Case R71

Judges:
HP Stevens Ch
TJ McCarthy M
PM Roach M

Court:
No. 1 Board of Review

Judgment date: 25 July 1984.

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H.P. Stevens (Chairman)

The question for decision in these jointly heard references of husband (A) and wife (B) is whether each has been correctly regarded, pursuant to the provisions of sec. 97(1)(a)(i), as being presently entitled to a share of net income of $584 from the X Trust for the year ended 30 June 1979.

2. By instrument dated 8 March 1965 A and B acquired a lease of land for the purpose of building a structure which would be both a residence and a place of business for B who was a physiotherapist - planning provisions allowing for such dual use. After erection of the structure B conducted her practice as a physiotherapist at those premises (rent not paid to anyone until the formation of the X Trust in 1977) whilst A and B occupied it also as their place of residence.

3. Sometime in 1977 the matter of the formation of a trust was discussed by A and B with a solicitor. A said ``the basic intention in the formation of the trust was to enable beneficiaries under our wills to have the maximum flexibility in dealing with the asset

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which finally came to all beneficiaries''. B added that, not having children of their own and beneficiaries being from two different families, ``it was a good idea to have something in which a decision to sell the house quickly need not be so imminent if something happened to both of us in a car accident''. She also said another reason related to possible negligence actions against her by patients - it being ``good to separate my business affairs from the house, otherwise the house could have perhaps been taken from above our head''. In due course the X Trust came into existence by virtue of Deed dated 29 April 1977 with one W as settlor, A as trustee and four named persons including A and B as beneficiaries - the relevant provisions of the Deed will be referred to later.

4. The lease including the building was apparently valued at the time at $50,000 and it was said the original intention was for A and B to ``transfer the property by deed of gift''. However ``events overtook that idea and financial difficulties also would have made it impossible'' and in lieu $50,000 was ``loaned'' to the X Trust. No cheques were drawn and the loans are evidenced by receipts dated 14 June 1977 for $25,000 each from A and B ``being interest free loan''. A further receipt of the same date records a ``payment'' by the X Trust of $50,000 to A and B ``being for Sale of Property... (subject to contract and approvals)''. This latter receipt is attached to a typed document dated 14 June 1977 signed by A and B which records that

``in consideration of the payment of Fifty thousand dollars, only ($50,000) receipt of which is hereby acknowledged we, the joint lessees (A and B) of property comprising... hereby agree to complete a transfer of the said property (subject to contract and approvals) to The (X) Trust.''

Although these documents are dated 14 June 1977 a Memorandum of Transfer of Crown Land signed by A and B in the presence of their solicitor recording that A and B in consideration of $50,000 ``paid to me by (A) the receipt whereof I hereby acknowledge, do hereby transfer to the said (A) all the estate and interest in'' the respective property is dated 29 April 1977 - some discussion took place as to whether it was really 26 April but I am prepared to accept it as being 29 April. The property is still registered in the name of A (registered 18 October 1977) and no notification that would have required the Registrar to record a caveat in terms of sec. 124(3) of the Real Property Ordinance of 1925 has been given.

5. Whilst B paid no rent to anyone prior to the formation of the X Trust it was ``agreed that the equity of the situation now required that the business operating on the trust property by her should pay a rent (to) the trust of $3,000 a year''. A payment of $3,000 was made to the solicitors' trust account in June 1977 on account of a year's rent in advance. From this amount the solicitors deducted their fees of $500, property transfer fees of $500 and rates $85.91 leaving a balance of $1,914.09 which was reduced by further solicitors' fees for 1977-1978 of $714.09 and the balance $1,200 was deposited to the X Trust bank account on 30 June 1978 (account opened by A with a loan of $4 on 5 September 1977). Further years' rents of $3,000 were deposited to this account on 15 May 1978, 11 June 1979, 24 June 1980, 19 June 1981 ($2,000), 30 June 1981 ($1,000), 13 May 1982 and 21 June 1983. The total solicitors' and transfer fees of $1,714.09 were apparently later adjusted to $1,658 and the amount of $56.09 was taken ``into current accounts of the year 1982-83''.

6. The trust return for the year ended 30 June 1979 disclosed a net income of $2,337 and a Balance Sheet as at 30 June 1979 included, inter alia, ``Future provision for... Required maintenance and repairs 4,000 Proposed alterations part 700.14''. A footnote was in the following terms:

``The trustee exercises discretion in making no distribution of income for the 1978/9 year. This will permit savings to be expended on the greatly overdue maintenance and repair of the Trust property. Funds available are barely adequate for work necessary, now, and the small additional sum designated as towards future alterations is a contingency sum for immediate work and may not be available as intended.''

In evidence A deposed that having taken over the Crown lease the trustee was liable to observe the covenants of the lease to ``maintain repair and keep in repair all buildings and erections on the said land all to the satisfaction of the Minister'' and that if he did not the Minister may take necessary action. Accordingly it was required of him that he set amounts aside for the

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maintenance of the property and ``the intention of the trustee at that time was to carry out fairly substantial works on the building - far in excess of the sum of money set aside for maintenance''. It was also A's intention at the time to build some extensions to the property as well.

7. Precise details of the various returns of the Trust and how they have been assessed is not available beyond the statement that the trustee has been assessed on certain amounts in terms of sec. 99A - the tax being as follows for the years given:

      1977       Nil

      1978       $1,324 + $61 medical levy

      1979       $161 + $2 medical levy

      1983       $1,566.60
          

The basis of the trustee's assessment other than for 1979 is unknown but it was claimed by A that the total claimed for all years is $6,041 (thus preventing any actual maintenance etc. being carried out). For 1979 the net income returned of $2,337 was increased by the disallowance of repairs regarded as capital expenditure $262 to $2,599 - the four equal beneficiaries were regarded as presently entitled to one quarter share of the returned net income of $2,337 i.e. $584 with the $262 being assessed to the trustee in terms of sec. 99A. Thus the Commissioner adopted the amount rather than the proportion concept in relation to sec. 97(1) and possibly this was the reason for the other assessments on the trustee.

8. Whilst the trustee is primarily concerned about the assessments upon the trust estate the only issue before the Board is in relation to the assessments of the beneficiaries A and B. A accepted this situation stating that he appreciated this although indicating ``I very much fear that at a later date the Trust will be before this Tribunal''.

9. Turning now to the provisions of the Trust Deed these are unusual in that although cl. 1(c)(iii) defines ``The trust fund'' as including ``any accumulation of income made in pursuance of this Deed'' cl. 5(a) specifically states that ``Notwithstanding any other provision of this Deed, any authority or direction to the trustee either expressly or impliedly to accumulate any income-hereunder is hereby expressly excluded''. Clause 3 provides -

``(a) Until the distribution date the trustee shall on or before each 30th day of June as it in its absolute discretion determines either:

• (i) Pay the whole or any part of the net income arising from the trust fund in the annual accounting period ending on that 30th day of June to all or any one or more of the beneficiaries or such of the issue of the beneficiaries as shall then be living as the trustee in its absolute discretion determines; or
• (ii) Apply the whole or any part of such net income for the maintenance education advancement or otherwise for the benefit of the beneficiaries or such of the issue of the beneficiaries as shall then be living in such proportions as the trustee in its absolute discretion determines.

PROVIDED HOWEVER that if the trustees shall not have exercised such discretion in respect of the whole or any part of such net income in any annual accounting period ending on the 30th day of June then such of the beneficiaries as shall be living at the expiration of such accounting period shall share equally in such whole or such part of such net income and be entitled to be paid the whole thereof in equal shares.

(b) For the purpose of determining the net income to be paid or applied as aforesaid all costs charges and expenditures incurred in earning that income and such costs charges and expenditure properly incurred in managing and administering the trust fund and any taxes for which the trustee shall be charged or debited against the gross income derived or arising in each annual accounting period.''

10. It is common ground that A did not exercise his discretion in terms of cl. 3(a)(i) or (ii) above and the proviso therefore operates. The right to share equally and the entitlement to be paid the whole thereof in equal shares in my view clearly satisfies the terms of sec. 97 - see
F.C. of T. v. Whiting (1943) 68 C.L.R. 199 and
Taylor & Anor v. F.C. of T. 70 ATC 4026 - and I would hold that the beneficiaries A and B have been correctly regarded as being within the terms of that section.

11. In Case R32,
84 ATC 298 I expressed the view that the proportion concept applied in relation to sec. 97(1) and on this basis A and B should have been assessed on one quarter of

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$2,599 (para. 7) and not one quarter of $2,337. If this view be correct then A and B have been assessed on a lesser amount than they should have been (I would not increase their assessments however) whilst the trustee should not have been assessed.

12. An argument was also put on behalf of the Commissioner in relation to whether the property did in fact form part of the X Trust but in view of the above conclusion it is unnecessary to deal with this argument. It is also unnecessary, having regard to the terms of taxpayer A's objection, to consider whether cl. 17 of the Trust Deed properly interpreted operates to exclude him from being a beneficiary of the Trust - similar for B.

13. For the above reasons I would uphold the Commissioner's decisions on the taxpayers' objections and confirm their assessments for the year ended 30 June 1979.