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Harmer & Ors v. Federal Commissioner of Taxation

Judges:
French J

Court:
Federal Court

Judgment date: Judgment handed down 23 October 1989.

French J.

Introduction

On 8 April 1982 three Perth solicitors acting for parties in dispute over a certain fund, consented to an order of the Supreme Court that it be paid into a building society investment account in their joint names. The order directed that the moneys ``be held in trust by them'' pending the determination of interpleader proceedings. Those proceedings were not finalised until 1985 and in the meantime the fund earned interest. In March 1986 the Commissioner of Taxation assessed

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the solicitors as trustees under sec. 99A of the Income Tax Assessment Act 1936 in respect of the interest earned in the 1983 and 1984 income years. They objected, the objections were disallowed and they have now appealed to this Court. The appeals turn on the question whether the solicitors were trustees of the fund and if so, whether there were any beneficiaries ``presently entitled'' to the income earned by it or otherwise having a vested and indefeasible interest in that income.

Factual background

On 4 May 1981 a company called Riverhall Pty. Ltd. (``Riverhall'') commenced interpleader proceedings in the Supreme Court of Western Australia against three other companies, In Residence Pty. Ltd. (in liq.) (``In Residence''), MPP Pty. Ltd. (``MPP'') and Amberwood Pty. Ltd. (``Amberwood''). Also named as a defendant was Raymond John McDonald Sweeney. The proceedings related to funds held by Riverhall as to which each of the defendants laid some claim. It was common ground that the action arose out of a written agreement made in 1978 whereby In Residence agreed to lend to Riverhall $125,000 for use in a proposed home unit development. In consideration of the advance, In Residence was to take an agreed share in the profits of the development. Sweeney, an architect who designed homes for In Residence, contributed some $25,000 of the sum advanced by that company. As was ultimately found by Olney J. after the trial of a preliminary issue, In Residence assigned its entitlement to $100,000 of the $125,000 to MPP by a deed dated 14 July 1979. The assignment, as his Honour held, left undisturbed the right of In Residence to receive the share of profits payable under the loan agreement, but two-fifths of that share was to be held on trust for MPP. On 18 March 1980, Messrs Brian Smith and Kevin Judge were appointed as liquidators of In Residence and on 15 June 1980 MPP purported to assign its interest in the loan agreement to Amberwood. At that time the development was substantially complete.

The first order in relation to the disputed funds was made by Kennedy J. in the interpleader proceedings on 30 June 1981. His Honour directed that Riverhall pay the principal amount of the loan and In Residence's share of the profits into court with liberty to the defendant to apply to have it placed on interest-bearing deposit pending determination of the proceedings. The total amount so paid in was $198,195. On 21 July 1981, Brinsden J. made an order for the trial of the issue whether Amberwood was beneficially entitled to $100,000 plus a share of the profit under the 1978 agreement, proportionate to the sum of $100,000. He also ordered a trial of the issue whether Sweeney was beneficially entitled to the sum of $25,000 and a proportionate share of the profits. Various ancillary directions were given which it is not necessary to set out here.

On 8 April 1982, and acting pursuant to the liberty provided for in Kennedy J.'s order, Wickham J. made further orders, by consent, in the following terms:

``1. The moneys paid into court by the Plaintiff herein be paid out of court to the solicitors for the First Defendant for investment with Town and Country Permanent Building Society in a redeemable investing share certificate account, such deposit to be made in the names of Ronald Winston Harmer, John David Finlay and Robert Graeme Hebbard, and that such moneys be held on trust by them pending the determination of these proceedings.

2. There be liberty to apply.

3. The costs of the application be in the cause.''

On 30 April the sum of $198,195 was deposited with Town and Country Permanent Building Society (``Building Society'') on a redeemable interest-bearing investment deposit. The first-named respondent, Ronald Winston Harmer, a member of the firm of solicitors acting for the first defendant in the proceedings, sent a letter bearing that date to the general manager of the Society in the following terms:

``I refer to our telephone conversation of late last week in which I advised of a forthcoming investment of $198,195 to be made on a redeemable interest bearing investment deposit with the Society for a period of 4 months.

The investment certificate is to be in the names of `Ronald Winston Harmer, John David Finlay and Robert Graeme Hebbard' with all signatories required to effect any negotiations on the certificate.''

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On 11 January 1985 Sweeney and In Residence consented to orders in the Supreme Court to the following effect:

  • 1. That Sweeney was entitled to $25,000 of the sum of $125,000 lent to Riverhall Pty. Ltd.
  • 2. That In Residence was entitled to 20% of the profits of the home unit development.
  • 3. That Sweeney receive from the money amounting to $198,195 invested with Town and Country W.A. Building Society in Redeemable Investment Share Number 88672/2-153284 the sum of $25,000 together with interest accrued thereon from time to time calculated as and from the date of deposit of such moneys until the date of payment of such sum to Sweeney.
  • 4. In Residence do receive such sum as together with the amount paid to Sweeney would equal 20% of the total moneys inclusive of interest thereon invested at the Town and Country W.A. Building Society in Redeemable Investment Share Number 88672/2-153284.
  • 5. Town and Country W.A. Building Society pay to Sweeney and In Residence respectively from the account such sums to which each of them is entitled by virtue of the orders.
  • 6. In Residence pay Sweeney's costs fixed at the sum of $3,500 to be paid by In Residence from its entitlement in the moneys invested with the Building Society.

On 16 January 1985, Olney J. gave judgment on the first preliminary issue directed for trial by Brinsden J., the orders made including orders to the following effect:

  • 1. MPP and Amberwood are entitled to the sum of $100,000 and to a further sum equal to four-fifths share of the profits of a home unit development payable by Riverhall under the agreement dated 1978 between In Residence and Riverhall.
  • 2. Four-fifths of the amount including interest thereon if any, standing to the credit of Town and Country W.A. Building Society Redeemable Investment Certificate 088672/2-153284 be paid to the solicitors for MPP and Amberwood with liberty to apply.

Other orders as to rectification and the dismissal of a counter-claim are not material for present purposes.

As at 30 June 1983, the credit balance in the investment account stood at $238,078.30. As at 30 June 1984 it stood at $268,744.20. It is common ground that in 1983 and 1984 interest was credited to the account as follows: 

                  May 1983       $39,883.30
                  May 1984       $30,665.90

On 5 March 1986, the Commissioner issued notices of assessment directed to ``The Trustee for R.W. Harmer, J.D. Finlay and R.C. Hebbard Court Trust''. The notices were for the tax years ended 30 June 1983 and 30 June 1984 respectively. The tax assessed for the respective years was $23,929.80 and $18,399.60. Additional tax of $10,437.32 and $4,375.45 was also assessed in respect of those years. For the 1984 year a further amount of $127.57 was assessed for the health insurance levy. It is common ground that the assessments were issued pursuant to sec. 99A of the Income Tax Assessment Act 1936.

Statutory history and framework

The history of provisions under Commonwealth law for the taxation of trust income begins with sec. 26 of the Income Tax Assessment Act 1915 whereby any person who derived income as a trustee was liable to tax as if beneficially entitled. Where any trust income was distributed to beneficiaries a pro rata amount of tax was deducted from that assessable to the trustee (sec. 27). The expanded definition of ``trustee'' under that Act was identical to that which appears in the present statute, namely:

```trustee' in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes -

  • (a) an executor or administrator, guardian, committee, receiver or liquidator; and
  • (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.''

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That statutory regime ended in 1918. Section 26, as it then stood, was repealed and a new provision substituted. Some basic concepts and verbal formulae were introduced which subsist in the 1936 Act as it stands today. The new section had the effect that the trustee was not liable to pay tax except as provided by the Act and each beneficiary who was under no legal disability and was presently entitled to a share of the income was assessed in his individual capacity -
Kuhnel & Co. Ltd. v. D.F.C. of T. (S.A.) (1923) 33 C.L.R. 349 at p. 361 (Isaacs and Rich JJ.); and at p. 367 (Starke J.).

When the 1915 Act was repealed and the Income Tax Assessment Act 1922 enacted, the new concept of trust taxation and the original definition of ``trustee'' were retained. Taxation of trusts was provided for by sec. 31. Like sec. 96 of the present Act, it set out that a trustee is not liable to pay tax as trustee except as provided by the Act. As in sec. 97 it imposed upon ``each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate'' liability to assessment in his individual capacity in respect of his individual interest in the income of the trust estate subject to deductions which would have been allowable to the trustee were he liable. Subsection 31(2)(a), foreshadowing sec. 98, imposed liability on the trustee to pay tax in respect of income ``proportionate to the interest in the trust estate of a beneficiary who is under a legal disability''. Subsection 31(2)(b), like the present sec. 99, imposed liability to tax on the trustee in respect of income of the trust estate ``to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof''. Amendments made to sec. 31 in 1928 and 1930 are not relevant for present purposes. It is appropriate to note that one early view of the words ``presently entitled'' saw them as meaning entitled in right as distinct from entitled in possession -
F.C. of T. v. Higgins (1930) 44 C.L.R. 297 at p. 305 (Rich J. arguendo).

The definition of ``trustee'' extended then, as it does now, beyond its conventional sense, but being subject to any contrary intention appearing from the Act had to be read in the light of the reference in sec. 31 to ``income of the trust estate''. This, it was held, required that the person who answers the description ``trustee'' must stand in the same relation to the proprietary right by virtue of which the income exists -
Howey v. F.C. of T. (1930) 44 C.L.R. 289 at p. 293 (Rich and Dixon JJ.). The definition is also limited by the minimum requirement that there be a fiduciary obligation towards some person -
Manning v. F.C. of T. (1928) 40 C.L.R. 506 at p. 509 (Knox C.J.). And it was, in the definition of ``trustee'', that the reference to ``legal disability'' made its earliest appearance in Commonwealth legislation dealing with taxation of trust income.

The passage of the Act of 1936 saw the enactment in Div. 6 of Pt III of a number of provisions (sec. 95 to 102) relating to the taxation of trust income and reflecting the general principle previously embodied in sec. 31 of the 1922 Act. Simply expressed that principle is that the person entitled to receive and retain income, is the person who should pay tax in respect of it - Challoner and Collins - Income Tax Law and Practice (1953) p. 494. Sections 95 to 99 were designed 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 -
Tindal v. F.C. of T. (1946) 72 C.L.R. 608 at p. 618 (Latham C.J.). The basic principle underlying the operation of Div. 6 remains intact although important amendments were effected in 1979 (Act No. 12 of 1979), 1980 (Act No. 19 of 1980) and 1982 (Act No. 29 of 1982). It is sufficient for present purposes to refer to the provisions as they now stand with passing reference to certain of the amendments.

Section 96 restates the general principle that subject to the Act, trustees are not liable to pay tax upon trust income:

``96 Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.''

And where a beneficiary is ``not under any legal disability'' and ``is presently entitled to a share of the income of the trust estate'' his assessable income will include his share of the net income of the estate (sec. 97). However, an exception to the general principle arises when a beneficiary is ``under a legal disability'' and ``presently entitled to a share of the income of the trust estate'' or is a natural person deemed to be so entitled and not under a legal

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disability. Section 98 provides in those cases by subsec. (1) and (2):

``98(1) Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of -

  • (a) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (b) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,

as if it were the income of an individual and were not subject to any deduction other than the concessional deductions (if any) that would have been allowable to the beneficiary if the beneficiary had been assessed in respect of the amount, or the sum of the amounts, applicable by virtue of paragraphs (a) and (b).

98(2) Where a beneficiary of a trust estate -

  • (a) is deemed to be presently entitled to a share of the income of the trust estate of a year of income by virtue of the operation of sub-section 95A(2);
  • (aa) is a natural person and is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;
  • (b) is not a beneficiary to whom sub-section 97A(1) or (1A) applies in relation to the year of income; and
  • (c) is not under a legal disability,

the trustee of the trust estate shall be assessed and liable to pay tax in respect of -

  • (d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (e) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia, as if it were the income of an individual and were not subject to any deduction other than the concessional deductions (if any) that would have been allowable to the beneficiary if the beneficiary had been assessed in respect of the amount, or the sum of the amounts, applicable by virtue of paragraphs (d) and (e).''

Subsections 98(3) and (4) concern the rates payable by trustees for corporate and other beneficiaries. It is unnecessary for present purposes to set them out in full. The mention in subsec. 98(2) of a beneficiary deemed to be presently entitled ``by virtue of the operation of sub-section 95A(2)'' requires reference to the provisions of that section, and sec. 95B which provide:

``95A(1) 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.

95A(2) For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate.

95B For the purposes of this Act, a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate in the capacity of a trustee of another trust estate shall, in respect of his present entitlement to that share, be deemed not to be under a legal disability.''

Subsection 95A(1) was introduced in 1979 to avoid the suggestion that a beneficiary, presently entitled to trust income, ceased, when paid, to be so entitled for the purposes of sec. 97 and 98, a view expressed as obiter by Barwick C.J in
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of dT. 69 ATC 4084 at p. 4087; (1969) 119 C.L.R. 177at p. 182. More extensive discussion of the background to that subsection is found in the decision of Spender J., D.P. Breen [Deputy President] and K.L. Beddoe, Senior Member, sitting as the Administrative Appeals Tribunal in Case V85,
88 ATC 589.

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Subsection 95A(2) enacted in 1980 is of importance for the present case and it seems has not yet been the subject of any reported decision.

Where all or some of the income of the trust estate is not assessable under sec. 97 or 98 and does not represent non-resident foreign income, the trustee is assessable and liable to pay income tax on that whole or part. According to the Commissioner's discretion, he may be assessed under either sec. 99 or 99A of the Act and the rate of tax payable will depend upon the section which is applied. Section 99 imposes liability to tax as though the income of the trustee were that of an individual not subject to any deduction. But it does not apply if sec. 99A which imposes a prescribed (and generally higher) rate, applies.

The contentions

The Commissioner contended that at all material times the applicants were joint trustees of the moneys held in the Building Society account subject to the directions of the Supreme Court of Western Australia. For the relevant years of income there were no beneficiaries ``presently entitled'' to the trust income. The term ``presently entitled'' to the trust income. The term ``presently entitled'' was said to denote a right to demand payment of the income from the trustee and in that regard reference was made to
F.C. of T. v. Whiting (1943) 68 C.L.R. 199 at pp. 215-216;
Taylor v. F.C. of T. 70 ATC 4026 at pp. 4028-4030; (1970) 119 C.L.R. 444 at pp. 449-452 and
F.C. of T. v. Totledge Pty. Ltd. 82 ATC 4168; (1982) 40 A.L.R. 385. There being no beneficiary presently entitled neither sec. 97 nor 98 was applicable, in which case sec. 99A could be applied. This argument was subject to the qualification that sec. 95A did not operate, deeming the beneficiaries to be presently entitled on the basis of a vested and indefeasible interest in the trust income. The Commissioner submitted however that a ``vested and indefeasible interest'' should be construed as meaning an interest of such a nature that the beneficiary is capable of being identified and the amount of income to which he is absolutely entitled is capable of being ascertained at 30 June each year. Alternatively, the interest of the beneficiaries was said to be contingent rather than vested because the moneys were to be held on trust ``pending the determination of the proceedings''. The trust fund, it was said, was created on the understanding that payment was contingent upon a judgment being secured and a direction of the Court being made concerning entitlement to the money.

The applicants on the other hand submitted that they were not trustees. Their argument was, as put by their counsel, that they were merely signatories to the accounts under the mandate of the Court, not able to control the property. Thus it was said, one of the essential attributes of a trust was missing. If, contrary to the applicants' contention, they were trustees then the beneficiaries were by virtue of sec. 95A presently entitled to income of the trust estate and assessable under sec. 97 at the individual rates. Alternatively, they were presently entitled and under a legal disability by virtue of the order of Wickham J. in which event the applicants would be assessable under sec. 98 at individual rates.

Whether the applicants were trustees

The applicants' submission that there was no trust and that they were not trustees must be considered first in the light of general criteria governing the identification of the trust relationship and, if necessary, against the expanded statutory definition of trustee in the Act.

The trust concept is not readily comprehended by pithy description. In the first English edition of Story's Commentaries on Equity Jurisprudence at para. 964, it was said and repeated with approval in
Wilson v. Lord Bury (1880) 5 Q.B.D. 518 at p. 530 (Brett L.J., Bramwell L.J. agreeing) that:

``A trust, in the most enlarged sense in which that term is used in English jurisprudence, may be defined to be an equitable right, title, or interest in property, real or personal, distinct from the legal ownership thereof.''

The same text referred to the statement of Lord Hardwicke in
Sturt v. Mellish (1743) 2 Atk. 610 that ``a trust is, where there is such a confidence between parties that no action at law will lie but is merely a case for consideration of the court''. Lindley L.J. described it as an equitable obligation to deal with property in a particular way and as ``really nothing except a confidence reposed by one person in another and enforceable in a court of equity'' -
Re Williams (1897) 2 Ch. 12. And as Lord

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Lindley, delivering the judgment of the Privy Council in
Hardoon v. Belilios (1901) A.C. 118 at p. 123, said:

``All that is necessary to establish the relation of trustee and cestui que trust is to prove that the legal title was in the plaintiff and the equitable title in the defendant. This might be proved in many ways. The mode of proof is quite immaterial. Being proved, no matter how, the relation of trustee and cestui que trust was thereby established.''

The 14th edition of Underhill's Law of Trusts and Trustees (1987) at p. 3 sets out a definition used in its earlier editions and expressly approved in
Re Marshall's Wills Trusts (1945) 1 Ch. 217 at p. 219 (Cohen J.) and
Green v. Russell (1959) 2 Q.B. 226 at p. 241 (Romer L.J.):

``A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation. Any act or neglect on the part of a trustee which is not authorised or excused by the terms of the trust instrument, or by law is called a breach of trust.''

It has, however, been criticised for its emphasis on obligations rather than the logically anterior relationship from which they spring. The 4th edition of Keeton - The Law of Trusts in a passage evidently preferred by the authors of the 4th edition of Jacobs' Law of Trusts in Australia (para. 104, 105) defines a trust as:

``... the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one and who are termed cestuis que trust) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiary or other object of the trust.''

It is notably a definition of a relationship by reference to obligations. So too is that propounded by the American Law Institute in its Restatement of the Law of Trusts and also mentioned in Jacobs (supra), which describes an express trust as ``a fiduciary relationship with respect to property subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another person which arises as a result of a manifestation of an intention to create it''.

Beyond general definition, whether in terms of relationship or obligation, it is necessary to identify the essential elements of a trust. Three were referred to in Ashburner's Principles of Equity 2nd edition (1933) p. 84 and in Jacobs they are divided into four:

  • 1. The trustee who holds a legal or equitable interest in the trust property.
  • 2. The trust property which must be property capable of being held on trust and which includes a chose in action.
  • 3. One or more beneficiaries other than the trustee.
  • 4. A personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.

Linked to the imposition of equitable obligations on the trustee is the notion that he must have some control of the trust property. That is explicit in Underhill's definition. But, as suggested in Pettit's Equity and The Law of Trusts (1984) 5th edition at p. 23, even nominal control will suffice. The concept of the ``bare trust'' recently discussed by Gummow J. in
Herdegen & Anor v. F.C. of T. 88 ATC 4995; (1988) 84 A.L.R. 271 encompasses a trustee who has no discretion, only nominal legal control of the property and one duty, namely to convey it on demand. Such a case, cited by his Honour, was
Re Docwra (1885) 29 Ch.D. 693 where the trustees of certain real estate had but one obligation, being obedience to a court order to convey the land to a purchaser taking under the judgment of the Court. Another is found in the trust considered in F.C. of T. v. Higgins (1930) 44 C.L.R. 297 created by a declaration that certain disputed funds would be held ``in trust to abide the final result of... proceedings for such persons (if any) as may by the final result of such proceedings be declared to be entitled thereto'' and if none for a nominated association. The control requirement is a corollary of the condition that there be a personal obligation to deal with the property for

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the benefit of the beneficiaries. The scope of the obligation determines the nature of the control necessary to discharge it. If the obligation is to convey the trust property to a beneficiary on demand, it connotes at least an ability to do that much. In the present case it was the Commissioner's submission that the applicants were legally in control of the moneys invested even though they had ``little or no discretion'' and that that control was sufficient to meet the requirements for the existence of a trust relationship.

The order made by Wickham J. directed that the applicants hold the moneys in the investment account ``on trust''. Not every use of the word ``trust'' in relation to property will give rise to a relationship enforceable in the exercise of equitable jurisdiction -
Te Teira Te Paea v. Te Roera Tareha (1902) A.C. 56 at p. 72. It may refer to the discharge by public officers of duties or functions belonging to the prerogative and authority of the Crown, and is then used not in the conventional but ``in the higher sense'' -
Kinloch v. Secretary of State for India (1880) 7 App. Cas. 619 at pp. 625-626 (Lord Selborne L.C.). There is as Lord O'Hagan said in that case ``no magic in the word `trust'''. See also
D.F.C. of T. v. Trustees of the Wheat Pool of Western Australia (1932) 48 C.L.R. 5 where so called ``trustees'' were held to be merely agents or mandataries. And in
Tito v. Waddell (No. 2) (1977) 3 All E.R. 129 at p. 216, Megarry V.-C., acknowledging that the word is often used in a sense different from that of an equitable obligation, added:

``In every case one has to look to see whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a true trust has been manifested.''

The order made in the interpleader proceedings was authorised by O. 52 r. 2(3) of the Rules of the Supreme Court (W.A.) which provides:

``Where the right of any party to a fund is in dispute in a cause or matter, the Court may order that the fund be paid into court or otherwise secured.''

In so far as it imposed a limitation on the ability of the applicants to deal with the fund other than as directed by the Court, it was a limitation imposed by law, enforceable without resort to equity. As Megarry V.-C. observed in Tito v. Waddell (No. 2) (supra) there is no presumption or general rule that the imposition or assumption of a statutory duty to perform certain functions gives rise to fiduciary obligations - see also
Swain v. The Law Society (1983) 1 A.C. 598. The duties imposed upon the applicants by the order were of a public nature to be carried out in their character as solicitors and officers of the court. But accepting that no presumption in favour of the creation of a trust flows from the mere imposition of those legal duties, there is no presumption against its existence. The order did specify that the moneys ``be held on trust'' and it was made by consent. That consent may properly be characterised as given on behalf of the parties. But it was also expressive of an intention on the part of the applicants capable of supporting an express trust. The words ``in trust'' were not necessary to the imposition of the legal duty to leave the fund in the designated account until otherwise directed by the court. Their inclusion by consent in the order cannot be dismissed as merely rhetorical or as referring to a trust in ``the higher sense''. In my opinion, they reflect an intention on the part of the applicants, sanctioned by the court, to assume equitable obligations as between themselves and those entitled to the fund.

Such a declaration of intention is not sufficient to create a trust unless certain essential criteria are met. But applying the four tests enumerated in Jacobs (supra) the necessary elements were present. The applicants being clearly capable of acting as trustees, the first requirement was satisfied. As to the second, the existence of property capable of being held on trust, neither the rules of the Building Society nor the terms and conditions defining and regulating its relations with depositors in redeemable investment accounts were in evidence. But it can be accepted without further enquiry that as between a depositor and the Building Society, a contractual relationship exists. The depositor has the right, subject to the terms and conditions governing the particular class of account, to make demand for repayment of all or part of the sum deposited together with interest. There was nothing in the order made by Wickham J. to prevent such a contract coming into existence. The moneys were paid out of court to the solicitors for In Residence,

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but paid into the Building Society's account in the name of the three applicants who were solicitors for all contending claimants. In the event, a contractual relationship existed between all three jointly on the one hand and the Building Society on the other. The one or more rights they jointly enjoyed flowing from their contract were choses in action, a species of property to which trust obligations could be annexed.

The third element, namely the existence of a cestui que trust or beneficiary, was also present as it was clear that one or more of the defendants in the interpleader proceedings were entitled as against Riverhall to all the money. That this entitlement was legal did not affect their character as beneficiaries. The contractual rights as between the applicants and the Building Society were a distinct but related property in which the applicants had a legal interest which they held for the benefit of the persons found by the Court to be entitled, as against Riverhall, to receive the moneys advanced.

The fourth test in Jacobs requires the identification of a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries. I am satisfied that such an obligation existed in this case and was the product of the declared relationship between the applicants and those properly entitled to the fund. While the obligation might be as limited in its scope as that imposed by the order itself, it was enforceable by equitable as well as legal remedies.

On the question of control, the applicants were in at least nominal control of the chose in action arising out of their contract with the Building Society. The signatures of all were necessary to deal on the account, although they had no discretion to deal except in accordance with the order of the court. The control they exercised may have been that of bare trustees under a limited obligation. But it was a degree of control consistent with the existence of an equitable obligation and the ability to discharge it. The applicants were, in my opinion, trustees in the conventional sense. In the circumstances, it is not necessary to consider the application of the expanded definition of ``trustee'' in sec. 6 of the Act.

Whether there were any beneficiaries ``presently entitled'' to the income of the fund

The applicants were not liable to tax as trustees if there were in the relevant income years beneficiaries not under a legal disability who were ``presently entitled'' to a share of the income of the fund. For in such a case each beneficiary's entitlement would be included in its assessable income (sec. 97) and none of sec. 98, 99 or 99A would apply. If there were beneficiaries presently entitled, but under a legal disability or being natural persons, deemed to be presently entitled by virtue of sec. 95A(2) and not under a legal disability, then sec. 98 would operate to impose a liability to tax on the trustee in respect of the income of the fund as though it were the income of an individual. It is only when both of these cases are excluded that sec. 99 and 99A can be applied. The provisions of subsec. 98(2) relating to natural persons not under a legal disability and having a deemed present entitlement could only apply in this case to Mr Sweeney, if at all.

A beneficiary of a trust is ``presently entitled'' to all or part of its income when he is entitled to immediate payment of all or part of that income as the case may be - F.C. of T. v. Whiting (1943) 68 C.L.R. 199 at p. 215 (Latham C.J. and Williams J.). The phrase does not refer to the nature of the title and whether it be vested or contingent but to the right to receive income which is available in the hands of trustees for payment to the beneficiaries - ibid. p. 219 (Starke J.). The trust, there in question, was of the profits of a partnership business, one of the assets of a deceased estate. The income was applied to reduce estate debts. Until those debts were satisfied and the amount of the residue ascertained, the administration was incomplete and the income of the residuary estate was the income of the executors -
Robertson v. D.F.C. of Land Tax (1941) 65 C.L.R. 338. On that basis the beneficiaries were held not to be presently entitled. The fund in this case is not to be compared to the unascertained residuary estate in Whiting. The underlying reason for the absence of entitlement to the residue of a deceased estate until completion of its administration was explained by Lord Halsbury L.C. in
Lord Sudeley v. Attorney General (1897) A.C. 11 at p. 16:

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``... the cestui que trust has no right to apply to the trust fund until a trust fund has been constituted, and by the hypothesis the trust fund is not constituted.''

See also Barnardo's
Homes v. Special Income Tax Commissioners (1921) A.C. 1 at p. 8 (Viscount Finlay), p. 10 (Viscount Cave). And consistently with that rationale a beneficiary may become entitled to assets despite the existence of secured debts where the assets are not required to satisfy the debt - Whiting (supra) at p. 217 citing
Corbett v. Inland Revenue Commissioner (1938) 1 K.B.. Taylor v. F.C. of T. 70 ATC 4026 at p. 4029; (1970) 119 C.L.R. 444 at p. 450, Kitto J. saw the judgments in Whiting as holding ``only that an admittedly vested interest in possession in the income of an estate does not make the beneficiary `presently entitled' to any income which is not yet distributable, and so is not yet specifically caught by the beneficiary's interest''. At ATC p. 4030; C.L.R. p. 452 his Honour said:

``... the tenor of the judgments is, I think, that `presently entitled' refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he were not under a disability.''

The Full Federal Court in F.C. of T. v. Totledge Pty. Ltd. 82 ATC 4168 at p. 4175; (1982) 40 A.L.R. 385 at p. 394, saw the requirement of present entitlement under subsec. 97(1):

``as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate.''

The enjoyment of a right to demand and receive payment may be deferred by a dispute or uncertainty as to its existence. If by a judicial resolution that right is found to have existed that is a determination of what was the true position at the time of the dispute or uncertainty. In the present case it is clear that certain of the parties to the interpleader proceedings were at all material times in the years of income entitled to immediate payment of parts of the capital of the fund and interest earned by it in the redeemable investment account. The fact that that entitlement was not ascertained until the determination of the proceedings in 1985 does not alter its character. The trust fund, to use the language of Lord Halsbury ``was constituted''. It was to determine the entitlements to that fund that the action was begun. The order made by the Court in 1982 does not alter them. In my opinion the beneficiaries of the trust were at all material times ``presently entitled'' to its income within the meaning of sec. 97 of the Act.

Whether the interests of the beneficiaries were vested and indefeasible

If that conclusion be incorrect, the question would still remain whether the beneficiaries were, pursuant to sec. 95A(2) deemed to be presently entitled to the trust income by virtue of having a vested and indefeasible interest in it. In light of the construction placed on the words ``presently entitled'' in Div. 6 by Whiting (supra) and Taylor (supra), the term ``vested and indefeasible interest'' must refer to a class of rights including but not limited to an ``entitlement to immediate payment'' or ``an interest in possession in an amount of income that is legally ready for distribution''. The relevant meaning of the verb ``vest'' as set out in the Oxford English Dictionary is ``to place, settle or secure (something) in the possession of a person or persons;... With reference to estates, rights titles etc.''. And the word ``indefeasible'' in the same dictionary is defined as ``not defeasible; not liable to be `defeated', made void or done away with; that cannot be forfeited''.

At the core of the relevant natural meaning of the word vest are the concepts of placing, settling or securing something with a person. Each of these embodies the idea of conferring. Brett L.J. used the word ``give'' in
Coverdale v. Charlton 48 L.J.Q.B. 132. More controversial is the question whether ``vest'' is to be taken in law as referring to a vesting in interest or in possession. The weight of authority supports the view that in English law it means, prima facie, vesting in interest, although whether it is so construed in a particular case will depend upon context -
Marks v. Trustees Executors and Agency Co. Ltd. (1948) 77 C.L.R. 497 at p. 507. In Vol. 50 of the 4th edition of Halsbury's Laws of England at para. 588 it is said that ``The proper

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legal meaning of `vest' is vest in interest''. The distinction between the two senses in which the word is used is made in the 4th edition of Megarry and Wade - The Law of Real Property (1975) at p. 173:

``An interest is `vested in possession' when it gives the right of present enjoyment; but of course it is not then a future interest. If it is vested in interest but not in possession (for which situation the term `vested' is ordinarily used by itself) it is a `future interest', since the right of enjoyment is postponed, yet it is also an already subsisting right in property vested in its owner: it is a present right to future enjoyment. By contrast with a vested interest, a contingent interest is one which will give no right at all unless or until some future event happens.''

The text goes on to say that a remainder will not vest unless the person or persons entitled to it are ``ascertained'', but this word is used to make the distinction between a vested and contingent remainder. That is brought out in the passage from the judgment of McKinnon L.J. in
Re Legh's Settlement Trusts (1938) 1 Ch. 39 at p. 52:

``... a future estate or interest is vested when there is a person who has an immediate right to that interest upon the cessation of the present or previous interest. But a future interest is contingent if the person to whom it is limited remains uncertain until the cessation of the previous interest.''

Counsel for the Commissioner submitted that subsec. 95A(2) was enacted in light of the provisions of various State Trustees Acts providing for accumulation during minority of so much of the trust income of infant beneficiaries as is not expended upon their maintenance, education or advancement, thereby barring such beneficiaries from exercising rights to immediate payment of trust income during their minority (e.g. sec. 58 Trustees Act 1962 (W.A.); sec. 37 Trustee Act 1958 (Vic.); sec. 61 Trusts Act 1973 (Qld)). In such a case it was said the infant beneficiary would not be ``presently entitled'' and, absent subsec. 95A(2) the trustee would be assessable, presumably at the prescribed rate under sec. 99A. A like provision is found in sec. 31 of the Trustees Act 1925 (U.K.) and was held by the Court of Appeal in
Stanley v. I.R. Commrs (1944) 1 K.B. 255 to cause surplus income to cease to be that of the beneficiary and to convert it to a contingent interest. Against this background it was submitted that on its proper construction ``vested and indefeasible'' in subsec. 95A(2) describes an interest the beneficiary of which is ``capable of being identified... or established... and the amount of income to which he is absolutely entitled is capable of being ascertained at 30 June each year''. The propounded rationale for the enactment of sec. 95A(2) was not explained in the Parliament in the Second Reading Speech nor was anything put before the Court to indicate that it was known to those who passed that law. The statutes are the Acts of the Parliament. However fanciful the notion of a ``legislative intent'' may be on occasion, the day has not yet come for its general displacement as a tool of construction by the concept of a departmental or official intent. Nothing has been said to indicate any cogent reason for departing from the usual legal meaning of ``vested''. In my opinion, the vesting contemplated by subsec. 95A(2) is a vesting in interest and such a vesting had occurred in this case. The beneficiaries may not have been known but they were certain, albeit a process of judicial inquiry was necessary to determine who they were.

The Commissioner submitted that the interest of the beneficiaries was contingent rather than vested as the trust fund was created on the understanding that payment was contingent upon a judgment being secured and a direction of the Court being made concerning entitlement to the money. In my opinion, while it may be arguable, contrary to my view on the question of ``present entitlement'' generally, that there was no right of immediate payment the fund was vested in interest. Its enjoyment was merely postponed until and not contingent upon the judgment of the Court. The directions to be given by the Court would merely give effect to the rights recognised by the judgment.

There is no basis for any suggestion that the beneficiaries' interests were defeasible. If therefore they had not been otherwise presently entitled to the income of the fund, I would conclude that their interests were vested and indefeasible for the years 1983 and 1984 and that they were deemed to be presently entitled.

ATC 5192

On the question whether the beneficiaries were under any legal disability, it is sufficient to say that that concept does not extend to restrictions of the kind imposed by the order of Wickham J. I am inclined to the view that the word is used in the sense of an incapacity derived from status, obvious examples being infancy and lack of mental capacity. That accords best with its natural meaning - ``thing or lack that prevents one's doing something; legal disqualification...'' - Concise Oxford Dictionary. Whatever the full range of its meaning it does not extend to the effect on the beneficiaries of an order such as that made in April 1982. Far from disabling them, the order was an incident to the proper adjudication and enforcement of their rights.

Conclusion

For the preceding reasons these appeals will be allowed. In the circumstances, the appropriate order would appear to be that the assessments be set aside. I will, however, give the parties an opportunity to be heard on that question.


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