Herdegen & Anor v. Federal Commissioner of Taxation

Gummow J

Federal Court

Judgment date: Judgment handed down 2 December 1988.

Gummow J.

The facts

These matters were heard together and raise the same issue. The applicant in matters G2773 and G2774 of 1987 is the wife of the applicant in matters G2775 and G2776 of 1987. All four matters were commenced in the Supreme Court of New South Wales and were transferred into this Court upon the coming into operation of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987.

In matter G2773 of 1987, the applicant taxpayer, Mrs Herdegen, lodged a notice of objection against an assessment to vendor shareholder recoupment tax based upon the unpaid undistributed profits tax due and payable (in respect of the income year ended 30 June 1980) by a company later named Chicken Grills

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Pty. Limited but named at the time of the events in question Onedin Investments Pty. Limited (``Onedin Investments''). In matter G2774 of 1987, the same applicant objected to an assessment to vendor shareholder recoupment tax based upon the unpaid ordinary company tax due and payable by Onedin Investments in respect of the same year of income. In matter G2775 of 1987, the applicant taxpayer, Mr Herdegen, objected to an assessment to vendor shareholder recoupment tax based upon the unpaid undistributed profits tax due and payable by Onedin Investments in respect of the income year ended 30 June 1980. Finally, in matter G2776 of 1987, the same applicant objected against an assessment to vendor shareholder recoupment tax based upon the unpaid ordinary company tax due and payable by Onedin Investments, in respect of the same year of income.

In each matter the applicant, being dissatisfied with the decision of the Deputy Commissioner of Taxation upon the relevant objection, requested the Commissioner to treat the objection as an appeal and to forward it to the Supreme Court of New South Wales.

Before stating the issues which are common to all four matters, it is appropriate first to deal further with the position of Onedin Investments. Onedin Investments started its life as Beal Pty. Limited, which was incorporated in 1968. Control of the company passed to Mr and Mrs Herdegen in about 1972 and the company remained as what was described in the evidence as a ``shelf company''. The company changed its name to Onedin Investments Pty. Limited on 12 March 1979. At that time, and at the time of the events in issue in these proceedings, Mr Herdegen was the registered holder of 59 shares in the issued capital of Onedin Investments (numbered 1-10, 52-100), and Mrs Herdegen was the registered holder of 41 such shares (numbered 11-51). This represented the total paid-up capital of the company, and there was about $180 in the appropriation account. The result was that shareholders' funds were $280. Mr Herdegen also controlled a company named Onedin Corporation Pty. Limited (``Onedin Corporation''). Mr Herdegen was a Fellow of the Australian Society of Accountants and in practice as an accountant.

In 1980 Mr and Mrs Herdegen, as holders between them of all the issued shares in Onedin Investments, entered into a written agreement with a company named Shareholder Pty. Limited to sell their entire shareholding in Onedin Investments. The agreement bears the date 27 June 1980. In it Mr Herdegen is shown as selling 59 ordinary shares of $1 for a sale price of $184,378.40 and Mrs Herdegen is shown as selling 41 ordinary shares of $1 for $128,127.43, giving a total of $312,505.83. The document is not felicitously drawn. It provides, in cl. 3, that:

``At completion the Vendors will: -

  • (a) Hand to the Purchaser
    • ...
    • (iv) a bank cheque in the sum set forth in Item 8 in the Schedule naming as the payee the nominee of the Purchaser set forth in Item 8 in the Schedule. OR ALTERNATELY a Certificate of Deposit from the person nominated in Item 8 of the Schedule evidencing a deposit by the Company with such person of the amount shown in Item 8 in the Schedule.''

The amount identified in Item 8 is $312,505.83 which was, of course, payable not by the vendors, but to the vendors.

The evidence also includes two share transfers each dated 27 June 1980, that is to say the date carried by the written agreement. The first transfer is in respect of Mr Herdegen's 59 ordinary shares, transferred for a consideration of $184,378.40 and the other transfer in respect of Mrs Herdegen's 41 ordinary shares transferred for a price of $128,127.43. The transferee in each case is identified as Shareholder Pty. Limited. This company was described in the evidence as a company associated with the late Mr Wynyard.

On the same date, 27 June 1980, there was paid to the credit of an account of Onedin Corporation with Bank of New Zealand, the sum of $312,505.83. The deposit slip bears the notation, in Mr Herdegen's handwriting:

``Onedin Corpn




The initials are those of Mr and Mrs Herdegen.

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In his affidavit, sworn in these proceedings on 6 April 1987, Mr Herdegen deposed as follows:

``3. During the financial year ended 30 June 1980 the company [Onedin Investments] was involved in advancing funds as bridging finance and earned interest from this activity.

4. The funds which were earned by the company came from the efforts of myself, John Arthur Prideaux Boyden who was an employee of Selway Investments Pty. Limited and Garry Kellar Allen the Managing Director of Transia Corporation Limited who introduced the borrowers.

5. During the period from February 1980 to 27 June 1980 income of approximately $312,000 was earned by the company.

6. On about 27 June 1980 the shares in the company were sold and the proceeds of sale were paid out to the beneficial owners of the shares. Pending directions from these persons the funds were held by [Onedin Corporation].


9. I regarded the shares as the trust property of myself as to 25 shares, John Arthur Prideaux Boyden as to 37 shares and Garry Kellar Allen as to 38 shares. This trust came into existence as a result of a conversation which I believe took place during the first half of 1979 to the following effect:

KJH: `I have a company called Onedin Investments Pty. Limited. We could use it to finance Slutzkin schemes if you need another vehicle. My wife Helen and I are the only shareholders and can hold the shares in trust. We have to work out the proportion of shares for each of us. You too will obviously introduce more income so I suggest that 25 be held for myself and Helen and the balance split between you. There are a total of 100 shares.'

GKA: `The balance of 75 shares does not split evenly.'

JAPB: `You can have one more than me Garry.'

KJH: `Okay, 25 for Helen and myself, 37 for Rex and 38 for Garry.'''

In his oral evidence, Mr Herdegen put the date of the conversation as in May 1979 at a meeting in Mr Allen's office at Transia Corporation Limited (``Transia'') in the City of Sydney; he also said that he always regarded the assets of himself and his wife as ``our joint asset''. In his affidavit Mr Herdegen deposed that no transactions of the kind described in para. 3, 4 and 5 were carried out until February 1980.

The evidence shows that the transactions carried out from February 1980 involved the borrowing by Onedin Investments from its banker of ``daylight facility funds'', the lending of those moneys to the proposed purchaser of shares in a ``cashed-up'' ``target'' company, the purchase of those shares, the drawing on behalf of the target company of cheques in favour of the purchaser which now controlled it, and the repayment of the moneys lent the purchaser by Onedin Investments. That company then repaid its banker before the dusk of an eventful day. Some of the transactions also took more complex forms. Plainly, there was some arrangement between Transia, Mr Boyden and Mr Herdegen as to the division of benefits flowing from these transactions. The question in these proceedings is whether Mr and Mrs Herdegen have shown the arrangement took the form of oral declarations of trust of certain shares in Onedin Investments. The statement of issues which has been filed by the respondent poses the questions of whether any, and if so which, shares in Onedin Investments held by Mr Herdegen and Mrs Herdegen were the subject of an oral declaration of trust by them in favour of Mr Boyden and Mr Allen.

In the period 2 July-9 September 1980 seven cheques were drawn on the account of Onedin Corporation whereby either directly or by medium of bank cheques purchased from Bank of New Zealand, there was paid $121,750 to Transia and $122,400 to Mr Boyden. Of these sums, that paid to Mr Boyden represented a percentage greater than 37% of the sale proceeds of the shares. Mr Herdegen's explanation for this in his oral evidence was that he and Mr Boyden were on good terms and agreed to adjust the amount at some later stage. The sum paid to Transia, $121,750, was some $2,998 more than the figure which represented 38% of the net proceeds of sale. This additional sum was explained by Mr Herdegen as representing interest for late payment, the right to which had been claimed by Mr Allen to Mr Boyden and conveyed by him to Mr Herdegen.

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Mr Allen in his evidence said the two cheques in question had been brought by Mr Boyden to the offices of Transia.

The respondent submitted, in my view correctly, that receipt by Mr Boyden and Transia of the moneys as I have described was equivocal in the sense that it was consistent with a host of commercial arrangements involving a division of profits but falling short of trusts as alleged. The same is true of the handwritten note (Exhibit C) in which Mr Herdegen recorded, in pencil, apparently over the period in question, and with visibly apparent alterations, details of the payments made after the sale of the shares.

Mr Boyden is a bankrupt. He did not give evidence and has had various disputes with Mr Herdegen in recent years. As I have indicated, Mr Allen gave evidence. He was called by the respondent. Mr Allen was managing director of Transia, an unlisted public company with a number of shareholders of apparent substance in the commercial community. Although neither applicant had so stated it in their evidence, in his submissions their counsel put the proposition that if shares were not held for Mr Allen they were held, alternatively, for Transia.

The issues

If there were trusts, such as alleged, the question then arises as to whether in each case the trustee held the relevant shares as bare trustee within the meaning of subsec. 5(5) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (``the Recoupment Act''). If any of these issues were decided adversely to the applicant in any of the four matters, then it was accepted that it would follow that the decision of the respondent, in rejecting the objection in question in that matter, should be confirmed. The applicants carry the burden of showing the respective assessments were excessive: Income Tax Assessment Act 1936, sec. 190, and the Recoupment Act, sec. 4.

Section 5 of the Recoupment Act is concerned with the identification of what is described in the legislation as primary taxable amounts. Mr and Mrs Herdegen say that by reason of the events they allege, subsec. 5(5) is applicable to them. This provides as follows:

``5(5) Sub-sections (1) and (2) do not apply in relation to the sale of shares or of an interest in shares by a person who was a bare trustee in respect of those shares or that interest but, where, but for this sub-section and sub-section (4), a primary taxable amount (in this sub-section referred to as `the trustee's taxable amount') would exist in relation to the person at a particular time in relation to such a sale -

  • (a) if there was only one beneficiary in the trust estate - a primary taxable amount equal to the trustee's taxable amount shall be taken to exist at that time in relation to the beneficiary; and
  • (b) if there were 2 or more beneficiaries in the trust estate - a primary taxable amount shall be taken to exist at that time in relation to each of those beneficiaries and, in relation to each beneficiary, that primary taxable amount is an amount ascertained by multiplying the interest in the trust estate of the beneficiary concerned, expressed as a fraction of the aggregate of the interests in the trust estate of the beneficiaries, by the trustee's taxable amount.''

The general nature of the Recoupment Act and associated legislation has been described by the High Court on two occasions:
MacCormick v. F.C. of T. 84 ATC 4230 at pp. 4231-4235 and 4240-4242; (1984) 158 C.L.R. 622 at pp. 630-637 and 646-649;
D.F.C. of T. v. Truhold Benefit Pty. Ltd. 85 ATC 4298 at pp. 4299-4300; (1985) 158 C.L.R. 678 at pp. 682-683. Recoupment tax is a tax upon a transaction which resulted in a company being stripped of its assets so as to be unable to pay company tax. If the nine criteria specified in subsec. 5(1) of the Recoupment Act are satisfied, a primary taxable amount shall be taken to exist at the time at which an amount of overdue company tax remains unpaid. This amount shall be taken to exist in relation to each person who, as the holder of shares in the company, sold the shares, the amount being equal to that part of the overdue company tax proportionate to the portion of the total consideration for the sale of the shares attributable to that person's sale of shares.

Whilst prima facie the vendor of shares obtained the benefit of the tax avoidance device and thus would bear primary liability for the tax recoupment, subsec. 5(5) recognises that the vendor may have been a bare trustee of the

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shares so that the burden should fall on the beneficiary. The adoption of the term ``bare trustee'' is expressive of a concern that the vendor of the shares should only escape liability where he had a legally minimal interest in the shares, so that the vendor would be liable where particular arrangements had the effect that the vendor held more than the bare legal title. Not only must there be a trust, but it must be a bare trust.

In some factual situations where the existence of an express trust is in issue, it will be against the interest of the alleged trustee to admit the trust. Thus evidence of acts by him subsequent to the date of the alleged declaration of trust which tend to show the existence of the trust will be admitted as admissions against (but not for) his interest:
Shephard v. Cartright (1955) A.C. 431 at p. 445;
Calverley v. Green (1984) FLC ¶91-565 at p. 79.569; (1984) 155 C.L.R. 242 at p. 262. Evidence was received on this basis in the present case, largely without objection, of events after May 1979 but before the passage of the Recoupment Act in 1982. The operation of that legislation, as this litigation illustrates, reversed the situation, it now being in favour of the applicants to show there were trusts of the shares which satisfied subsec. 5(5).

Were there trusts?

Counsel for the applicants submitted that for the purposes of subsec. 5(5) there might be a trust (and a ``bare'' trust) binding a vendor, although it was not possible for the vendor to establish which shares of a parcel held by the vendor were held for which of several beneficiaries. Thus, it was said that Mr Herdegen held 38 of his 59 shares in Onedin Investments on bare trust within the meaning of subsec. 5(5), although he might not be able to establish which of the 59 shares were so held and for whom they were held, as between Mr Allen, Transia or Mr Boyden.

In my view, this cannot be so. The trust asserted is an express non-purpose trust of personalty of the traditional type and without any of the complexities that arise in defining the nature of the rights of beneficiaries under the modern discretionary trust (as to which see
Gartside v. I.R. Commr (1968) A.C. 553). Even if it were a discretionary trust, the class comprising the objects of the exercise of the trustee's discretion still would have to be certain of identification in the sense of the authorities (as notably explained in
McPhail v. Doulton (1971) A.C. 424). And, in any event, there must be certainty also as to the property bound by the trust (
F.C. of T. v. Clarke (1927) 40 C.L.R. 246 at pp. 283-285, Scott on Trusts, 4th ed., 1987, §76, 77).

In the present case, each applicant propounds a trust of which he or she was trustee. Their counsel rather tended to approach the matters as if there was one trust with co-owners declaring themselves trustees of jointly owned assets. That thinking tends to obscure the issues. Further, if there is the necessary certainty in identity of trustee, subject matter and beneficiary, then in any given case it will be necessary for those propounding the express trust to establish on the part of the alleged settlor the presence of the necessary intention to constitute a trust. The relevant principles are explained by Herring C.J. in
Re Armstrong, deceased (1960) V.R. 202 at pp. 205-206, and by Megarry V.-C. in In
re Snowden (1979) Ch. 528 at p. 536 E-H. In the present proceedings, the alleged settlors are also the alleged trustees. In divining intention from the language they employed, the Court may look to the nature of the transaction and the circumstances in order to infer intention.
Trident General Insurance Co. Ltd. v. McNiece Bros Pty. Ltd. (1988) 62 A.L.J.R. 508 at p. 514 per Mason C.J. and Wilson J.

However, it should be borne in mind that the trusts alleged here were not the result of private family dealings where some imprecision of thought and expression might perhaps be expected, nor were they part of a pattern of business dealings each in legal form intended to follow those before it, with a resulting abbreviation in attention to detail. The trusts alleged here arose from a special business relationship between parties at arm's length and (save in the case of Mrs Herdegen) of experience in commerce and accounting matters.

It is plain, in my view, that in subsec. 5(5) of the Recoupment Act ``trust'' was being used in its technical sense, so that what is put forward by the taxpayer will qualify if it is an express non-purpose trust, and the trust must satisfy the requirements of certainty of subject matter and identity of trustee and beneficiaries. If this is so, subsec. 5(5) may apply. But subsec. 5(5) will only apply if that trust also answers the

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description of a ``bare'' trust, within the meaning of the subsection.

The account by Mr Herdegen in para. 9 of his affidavit (which I have set out earlier in these reasons) falls far short of indicating the necessary identity of trustee, beneficiary and parcel of shares. This is not the least because the looseness of the statement ``My wife Helen and I are the only shareholders and can hold the shares in trust'' leaves it quite unclear who was to hold which parcel of shares on trust for whom. The end result which would flow from para. 9 would be that 37 shares of the holding of either Mr or Mrs Herdegen were to be held by that unidentified trustee on trust for Mr Boyden, and that 38 of the shares on the holding of either Mr or Mrs Herdegen were to be held by that unidentified trustee on trust for Mr Allen.

As the case developed, the picture presented by the applicants became further clouded. In the written submissions for the applicants, it is said that Mr Herdegen contends for a trust in which he held 38 of his 59 shares on trust ``for Mr Allen or alternatively for Transia Corporation''. That company was not referred to in para. 9 of the affidavit. Further, on 7 October 1988, in his evidence at the examination under sec. 81 of the Bankruptcy Act 1966, with respect to Mr Boyden, Mr Herdegen said (p. 9) that he held ``approximately one-third'' of the shares in Onedin Investments on trust for Mr Boyden. In his oral evidence in the present proceedings, Mr Herdegen said that after the discussion deposed to in his affidavit, he had a conversation with Mrs Herdegen in which she apparently assented to his suggestion ``I should hold (Mr Allen's 38) shares in trust (and) you should hold Mr Boyden's 37 shares in trust out of your share(s)''. The oral evidence of Mrs Herdegen upon the subject was as follows:

``Well, could you do the best you can trying to recall what was said? - It was something to do - I understood that we were to hold shares on their behalf but that is all I remember.

Well, on whose behalf? - On behalf of a Mr Allen and a Mr Boyden.

Mr Hale: Perhaps we can have it in proper form.

Mr Gibb: Yes. Can you try and do the best you can in saying what you recall your husband said to you. I know it is a long time ago but doing the best you can? - He was doing some form of business with a company, Onedin, and he said that Mr Boyden and Mr Allen were involved in this and he wanted us to hold some shares on their behalf. That is very vague; I am sorry.

Can you remember what you said? - I just left it to him. It was his business.

Can you remember how many of your shares were to be held for these people? - No.

Any particular reason for that, that you cannot recall it? - Well, there was probably some form of conversation at the time but I just really do not recall it, you know: what was said I probably, something was probably said at the time and I just left it to John.

Why did you leave it to him? - I always leave all of our business to him.''

Finally, it should be recalled that in the first sentence of his affidavit sworn 6 April 1987, Mr Herdegen said he ``regarded the shares as the trust property of myself as to 25 shares. [Mr] Boyden as to 37 shares, and [Mr] Allen as to 38 shares''. In cross-examination, Mr Herdegen said that at the time he swore the affidavit, he regarded the shares as the trust property of himself and his wife.

In these circumstances, I am quite unable to be satisfied that Mr Herdegen has shown there was (i) an oral declaration of trust by Mr Herdegen that he held 38 of his 59 shares in Onedin Investments on trust for Mr Allen or, alternatively, such a declaration in favour of Transia; (ii) an oral declaration of trust by Mr Herdegen ``as agent for Mrs Herdegen'' that she held 37 of her 41 shares in Onedin Investment on trust for Mr Boyden, or, alternatively, an oral declaration to this effect by Mr Herdegen, without prior authority of Mrs Herdegen, but later ratified by her in the discussion of which they gave evidence. That is how the applicants' cases were put in counsel's written submissions.

(I should add that with respect to the 38 shares allegedly held on trust by Mr Herdegen, no attempt was made to indicate how they were selected from among the parcel of 59 shares numbered 1-10 and 52-100. The same is true of Mrs Herdegen's shares. As to whether such

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specific identification was essential to establish certainty of subject matter, or whether the shares might be treated as fungible for this purpose, the authorities appear to be unsettled:
Rollestone v. National Bank of Commerce 252 S.W. 394 at p. 398 (1923);
Busch v. Trutt 160 P. 2d. 925 at p. 928, affd. 163 P. 2d. 739 (1945). I am also prepared to assume without deciding that it would in law have been competent for Mr Herdegen to declare a trust for his wife in the way contended for by the applicants.)

What emerges from the evidence quite clearly is a failure by Mr Herdegen to focus his attention upon the distinction between the separate ownership of himself and his wife and the allocation of distinct parcels of shares between particular beneficiaries, and to frame accordingly the words relied upon to give effect to any intention to declare trusts. He may well have believed in May 1979 that what had been achieved was the creation of trusts of shares in Onedin Investments in favour of Mr Allen and Mr Boyden. But that would not be sufficient. The whole vice in the applicants' case is indeed manifest in para. 9 of Mr Herdegen's affidavit which puts the applicants' case in its most favourable light. The other evidence to which I have referred only emphasises that had it otherwise been sufficient for the applicants to rely on para. 9, it would have been quite unsafe for me to do so. I do not say that Mr Herdegen has set out consciously to mislead the Court, but there is in his varying recollections of what happened an element of ex post facto wish fulfilment which makes his recollection quite unreliable.

Mr Allen's recollection of what took place in 1979 is consistent with there having been a commercial discussion between him, Mr Herdegen and Mr Boyden for the provision of bridging finance and the involvement of Onedin Investments and Transia. But Mr Allen was insistent that there was no discussion of his taking a beneficial interest in shares in Onedin Investments as an individual. He would have seen the taking by him of a benefit such as this as inconsistent with his duties to Transia. Mr Allen agreed that there could have been discussion of a proposal whereby shares in Onedin Investments or a beneficial interest in such shares might have been acquired by Transia. But that does not go far enough for the applicants' case.

Was there an agreement to create trusts?

The conclusions I have expressed also place insuperable barriers in the path of the alternative formulation of the applicants' case. This rests not upon any immediately effective oral declarations of trust in May 1979, but upon the conclusion at the meeting in question of what in substance appears to be an alleged agreement to create trusts in respect of the shares, which agreements were performed subsequently, or which are in any event in equity to be regarded as having been so performed. The submission was as follows:

``Alternatively, by an agreement made between Mr Herdegen, Mrs Herdegen, Mr Allen (or Transia Corporation Limited) and Mr Boyden in 1979 the parties agreed that in consideration of Mr Boyden introducing clients to Onedin Investments to enable the commercial transactions to take place, Mr Herdegen would hold 38 shares on trust for Mr Allen (or Transia) and Mrs Herdegen 37 shares for Mr Boyden. The parties gave effect to the agreement and Mr and Mrs Herdegen performed their obligations by transferring the beneficial interest in the shares pursuant to the agreement. In any event, the agreement would be subject to an order for specific performance. Equity would therefore treat Mr Allen and Mr Boyden as beneficiaries from the outset:
Pullan v. Koe (1913) 1 Ch. 9.''

There is a number of difficulties with this submission. First, the evidence does not satisfy me that there was in respect of the shares any concluded agreement or agreements to the effect alleged, any, more than the evidence satisfies me there were immediately effective oral declarations of trust. There was nothing which in equity would be susceptible to an order for specific performance or simply would be regarded as done because it ought to be done (there being an agreement to do it): Pullan v. Koe (1913) 1 Ch. 9; In
re Lind (1915) 2 Ch. 345 at pp. 360 and 373;
Patti v. Belfiore (1958) 100 C.L.R. 198 at p. 210.

Secondly, the evidence does not show that Mr and Mrs Herdegen, in the terms of counsel's submission, ``performed their obligations by transferring their beneficial interest in the shares...''. The case on this hypothesis would not be one where a settlor performed a covenant by transferring the title to

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shares to the covenantee to hold them as trustee for the beneficiaries. It would be necessary to show something which amounted not to a transfer but to oral or written declarations of trust by the legal owners in favour of the beneficiaries. This has not been shown.

In this regard, I should deal with the suggestion that there were, in effect, declarations of executory trusts. This term is used usually to describe situations where there is (i) an agreement or covenant for the subsequent execution of a trust instrument; or (ii) a direction or declaration (usually in a will) giving instructions or short heads from which the trustee is to prepare a formal written settlement:
Sackville-West v. Holmesdale (Viscount) (1870) L.R. 4 H.L. 543 at pp. 571-572 per Lord Cairns. On no basis can it be said that Mr and Mrs Herdegen or either of them contemplated the preparation of a formal instrument of settlement that set out the effect of any arrangements with Messrs Allen and Boyden. It is therefore not strictly necessary to add that even in the case of an executory trust, the settlor's intentions must have been indicated with sufficient certainty;
Pass v. Mills (1886) 7 N.S.W.R. (Eq.) 34 at pp. 36-37.

It follows that the applicants have failed and the Court should not disturb the rejection by the respondent of the objections by the applicants. Accordingly, it is unnecessary to determine what is meant by the term ``bare'' trust in subsec. 5(5) of the Recoupment Act. However, in the light of the submissions that were made, I should add some observations on that topic.

What is required for a ``bare'' trust?

A distinction has long been drawn between ``active'' and ``passive'' trusts; it was first drawn in sixteenth century decisions which held that the Statute of Uses 1536 (27 Hen. VIII, c. 10) (Eng.) executed passive but not active uses, and remains of importance in some jurisdictions in the United States: Scott on Trusts, 4th ed., 1987, §68, 69.

The expression ``bare trustee'' was used by Lord Hardwicke L.C. in
Fell v. Lutridge (1740) Barn. C. 319; 27 E.R. 662, to describe the interest of the defendant in proceeds of an insurance policy on a merchant ship, the policy having been taken out in his name but on behalf of and at the direction of one of the owners of the ship.

Today the usually accepted meaning of ``bare'' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others: see Halsbury's Laws of England, 4th ed., Vol. 48, ``Trusts'', para. 938. The term is usually used in relation to trusts created by express declaration. But it has been said that the assignor under an agreement for value for assignment of so-called ``future'' property becomes, on acquisition of the title to the property, trustee of that property for the assignee (
Palette Shoes Pty. Ltd. v. Krohn (1937) 58 C.L.R. 1 at p. 27) and this trust would answer the description of a bare trust. Also, the term ``bare trust'' may be used fairly to describe the position occupied by a person holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property.

What is meant in these situations by saying that the trustee holds the property without any duties to perform other than to convey the property to the beneficiary or as the beneficiary directs? The answer is supplied by Professor Waters in his work Law of Trusts in Canada, 2nd ed., 1984, at p. 27:

``It is of course true that so long as a trustee holds property on trust he always retains his legal duties, namely, to exercise reasonable care over the property, either by maintaining it or by investing it; he cannot divest himself of these duties. The reference, however, is to duties which the settlor has enumerated. For example, the settlor may have required that the beneficiary be maintained until he reaches the age of majority, when he is entitled to call for capital and income. The trustee is then bare or naked of these active duties decreed by the settlor. If the trustee possesses his legal duties only for the purpose of guarding the property, prior to conveyance to the beneficiary, these duties are said to be passive.''

What of the trust where the settlor has settled property on trust for the maintenance and

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advancement of children X and Y until the younger of them attains the age of thirty, at which time the capital is to be divided equally between them? When the two children both have attained their majority, and assuming them to be of sound mind, they can forthwith call for the capital without waiting for the younger to attain his thirtieth birthday. In such a case, they may call for the property on demand although the active duties required by the settlor have not yet fully been performed by the trustee, whose obligations with respect to maintenance and advancement go beyond those of guarding the property prior to conveyance to the children. In such a case, is it an apt use of language, in the period after the beneficiaries have both attained their majority, to describe the trustee as thereafter holding the property on a bare trust for them? Professor Waters takes the view, with which I would, with respect, agree, that whilst the trustee retains active duties of the description involved in this example, it would not be, in modern times, an apt use of language to describe him as a ``bare'' trustee.

Further, this modern usage in my view also represents the sense in which that term is used in subsec. 5(5) of the Recoupment Act. I have already referred to the context in which the term is used in that statutory provision, and it is consistent with that purpose to treat as ``bare'' trustees in the statutory sense those trustees who have no interest in the trust assets other than that existing by reason of the office and the legal title as trustee and who never have had active duties to perform or who have ceased to have those duties, such that in either case the property awaits transfer to the beneficiaries or at their direction.

It may be, in a given case, that a trustee is entitled either by statutory provision or the terms of a trust instrument or court order, to charge fees and to have a lien or charge upon the trust assets for those fees. The trustee may also in a given case have a lien upon the trust assets for costs properly incurred in performance of the obligation to safeguard the trust property. It is unnecessary in the present case to decide whether the existence of such a lien or charge in the circumstances described would take a trustee outside what would otherwise be the category of ``bare'' trustee for the purpose of the Recoupment Act.

I should refer to certain nineteenth century English cases which deal with the term ``bare trustee'' in particular statutory settings. The Fines and Recoveries Act 1833 (3 & 4 Will. 4, c. 74) (U.K.) abolished the levy of fines and the suffering of common recovery as means of barring entails and replaced those conveyancing devices by a simple deed enrolled in Chancery. However, where the tenant in tail was not in possession, the consent was necessary of a newly created officer, the protector of the settlement. Without his consent, the deed enrolled created but a base fee, not a fee simple. Section 27 of the Act stated that, inter alia, no ``bare trustee'' might be the protector of a settlement. In In
re Blandy Jenkins' Estate (1917) 1 Ch. 46. Peterson J. held that a trustee with no beneficial interest, whether or not he had duties to perform, was a ``bare trustee'' within the meaning of sec. 27.

There was also a number of decisions, the occasion for which was provided by the state of the statute law in England between 1874 and 1882 with respect of the devolution of title to an estate in fee simple which was trust property, on the death of the sole or last surviving trustee. If such a trustee died between 7 August 1874 and 1 January 1882, the path for the devolution of the title to the property to the trustee's legal personal representative or the heir-at-law or customary heir, depended, inter alia, upon whether or not the trustee had been what the legislation described as a ``bare trustee'': Underhill's Law of Trusts and Trustees, 12th ed., at pp. 527-529. The legislation in question was the Vendor and Purchaser Act 1874 (37 and 38 Vict. c. 78) (U.K.), sec. 5 and the Land Transfer Act 1875 (38 and 39 Vict. c. 87) (U.K.), sec. 48. The Conveyancing Act 1881 (44 and 45 Vict. c. 41) (U.K.), sec. 30, had effect from 1 January 1882 and the term ``bare trustee'' ceased to supply a relevant criterion for the operation of the legislation.

In In
re Docwra (1885) 29 Ch.D. 693, Bacon V.-C. treated as ``bare trustees'' within the meaning of sec. 6 of the Vendor and Purchaser Act 1874, two persons who were trustees for sale of real estate, the sale of which had been ordered by the court and who had beneficial interests in the proceeds of sale; they had no duty to perform save to obey the order of the court. In
Morgan v. Swansea Urban Sanitary Authority (1878) 9 Ch.D. 582, Sir George

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Jessel M.R. held that a vendor of land who had let the purchaser into possession before payment of the purchase money and execution of the conveyance, was not a ``bare trustee'' within sec. 48 of the Land Transfer Act 1875; he had a lien on the property for his purchase money and was not bound to convey until payment. Upon the death of the vendor in July 1876, intestate, the money remaining unpaid and the conveyance unexecuted, the legal estate passed to his heir-at-law, not to his legal personal representative, as it would have done had he been a ``bare trustee''. (It should be added that the assumption that on such facts as these a trust of some description arose from the relationship of vendor and purchaser has itself not gone unchallenged:
Kern Corporation Ltd. v. Walter Reid Trading Pty. Ltd. (1987) 4 ANZ Insurance Cases ¶60-790 at p. 74,834; (1987) 163 C.L.R. 164 at pp. 191-192.) The Master of the Rolls (at p. 586) said he expressly abstained ``until I am absolutely compelled'' from giving an opinion as to whether a trustee with no beneficial interest but with active duties to perform could be a bare trustee under sec. 48. His Lordship never was so compelled. However, his remarks were read by Stirling J. as intimating an opinion (which Stirling J. did not share) that a trustee with active duties to perform might be a ``bare trustee'' within sec. 48, provided he had no beneficial interest: In
re Cunningham and Frayling (1891) 2 Ch. 567 at pp. 571-572.

Whatever the correct view might be as to the meaning of the term ``bare trustee'' when used in various English conveyancing legislation of the last century, that meaning cannot be determinative of the meaning of the expression in the Recoupment Act. I have mentioned the English cases to indicate first that the meaning of the term may vary from statute to statute, secondly that the setting and purposes of the English legislation and the Recoupment Act are very different in character, and thirdly that observations in the English cases are therefore not necessarily helpful in construing subsec. 5(5) of the Recoupment Act.

In the present case, had the point been reached, the question would have been whether at the time of the sale of the shares on 27 June 1980, the applicants were to be described as ``bare'' trustees. Bearing in mind the state of the evidence upon the alleged establishment in May 1979 of the trusts or conclusion of an agreement for such trusts, and the uncertainty of the terms of the business arrangements between the parties, it would not have been open to find that the applicants had shown that at the date in question in 1980 they were bare trustees of shares in the necessary sense, namely that they held no interest therein and they held the shares without any further duty to perform except to convey them to the respective beneficiaries upon demand or to deal with the shares as directed, e.g. by selling them and accounting for the proceeds.


It follows that in each of the four matters before the Court, the Commissioner was correct in his decision to reject the objection made by the taxpayer. Accordingly, in each matter, the assessment should be confirmed and the application dismissed with costs.

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