school fees, medical expenses or whatever. If however payment during the year is inconvenient or impossible, the question arises of the sum that may be paid or applied for the purposes of sec. 101 at a time, before 30 June when the trust accounts have not been finalised. The Commissioner has recognised this difficulty and has adopted a practice of allowing a two month period, to the end of August, in which a distribution may be made and be treated as a distribution in respect of the financial year which ended on 30 June. In these references, the resolutions were passed before the end of the financial year, but the disbursements made in purported compliance with the resolutions were partly made before the end of the financial year and partly well after it had ended. If the trustee's claims are to succeed in full, as it were, it must rely on the effect of the resolutions.
21. In our opinion the resolutions cited had the effect contended for by the trustee, in reliance upon the decision of the Court of Appeal of New Zealand in
Commr. of I.R. (N.Z.) v. Ward 69 ATC 6050. In that case the trustee stood possessed of the assets of the trust and of any accumulations of income thereon for such of the children of the trustee and her husband as should attain the age of 21 as tenants-in-common in equal shares with provision for substitution of the issue of any deceased child. Section 40 of the Trustee Act 1956 (N.Z.) conferred on the trustee the familiar statutory power to pay to the parent or guardian of, or to apply for the benefit of, an infant beneficiary the whole or such part as may be reasonable, of the income of property held in trust for such beneficiary. Section 155 of the Land and Income Tax Act 1954 (N.Z.) provided as follows -
ATC 390
``With respect to income derived by a trustee the following provisions shall apply -
(a) If and so far as the income of the trustee is also income derived by a beneficiary entitled in possession to the receipt thereof under the trust during the same income year, the trustee shall in respect thereof be deemed to be the agent of that beneficiary, and shall be assessable and liable for income tax thereon accordingly, and all the provisions of this Act as to agents shall, so far as applicable, apply accordingly...
(b) If and so far as the income of the trustee is not also income derived by any beneficiary as aforesaid, the trustee shall be assessable and liable for income tax on that income in the same manner as if he were beneficially entitled thereto, save that the rate of tax shall be calculated by reference to that income alone, and that (the trustee shall be entitled to a deduction by way of special exemption of two hundred pounds for the purpose of assessing ordinary income tax, and shall not be entitled to any further deduction by way of special exemption for the purpose of assessing either ordinary income tax or social security income tax):
Provided that in any case where a trustee is required or is empowered at his discretion to pay or apply income derived by him to or for the benefit of specified beneficiaries or to or for the benefit of some one or more of a number of specified beneficiaries or of a specified class of beneficiaries, a beneficiary in whose favour the trustee so pays or applied income shall be deemed to be entitled in possession to the receipt of the amount paid to him or applied for his benefit during the income year by the trustee under the trust:
Provided also that where the income of the trustee is also income derived by any beneficiary who is an infant but whose interest in that income is vested, the beneficiary shall for the purposes of this section be deemed to be entitled in possession to the receipt of that income under the trust during the same income year.''
22. Shortly before the end of the financial year, the trustee in Ward's case executed the following document -
``I, Joyce Elayne Ward, Trustee under Trust Deed dated 16 September 1959, hereby determine that the Income of the Trust for the year ended 31 March 1963 shall be disposed as follows -
To be retained and added to the capital
of the Trust L699.14.6
To be held for the credit of my four
children in equal shares 3540. 0.0
------------
Total income derived from sales
of land L4239.14.6
------------
In addition the interest to be credited on the Post Office
Savings Bank account shall be held for the credit of my four
children in equal shares.
Dated this 29th day of March 1963.
J.E. Ward.''
This declaration was carried into effect in the books of the trust but the appropriate entries were not made until after the end of the financial year. No part of the income credited to the four children was however paid to them until some years later when the amounts standing to their credit in the books of the trust were paid into separate post office accounts. The question then was whether the trustee had paid or applied, income, to or for the benefit of the beneficiaries within sec. 155 of the Land and Income Tax Act 1954 so that the beneficiary was to be deemed to be entitled in possession to the receipt of the amount paid to him or applied for his benefit during the income year by the trustee. It was held by the Court (North P., and McCarthy J., Turner J. dissenting) that the declaration did amount to an application within the relevant provisions.
This decision is of course of very high persuasive authority, and it is not strictly necessary to say more than that it applies in our opinion to the facts proved in this case, there being no significant point of difference between the provisions of the proviso to sec. 155 of the New Zealand legislation and sec. 101 of the Income Tax Assessment Act. There are however a number of points worth
ATC 391
emphasising as they appear from the judgment, in which a very close examination is made ofRe Vestey's Settlement; Lloyds Bank Ltd. v. O'Meara (1951) Ch. 209, an examination which had not occurred in
Montgomerie v. Commr. of I.R. (N.Z.) 14 A.T.D. 102.
23. First, a declaration, resolution or whatever of the trustee will amount to an application if it is immediately and irrevocably effective to vest a specific portion of the income of the year in the beneficiary so that his contingent interest in the trust income becomes an absolute interest in the income allotted to him. Second, it is immaterial whether the income is immediately used for the benefit of the beneficiary and it is sufficient if it is allocated to him in terms which makes the part of the income so allocated the separate property of the beneficiary. Third, the fact that a specific sum is not named (as in Ward's case the Savings Bank interest was not) is immaterial provided that the distinct sum in question is or becomes ascertainable from the trust accounts. Fourth, it is not correct to say that a resolution should not be regarded as applying income unless it acted as a declaration of trust imposing a new trust on the trustee in favour of the beneficiaries or created a debtor-creditor relationship between them. The decision in Vestey's case is against the first of such propositions, and as far as the creation of a debtor-creditor relationship is concerned the rights of the beneficiaries do not arise out of debt or contract but out of the trusts created by the deed of trust, and the beneficiaries are entitled to invoke the powers of the Court by reason of a new title consisting of the exercise of the trustees' discretion in favour of the infant beneficiary, the effect of which was deliberately and distinctly to destroy his previous contingent expectation and convert it into an absolute title.
24. For the Commissioner it was argued, as we understood it, that looking beyond the resolution at the terms of the trust the trustee had such wide powers as to lead to a conclusion that the trustee's decision was not irrevocable. We intend no discourtesy by not canvassing counsel's submissions in any detail. We have considered them carefully but they do nothing to shake our view that these references are governed by the decision in Ward's case. If that conclusion is correct, counsel is thrown back on the argument that notwithstanding the effect of the resolution, cl. 22 of the deeds permits the divesting of the interest the resolutions conferred. We are unable so to construe it.
25. The Commissioner's other arguments seem to have related to the circumstances in which the actual disbursements were made, and in view of the conclusion which we have reached as to the effect of the resolutions passed in each year it is unnecessary to consider the effect of these disbursements. The difficulties involved in making a payment to an infant must be recognised, but one can be pardoned for experiencing a sense of disquiet at the way in which the infant beneficiaries' entitlements were handled in this case. It may well be that their interests were best advanced by their entitlements being lent back to the trustee, interest free and repayment unsecured, so that the funds available to the trust could be swollen, but one would feel happier about the decision if it had been made by trustees who were at arm's length from the administration of the family enterprises and of the trust itself. As we have already indicated, however, the question whether a finding would be required that, in the absence of the resolutions, no payment to, or application for the benefit of, the beneficiaries had been made, does not in our opinion arise and must be left quite open.
26. In view of the foregoing, it is also unnecessary to consider the applicability of sec. 99A of the Act.
27. In the result we consider that the trustee's objections should be allowed, and the assessments amended accordingly.
Claims allowed
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