Federal Commissioner of Taxation v Belford
88 CLR 589(Judgment by: Taylor J)
Between: Federal Commissioner of Taxation
And: Belford
Judges:
Dixon CJ
Webb J
Fullagar J
Kitto J
Taylor J
Subject References:
Taxation and revenue
Income tax
Assessable income
Income under trusts of will
Deseased estate and trustees ex-Australia
Liability to tax of taxpayer resident in Australia
Legislative References:
Income Tax Assessment Act 1936 No 27 - s 6; s 23(e); s 23(r); s 25(l); s 26(b); s 95; s 96; s 97; s 98; s 99; s 100; S101
Judgment date: 19 December 1952
SYDNEY
Judgment by:
Taylor J
The case stated in this matter raises for decision the question whether the appellant was right in including in the respondent's assessable income for the year ended 30th June 1945 the amount of PD1,428. There is no dispute that during that year the respondent became entitled to that amount as the sum of the income of a settled fund and residuary income under the will of her deceased father, and there is no dispute that this sum was paid to her during the same year. The trustees of the settlement, however, were non-residents of Australia and they derived the trust income from sources outside Australia.
In particular, the facts raise the question whether the liability of a beneficiary in such a case to income tax must be determined exclusively under Div. 6 of Pt. III. of the Income Tax Assessment Act 1936-1945 by reference to his right to share in the income of the trust estate during any year and not by reference to his actual receipts of such income during that year, or whether a beneficiary may, independently of Div. 6, be assessed by reference to his actual receipts of trust income to which he is beneficially entitled. The respondent to the appeal contends that the first proposition is correct and thereupon raises the further contention, based upon s. 95 that where the trustee is a non-resident and the trust income is derived from sources outside Australia the beneficiary, even though he is a resident of Australia, is not liable to tax. This, it is said, is the consequence of the language of s. 95, which defines "the net income of a trust estate" as the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer of that income, less all allowable deductions, except, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus. "Taxpayer" is defined by the Act to mean a person deriving income and not as a person chargeable with income tax. Therefore, it is said, where he is a non-resident and derives the trust income from sources out of Australia the trustee has no assessable income under the Act and there is no net income of the trust estate within the meaning of Div. 6.
It is convenient, in the first instance, to consider the first problem raised by the appeal. Sections 97, 98 and 99 deal with the incidence of income tax on what is called in those sections the "net income" of trust estates. In view of the definition which is contained in s. 95, it is, pursuant to s. 97, incumbent upon a beneficiary who is presently entitled to a share of the income of a trust estate to include in his assessable income a proportion of the total assessable income of the trust estate for the relevant year calculated in accordance with s. 95. The ascertainment of the total assessable income of the trust estate for any year is, of course, not concerned with payments by way of distribution to beneficiaries and the total assessable income of the trust estate will, in any particular case, be precisely the same whether the whole or some part only, or none of the estate income has, during the relevant year, been distributed to beneficiaries presently entitled to shares thereof. Yet in such cases, s. 97 requires that the appropriate share of the total assessable income of the trust estate shall be included in the assessable income of each beneficiary, and this is so whether any beneficiary has actually received the whole or some part only, or none of such income. To my mind this is a clear indication that the Act intends, in such cases, that there shall be included in a beneficiary's assessable income, not the amount of his actual receipts of the estate income, but a proportion of the total assessable income of the trust estate which, for obvious reasons, may be quite a different amount and, generally at least, a greater amount.
Again, s. 98, though it has the effect of rendering the trustee liable to pay the tax involved in cases where the beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, requires the tax to be calculated not by reference to the amount to which the beneficiary is entitled but by reference to a share of the "net income of the trust estate" or, as defined by s. 95, the total assessable income of the trust estate. In the case of such beneficiaries the liability for tax ultimately falls upon them because the initial liability of the trustee for tax will always be discharged or recouped out of the shares of the beneficiaries and, indeed, any further liability to tax which may arise by reason of the fact that the appropriate share of the "net income of the estate" is part only of the assessable incomes of such beneficiaries will fall directly upon the beneficiaries themselves pursuant to s. 100.
The plan of Div. 6 of Pt. III. is reasonably clear. Its various sections deal with at least four main categories; s. 97 deals with cases where beneficiaries are presently entitled to shares of income and are not under any disability; s. 98 deals with the cases of beneficiaries who are presently entitled to shares of income but are under a legal disability whilst s. 99 deals with the case of trust estates where no beneficiary is presently entitled to any part of the income and s. 101 deals with discretionary trusts. In the first of these cases the liability for tax is thrown directly upon the beneficiary who is required to include in his assessable income for any particular year his appropriate share of the "net income of the trust estate". The necessary effect of such inclusion is, of course, that the beneficiary is directly liable to pay tax on such share and his rate of tax is determined by reference to his total taxable income which, in turn, depends, in part, upon the inclusion in his assessable income of his share of the net income of the estate. In the case where a beneficiary is presently entitled to a share of income but is under a legal disability the liability for tax is thrown in the first instance upon the trustee, presumably because no payment will be made to the beneficiary whilst he remains under the disability. Nevertheless, the circumstance that such a beneficiary is entitled to a share of the net income of the trust estate will directly affect the amount of tax payable by the beneficiary himself. If he has other income his appropriate interest in the net income of the trust estate must, pursuant to s. 100, be included in his assessable income and this in turn will affect the rate at which he is directly taxed. Provision is made in sub-s. (2) of s. 100 against double tax in the case of any such beneficiary by the granting of a rebate from the income tax assessed against him of the tax paid or payable by the trustee in respect of the beneficiary's interest in the net income of thetrust estate. It is, I think, of some significance that no provision is made for any rebate of tax paid upon any beneficiary's share of the net income of any trust estate from any tax which might, on one view of the Act, be subsequently assessed upon actual receipts of income. 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.
It is to me inconceivable that the Act which, in Div. 6, requires a beneficiary presently entitled and whether under a disability or not to include as part of his assessable income for any year his appropriate share of "net income" of the trust estate for that year whether or not he has received any part of that income, should be taken to intend that such a beneficiary must also include in his assessable income for that or any later year his actual receipts upon a distribution of the estate income. The provisions contained in Div. 6 appear to me to cover the whole field and upon a review of the various sections contained in the division, I am of the opinion that, within the scope of its operation, it makes exclusive provision for the levying of tax upon income from trust estates and to this extent the respondent's argument must, I think, succeed.
I am of opinion, however, that the respondent's arguments on the remaining proposition are not sound. The clear answer to this proposition is that s. 95, beyond defining the meaning in Div. 6 of the expression "the net income of a trust estate" as the total assessable income of the trust estate and prescribing the appropriate method of calculation, is not concerned with determining the incidence of tax in particular cases. For the purpose of this calculation the residence or non-residence of the trustee would be immaterial, notwithstanding the general words of s. 25 (1) (b) that the assessable income of a taxpayer shall include, where he is a non-resident, the gross income derived directly or indirectly from all sources in Australia. The reference to allowable deductions in s. 95 and the exceptions therefrom indicate at the outset of the division that the representative capacity of trustees is a matter of significance and it is equally clear that the levying of tax upon either trustees or beneficiaries is dealt with by the other sections contained in Div. 6 and particularly by ss. 97, 98 and 99. Upon the scheme of the division there is no reason to assume that it was ever intended to make the residence of the trustee the criterion for ascertaining the liability to tax of a beneficiary under s. 97, or, indeed, under s. 98. The first of these sections provides for the levying of tax directly upon a beneficiary who is presently entitled and it would, I think, be quite out of accord with the scheme of the Act to make this liability to tax depend upon the residence of the trustee. Upon consideration of the part, as a whole, I do not think that this effect is produced by the language of s. 95; that section is merely concerned with the matters to which I have already referred. In my opinion a beneficiary, whether his case falls under s. 97 or s. 98, is, if he is a resident, liable to tax assessed in accordance with the part wherever the trust income is derived, but if he is a non-resident he would be liable to tax only to the extent to which his share of the income is derived from sources in Australia. The provisions of s. 99, however, present another problem, but it is unnecessary in this case to decide between the competing contentions.
For the reasons which I have given I am of the opinion that the decision of the Board of Review was wrong and that the respondent was liable to tax as assessed.