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Case V85

Members:
Spender J
DP Breen DP
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 June 1988.

Spender J. (President), D.P. Breen (Deputy President) and K.L. Beddoe (Senior Member)

The question on this application is whether an infant beneficiary of a discretionary trust was ``presently entitled'' to a distribution declared by the trustee and paid to the beneficiary during the year ended 30 June 1978.

2. If the infant beneficiary was presently entitled then the respondent has correctly assessed the applicant trustee in accordance with sec. 98 of the Income Tax Assessment Act 1936 (``the Act''). The applicant claims, however, that the infant beneficiary ceased to be presently entitled to the distribution once it was paid over to him and therefore the respondent's assessment has no basis in law.

3. At the hearing the parties proceeded by way of a statement of agreed facts. The essential elements of that statement for the purpose of deciding the question at issue are as follows:

  • (a) by resolution dated 5 May 1978 the directors of the trustee company resolved to distribute the net income of the trust for the year ended 30 June 1978 as to $6,804 of the net income to two beneficiaries specified in the resolution (including the beneficiary to which this application relates) as to $3,402 each and, as to the balance of the net income of the trust for that year to other specified beneficiaries in the proportions specified;
  • (b) the infant beneficiary was 12 years of age at 30 June 1978;
  • (c) it was agreed that the beneficiary became presently entitled to the amount of $3,402 on 5 May 1978;
  • (d) the distribution of $3,402 was paid to the infant beneficiary's bank account on 13 June 1978; and
  • (e) the trust deed confirmed that the trust was a discretionary trust and that it was within the power of the trustee to make the subject distribution of net income to the infant beneficiary.

4. The respondent Commissioner's assessment has been made on the following basis: 

      Taxable income       $3,402.00
      Tax assessed         $  453.96

5. For the year ended 30 June 1978, subsec. 6B(4) of the Income Tax (Rates) Act 1976 (the Rates Act) provides for the rates of tax payable by a trustee pursuant to sec. 98. Schedule 8 of the Rates Act provides as follows:

``2. In the case of a trustee who is liable to be assessed and to pay tax in pursuance of section 98 of the Assessment Act in respect of a share of the net income of a trust estate (not being the estate of a deceased person) to which a beneficiary under the age of 16 years on the last day of the year of income is presently entitled, the rate of tax is the rate that would be payable under Schedule 5, 6 or 7, as the case requires, if -

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  • (a) one individual were liable to be assessed and to pay tax on that income;
  • (b) the reference in the table in Part I of Schedule 5 to the part of the taxable income that exceeds $3,750 but does not exceed $16,000 were a reference to the part of the taxable income that does not exceed $16,000; and
  • (c) the amount ascertained in accordance with the formula in sub-paragraph 3(a)(i) of Part II of Schedule 6 were an amount equal to 13.344 per centum of so much of the net income as does not exceed $16,000.''

6. Part of Sch. 5 of the Rates Act is the relevant Schedule for present purposes. This Schedule provides that the rate of tax to be used by the Commissioner was as follows:

  • 41.7% of 32 cents being 13.34 cents in the $1.

This factor was applied to the taxable income of $3,402 to get the tax assessed of $453.96.

7. However if, as is contended for the applicant, the beneficiary had been assessable in his own right, and assuming for present purposes that the beneficiary had no other assessable income in the year of income, then no tax is chargeable in accordance with Sch. 5 on the taxable income of $3,402.

8. Section 6C(2) of the Rates Act has no operation on the facts of this case.

9. The applicant concedes that if the beneficiary was ``presently entitled'' to the amount of $3,402 after that amount was paid to him on 13 June 1978 then the respondent Commissioner's assessment was correct.

10. The relevant statutory provisions in the Income Tax Assessment Act (the Act) are:

``98 Where any beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual, and were not subject to any deduction other than the concessional deductions which would have been allowable to the beneficiary if he had been assessed in respect of that share.

101 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. By Act No. 12 of 1979, the Parliament inserted a new section in Div. 6 of the Act. The new section, which came into operation with effect from 1 July 1979 (and therefore after the tax year with which this application is concerned), read as follows:

``95A For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary.''

12. The applicant's argument relied in essence upon dicta of Barwick C.J. in
Union Fidelity Trustee Co. v. F.C. of T. 69 ATC 4084 at p. 4087; (1969) 119 C.L.R. 177 at pp. 182-183:

``In applying the provisions of Div. 6 a clear distinction must be maintained between the position of a person who is entitled to receive a share of the estate and one who has been paid the amount of it. When a beneficiary has been paid his share of the income of the estate in respect of a tax year he no longer satisfies the description of a beneficiary who is entitled to a share of the net income of the estate for that year. Thus, if at the close of the taxation year the appropriate share of the income of the trust estate has been already paid to the beneficiary who before the payment was merely entitled to it, the amount so paid to the beneficiary as his share of that income will form part of his assessable income by virtue of sec. 26(b) and not, in my opinion, by reason of sec. 97.

The purpose of these three sections in Div. 6, sec. 97, 98 and 99, it seems to me, is to anticipate the receipt by a beneficiary of the share of the trust income upon the receipt of which, whatever his residence, he

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would be liable to tax: and to bring the share of that income to tax before it is received by a beneficiary. The beneficiary under sec. 97 must include in the assessable income money which he has not received but which in the year of income he is entitled to receive as his share of the net income of the estate. In the case of a beneficiary under disability but entitled to his share the trustee is to pay the tax, it being assumed that the beneficiary will not receive it in that year of tax because of legal disability, and in the case of sec. 99 as there is nobody at present entitled to receive the amount to which that section applies, the trustee will be required presently to pay tax upon that amount. Where a beneficiary at the conclusion of a year of tax is still entitled to a share of income and, conformably to sec. 97, includes the amount of that share which he has not received in his assessable income for that year, he will not be liable to tax upon the money he subsequently receives as that share any more than a person who has rendered his return of income on a credit basis is liable to pay tax upon the actual receipt of the money which he has already brought to account in computing income upon a credit basis. For the same reason, when the trustee has paid tax under sec. 98, the subsequent receipt of the share of income by the person who was formerly under disability will not attract tax by reason of that receipt. The same will also be true of the person who ultimately becomes entitled to and receives income of the estate which has fallen within sec. 99 and on which the trustees have paid tax in pursuance of that section.''

13. The representative of the taxpayer conceded that his Honour, Barwick C.J., did not refer to sec. 101. It appears from the authorised report that sec. 101 was not referred to in the course of proceedings. The case concerned the question as to whether income derived by a trust estate from sources out of Australia, and to which, it was agreed, no beneficiary was presently entitled, was assessable in the hands of the trustee under sec. 99 of the Act. The trust estate was a deceased estate in which the executors were still acting in the course of their administration. So far as appears from the report there was no issue involving an exercise of discretion by the trustees. The Chief Justice's observations quoted above were not necessary for making a decision on the matter before the court.

14. Except for an amendment made in 1964, sec. 101 has been in the Act, in its present form, since 1936. The 1964 amendment deleted the word ``Division'' and inserted the word ``Act'' in lieu thereof.

15. Drawing a line from the approach taken by Dixon J. in
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309 the representative of the taxpayer submitted that sec. 101 should be read as if the words ``at the time such payment or application was made'' had been inserted after the word ``benefit''. This would, it was said, produce a result whereby the section no longer had effect after payment or application had been completed.

16. The introduction of sec. 95A into the Act from 1 July 1979 was also relied on, as was the following paragraph at p. 22 of the Explanatory Memorandum:

``Proposed section 95A is intended to remove any doubts that may exist that trust income to which a beneficiary is otherwise presently entitled in respect of a year of income does not, for the purposes of those provisions of the income tax law that turn on whether a beneficiary is presently entitled to income of a trust estate, cease to be income of that kind because the income concerned has been paid to or applied for the benefit of the beneficiary. For example, in a situation where a beneficiary in an `inter vivos' trust estate is under the age of 16 years on the last day of the income year and is on general principles presently entitled to an amount of income, the enactment of section 95A will obviate doubts that the trustee is assessable under section 98 of the Principal Act - and not entitled to the zero rate of tax - because the amount has been paid to the beneficiary.''

17. Reliance was also placed on the Treasurer's second reading speech. The relevant part of the speech reads as follows:

``Before moving to the next group of amendments I note that, as I said in my statement on 8th June 1978, the taxation of trust income of beneficiaries is - as has always been intended - to be based

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specifically on the present entitlement of the beneficiaries. The fact that a beneficiary is paid income to which he or she is otherwise presently entitled will not impair the operation of provisions of the income tax law, the application of which depends on the beneficiary being presently entitled to income.''

18. In essence, the taxpayer contends that, because Parliament had found it necessary to insert sec. 95A into the Act, it followed that the Act must have been deficient in this aspect prior to the amendment.

19. That submission also relied upon the amendment made to para. 26(b) by the same amending Act. That amendment made it clear that amounts of net income of a trust estate assessed in accordance with Div. 6 was not also assessable under para. 26(b).

20. The submissions of the applicant are counter to the decisions of Taxation Board of Review No. 3 reported as Case M45,
80 ATC 316 and Case M46,
80 ATC 322. In those cases the Board decided that sec. 101 had the effect that a beneficiary of a discretionary trust was ``presently entitled'', in respect of amounts paid by the trustee to the beneficiary and the respective trustees had been correctly assessed in accordance with sec. 98.

21. Counsel for the respondent drew attention to the fact that the insertion of sec. 95A in the Act was part of a package of measures arising out of the decision in the Union Fidelity case. Referring specifically to the introduction of sec. 95A, counsel relied on the following paragraph at p. 17 of the Explanatory Memorandum circulated by the Treasurer:

``Finally, a technical amendment is proposed to clarify the intention of the law that the payment to or application of income for the benefit of a beneficiary who was presently entitled to the income does not prevent the assessment of that income on the basis of the rules that apply to income to which a beneficiary has a present entitlement.''

22. The submission of the respondent was that the new sec. 95A was merely declaratory of the then law: the fact of payment did not mean that a person who prior to payment was presently entitled ceased to be presently entitled after payment.

23. The submission of the taxpayer that the passing of sec. 95A supports his contention as to the pre-existing law (see the observations of Dixon J., as he then was, in
Grain Elevators Board (Vict.) v. Dunmunkle Corporation (1946) 73 C.L.R. 70 at p. 86) has to be assessed in the light of the observations of Viscount Haldane L.C., in
Re Samuel (1913) A.C. 514 at p. 526 where, giving the advice of the Board, he said:

``It is not a conclusive argument as to the construction of an earlier Act to say that unless it be construed in a particular way a later enactment would be surplusage. The later Act may have been designed, ex abundante cautela to remove possible doubts.''

24. Counsel for the respondent referred to
Tindal v. F.C. of T. (1946) 72 C.L.R. 608, where Latham C.J. said at p. 618:

``As to the first question I am of opinion that, when s. 97 applies, the result is that the assessable income of a beneficiary does include his share of the net income of the trust estate, whether or not that income is paid to him. Otherwise the section would produce no effect in relation to assessment or payment of tax. Sections 95-99 are designed, in my opinion, to secure payment of tax upon the whole of the net income of a trust estate, either from a beneficiary or the trustee, whether or not that income is paid over to or on account of the beneficiary.''

25. Tindal's case did not involve a discretionary trust. In that case, the High Court was concerned with the Income Tax Assessment Act 1936 as amended by Act No. 17 of 1940, and in particular, the operation of sec. 97. That section was in the same form in the 1940 Act as it was at 30 June 1978. Section 101 was also in the same form except, as already mentioned, ``Division'' had been deleted and ``Act'' inserted in lieu by Act No. 110 of 1964. For present purposes that amendment does not appear to have any relevance.

26. In Tindal's case, Latham C.J. was the sole dissentient. The majority of the Court held that the whole sum paid to the beneficiary was assessable in the hands of the beneficiary whereas Latham C.J. held that the beneficiary was assessable to the distribution in respect of

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that year of income and not to a payment made in respect of distributions in respect of prior years. The distribution was made by an order of the Supreme Court of New South Wales and did not involve any exercise of discretion. The case is not, therefore, authority for the question which arises in this application, the question before the Court being the nature of the actual payment in the hands of the taxpayer and not whether she was presently entitled to a share of the net income of the trust.

27. Counsel for the respondent next referred to
F.C. of T. v. Belford (1952) 88 C.L.R. 589. In this case the question at issue was whether a beneficiary, sui juris, who was a resident of Australia was assessable in respect of distributions received from non-resident trustees of a trust deriving its income from a source outside Australia. The High Court held that the distribution received by the beneficiary was assessable income in the hands of the beneficiary.

28. In that case counsel for the Commissioner submitted in effect that Div. 6 operates to define and facilitate the operation of para. 26(b) which deals with the liability of a beneficiary for tax. That submission sought to establish that a receipts basis of assessment should be applied.

29. In his judgment Dixon C.J. asked a series of questions, as set out in the following passage appearing at pp. 599-600, which raises in sharp focus the problem confronting the Tribunal in this case:

``This solution of the Commissioner sounds attractive and simple but it has its own difficulties. If a beneficiary is liable to be taxed in this manner on actual receipts, then what happens with respect to his liability under s. 97(1) to include his share of the income of the trust estate in his assessable income before he receives it and whether he receives it or not? If he is under a legal disability does he pay tax on his actual receipts although under s. 98 his trustee pays tax in respect of his share of income? Under s. 97(1), taking a case where there is no territorial difficulty, as, for example, where all the income is derived from sources within Australia, the beneficiary, if he is presently entitled and under no legal disability, must include the net income of the trust estate in his assessable income whether he receives any part of it or not. Under s. 98 if the beneficiary is under a legal disability the trustee must pay the tax. Is the beneficiary under an additional liability if and when the money is distributed to him? It is, of course, possible, indeed it must frequently happen, that a beneficiary is paid income from a trust estate in the financial year following that in which it is derived by the trustee. But it must also happen that a beneficiary is paid income in the same financial year in which it is derived. Do s. 25 and 26 in each of these cases make it taxable in the trustee's hands and also in the beneficiaries' hands? If so, where is the provision to be found against double tax? No express provision applies to either case. It is not easy to imply one. How can an implication be worked out to adjust the tax when in the one case the taxable fund results from the inclusion in a beneficiary's assessable income of a share of the assessable income of the trust estate after making deductions except losses of a previous year and, in the other case, the taxable income of a beneficiary is arrived at by taking into account all his assessable income, including actual receipts from the trust and all his allowable deductions? That is a case under s. 97(1). Still more difficult is a case under s. 98. It must be remembered too that the tax is graduated. The difficulties of making an implication for the avoidance of double taxation are not lessened by s. 97(2), which is directed to dealing with a case where losses of a previous year are taken into account in calculating the income of the trust estate; nor by s. 100, which deals with the case of a beneficiary under legal disability who receives or derives income from more than one trust estate or from a trust estate or some other source and provides for a deduction from the tax of the tax if any paid by the trustee; nor by s. 101, which deals with the distribution of the liability of beneficiaries who receive income pursuant to a discretionary trust. Apart from the insuperable difficulties they disclose in making an implication to adjust the tax so as to avoid double taxation, it may be said that these sections neither throw any light on the solution nor in themselves greatly increase the difficulties.''

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30. His Honour went on to find that the assessment should be made on the basis of present entitlement to a share of the net income of the estate and assessability of that share will depend upon whether the beneficiary is a resident and the source of the net income.

31. The concept of assessment on a receipts basis was rejected by the Court even though the amounts in dispute had been received by the beneficiary during the year of income. It is therefore not open to the Tribunal to hold that a receipts basis of assessment is the correct basis, in the context of Div. 6, in respect of the applicant. This is made clear by the following dicta of Taylor J. (with whom Fullagar J. agreed) at 88 C.L.R. 589 at p. 607:

``It is also of some significance that s. 101, which deals with the case of discretionary trusts, does not provide that a beneficiary in whose favour a trustee exercises his discretion shall be taxable by reference to the amounts actually received by him. It merely provides that the beneficiary in such a case shall be deemed to be presently entitled to the amount paid to him or applied for his benefit. It is by reference to the share in the estate income represented by the amount so paid that such a beneficiary's share of the `net income' of the trust estate is calculated for the purposes of s. 97.''

32. As to the effect of a deeming provision such as sec. 101, reference can profitably be made, in the light of some observations in Case M45, to the observations of Windeyer J. in
Hunter Douglas Australia Pty. Ltd. v. Perma Blinds (1969-1970) 122 C.L.R. 49 where he said at p. 65:

``The words `deem' and `deemed' when used in a statute thus simply state the effect or meaning which some matter or thing has - the way in which it is to be adjudged. This need not import artificiality or fiction. It may be simply the statement of an indisputable conclusion, as if for example one were to say that on attaining the age of twenty-one years a man is deemed to be of full age and no longer an infant.''

33. The history of sec. 101 has a present relevance. In
re The Income Tax (1901) 27 V.L.R. 39 (R. & McG. 212) concerned an amount of £500 paid to a beneficiary of a deceased estate. The payment was made in the absolute discretion of the trustees of the estate within the terms of the bequest. The ultimate question to be determined by the Supreme Court of Victoria was whether the payment of £500 was income in the hands of the beneficiary. The Court held that it was.

34. Perhaps as a consequence of that decision, the Federal Parliament inserted a provision in the Income Tax Assessment Act 1922 which read as follows:

``31(4) For the purposes of this section, where by any deed, will or settlement a trustee is required to hold the income of a trust fund in trust for the beneficiaries specified therein in such manner as he in his absolute discretion thinks fit, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount of the income of the year paid to him by the trustee in the exercise of his discretion under the deed, will or settlement.''

35. That subsection makes it clear that the Parliament was intent on making distributions by trustees of discretionary trusts assessable in the hands of the beneficiaries. The taxpayer's argument in the 1901 case had proceeded on the basis that a distribution made and paid by a trustee of a discretionary trust was not in the nature of income being in the nature of a gift and being of a non-recurring nature, there being no assurance that distributions would be made to a particular beneficiary in future years of income. It is also relevant to note the decision of the High Court in
Ewing v. F.C. of T. (1928) 2 A.L.J. 246 where the Court held that payments to a beneficiary of a non-discretionary trust made from the corpus were income in the hands of the beneficiary, being in the nature of an annuity.

36. Section 101 in the present Act was derived from subsec. 31(4) of the 1922 Act. The addition of the words ``or applied for his benefit'' has broadened the scope of the section.

37. That broadening of the section in the new sec. 101 reflects the decisions of the High Court in
Manning v. F.C. of T. (1928) 40 C.L.R. 506;
Howey v. F.C. of T. (1930) 44 C.L.R. 289 and Countess of
Bective v. F.C. of T. (1932) 47 C.L.R. 417.

38. The historical development of sec. 101 shows that the section does two things. In

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respect of distributions by trustees of a discretionary trust it deems that a beneficiary in whose favour the trustee exercises the discretion is to be presently entitled to the amount paid or applied by the trustee. Section 101 having operated, it is left to sec. 97 or 98 to bring to account as assessable income the amount so paid or applied. Section 101 deems the beneficiary to be presently entitled to amounts paid to him or applied for his benefit; and quantifies the amount to which the beneficiary is presently entitled.

39. In the present application the trustee's resolution of 5 May 1978 was to distribute an amount of $3,402 to the infant beneficiary. The question is whether this was sufficient for there to be an application for the benefit of the beneficiary by the trustee in the exercise of the discretion.

40. In
Commr of I.R. v. Ward 69 ATC 6050, a decision of the New Zealand Court of Appeal, which in turn relied upon a decision of the Court of Appeal in
Re Vestey's Settlement (1951) Ch. 209; (1950) 2 All E.R. 891, the question was whether a declaration by a trustee, with an admitted discretionary power under the Trustee Act, in favour of contingent beneficiaries made two days before the taking of accounts was an application of the trust income for the benefit of the specified contingent beneficiaries. The New Zealand Court of Appeal held that a resolution deliberately arrived at and recorded is sufficient of itself to effect an immediate vesting of a specific portion of the trust income.

41. In Re Vestey's Settlement (supra), the Court of Appeal decided that an allocation of portion of the income of a trust estate in the exercise of the trustees' discretion to infant beneficiaries of the trust was an application for the benefit of the beneficiaries. No payment was made, the amounts allocated remaining under the control of the trustees and accumulated.

42. In Re Vestey's Settlement, the facts of which are more fully reported in the All England report than the authorised report, the conclusion of Lord Evershed M.R. appears from this passage ((1951) Ch. 209 at p. 219 and (1950) 2 All E.R. 891 at p. 899):

``Is a provision, to take John Vestey's case, that £12,000 shall belong to John Vestey an application for his benefit? If the question be fairly posed in that way, it seems to me impossible to give any but an affirmative answer. It is surely for his benefit that the trustees should resolve that £12,000, which it was in their discretion to apply to any one of a considerable number of persons, should belong to John Vestey, I, therefore, with all respect to Harman J., come to the conclusion (and I think I am unfettered by
Re Peel, (1936) Ch. 161 which seems quite a different case) that the first part of this resolution did amount to an application for the benefit of the infants.... In other words, I think that the effect of each of the resolutions was so to exercise the discretion that in each case each one of these infants became absolutely entitled to a particular sum of money so appropriated, and, sec. 31 being inapplicable, those appropriated sums have now become part of the infants' respective estates.''

Asquith L.J. agreed with the Master of the Rolls. Jenkins L.J. (at Ch. p. 222; All E.R. p. 900 respectively) said:

``I entirely agree with what Sir Raymond Evershed M.R. has said to the effect that such allocations were, at all events, applications of income for the benefit of the infants in whose favour they were made. Apart from any such allocation, no infant had any right to claim any part of the income, but was merely eligible to participate in any authorised distribution that the trustees might from time to time determine to make. An allocation of the kind here carried out would have the effect of making a certain provision for the infant concerned, and I cannot doubt but that the making of such a provision would be the conferring of a benefit on the infant, so that the application of income for the purpose would be an application for the infant's benefit.''

43. The facts in this present application go further than what occurred in Vestey. The trustee made the allocation to the beneficiary by the resolution of 5 May 1978, which amount was actually paid to the beneficiary on 13 June 1978.

44. This raises the nub of the taxpayer's case. Did the payment on 13 June 1978 change the liability of the trustee under sec. 98? Clearly, if the payment had not been made, the

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trustee would have been so liable. For the taxpayer it was argued that, once payment had been made, the beneficiary was no longer presently entitled and therefore sec. 98 ceased to operate. For the Commissioner, it was argued that payment did not extinguish present entitlement but, even if it did, sec. 101 deems the beneficiary to be presently entitled to the amount paid to him.

45. Section 101 draws no distinction between payment of an amount to a beneficiary and the application of that amount for the benefit of the beneficiary. Liability of the trustee to the beneficiary arose because of the application by the trustee of a portion of the net income of the trust estate for the benefit of the beneficiary, thereby making the beneficiary presently entitled to that amount on 5 May 1978. In the opinion of the Tribunal, it is irrelevant that the amount was paid before 30 June 1978.

46. The scheme of taxation in Div. 6 is to provide for the taxation of the net income of a trust estate. The essence of that scheme is to tax the net income according to whether beneficiaries are presently entitled to that net income or not so presently entitled. In a discretionary trust, sec. 101 makes it clear that present entitlement arises on payment, or on application for the benefit of the beneficiary. The position of present entitlement created by sec. 101 on the application of portion of the net income is not extinguished by subsequent payment of that amount.

47. The situation where the trustee allocates and pays the share of the net income during the year of income, and the situation where the trustee allocates during the year of income but pays after the close of the year of income, are not to be distinguished. In each case, present entitlement arises on the allocation of the net income and Div. 6 operates accordingly.

48. For the above reasons, the respondent's decision on the objection is affirmed.


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