Davies J

Sheppard J
Hill J

Full Federal Court

Judgment date: Judgment handed down 18 February 1991

Davies, Sheppard and Hill JJ

This is an appeal from a judgment of a single Judge of the Court [reported at 89 ATC 5274] in which his Honour set aside a decision of the Administrative Appeals Tribunal [reported as Case W36,
89 ATC 363] which in turn had allowed an objection by Mrs Helena Vegners in respect of assessments to income tax for the years ended 30 June 1982, 1983 and 1984.

In these years of income a company, Ray Vegners Pty Ltd, conducted the business of consulting engineer in its capacity of trustee of the Vegners Family Trust. The trust was a discretionary trust established by a deed of settlement dated 29 April, 1980. The income and capital beneficiaries under the trust included Raymond Vegners and any person who is or has been or becomes the spouse of the said Raymond Vegners. Mrs Vegners was such a beneficiary.

Clause 2(a) of the deed provided that the trustee might, from time to time during the financial year, pay or apply the income of the trust fund or any part thereof to or for the benefit of the income beneficiaries or any one or more of them. Clause 4 of the deed provided that the payment, application or setting aside of income might be effectively made inter alia by applying or setting aside for, or paying to any income beneficiary so much of the income as the trustee thought fit.

In the 1982 year of income the trustee resolved that out of the net income of the trust $4,042 should be distributed to Mrs Helena Vegners for her own benefit. In the 1983 year, a similar resolution was passed in respect of a distribution of $4,004 and in 1984 the sum was $3,504. During each year payments totalling $3,504 were actually made by the trustee to Mrs Vegners.

This situation arose from the circumstance that, in 1982, Mr Ray Vegners and Mrs Helena Vegners, who had earlier separated, entered into a matrimonial agreement dated 2 July, 1982 which provided, inter alia:

``5. The Wife shall receive payment from the Trustee of the... Family Trust by way of further property settlement, the lump sum of thirty nine thousand one hundred and twenty eight dollars ($39,128) by one hundred and thirty four equal calendar monthly instalments of two hundred and ninety two dollars ($292) per month, first of such instalments to be paid on 9 April 1981 and thereafter on the 9th day of each and every succeeding month. The payments by the Trustee shall be by way of allocation of trust income and only in the event that the trustee (sic) at any time or from time to time does not make such payments as prescribed, the Husband shall make the particular payment or payments until such time as the Trustee shall resume making the payments specified PROVIDED HOWEVER that in the event of the death of the Wife during the term of payment of the said instalments, all further instalments shall cease and there shall be no further liability for payment of instalments which would otherwise have fallen due after the date of death.''

That agreement, which was approved by the Family Court of Australia on the same day, 2 July 1982, may be contrasted with an order of the Court made on that day:

``That the husband pay direct to the wife by way of maintenance for each of the three children of the marriage, namely... and... the sum of nineteen dollars twenty five cents ($19.25) per week for each child and that the first of such payments be made within seven days from this date and that payments

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be made each four weeks thereafter and continue until each such child attains 18 years of age or is self-supporting whichever first occurs.''

The effect of the approval of the Court was that, under s. 87 of the Family Law Act 1975 (Cth), the agreement could be enforced as if it were an order of the Court. See
Perlman v. Perlman (1984) FLC ¶91-500; (1983-1984) 155 C.L.R. 474.

Mrs Vegners was assessed to tax on the income resolved to be distributed to her each year and her objections were considered by the Administrative Appeals Tribunal. The learned senior member constituting the Tribunal held that no sum was assessable to tax in Mrs Vegners' hands as Mrs Vegners had had no knowledge of the trust.

In his reasons for decision, the learned senior member said, inter alia [at p. 369]:

``Upon any effective determination of the Trustee to distribute income to the wife, she became entitled to the benefits of the distribution, but only if she chose to accept them. No such choice could be made until such time as she learned of the existence of the Trust and the passing of the resolution. That knowledge did not come to her until the assessment came to her notice and her enquiries led to the discovery of her entitlement. In my view the amounts in question could not become her `income' until she consented to the status of being a beneficiary and she determined to accept the distributions. As she did not assent to either proposition, there was no derivation of income whether in the amounts assessed or in any lesser amounts.''

This view was incorrect in law for an entitlement under a trust is valid notwithstanding that the beneficiary has had no knowledge of it. See, e.g. Equity and the Law of Trusts by Pettit, 2nd Ed., p. 63. One of the cases most oft cited in this respect is
Standing v. Bowring (1885) 31 Ch.D. 282. Other cases to the same effect are referred to in Pettit. In this country, the principle has been discussed and applied by the High Court of Australia in
F.C. of T. v. Cornell (1946) 73 C.L.R. 394 and by the Court of Appeal of New South Wales in
Grey v. Australian Motorists and General Insurance Co. Pty. Ltd. (1976) 1 N.S.W.L.R. 669.

A beneficiary may disclaim an entitlement on its coming to his or her knowledge, as the above cases show. But the submission was not put to the Administrative Appeals Tribunal and has not been put to this Court that, if she were entitled to disclaim, Mrs Vegners did so. She received the $3,504 each year from the trustee, and retained it.

Notwithstanding the many submissions put to him, the trial Judge necessarily allowed the appeal brought by the Commissioner of Taxation from the decision of the Administrative Appeals Tribunal, and he set aside that decision on the footing that Mrs Vegners ought to have returned as income $3,504 each year, that figure being agreed by counsel to be the correct figure if any income was to be assessed to Mrs Vegners.

The trial Judge dealt carefully and fully with all issues in the case and we may therefore be brief in our comments. Mr B.A. Coles, counsel for Mrs Vegners, submitted that clause 5 of the matrimonial agreement imposed a personal obligation on Mr Ray Vegners to pay the specified amount to Mrs Vegners. However, it is not necessary for this Court to rule upon that submission, and as the clause is a strange one, we do not propose to do so. The sole question is whether Mrs Vegners was personally entitled to trust income and assessable to tax under the provisions of ss. 97 and 101 of the Income Tax Assessment Act 1936 (Cth).

Notwithstanding the many submissions put by Mr Coles, we are satisfied that the Administrative Appeals Tribunal and the trial Judge were correct in holding that the trustee carried on its business of consulting engineer as a trustee and derived income therefrom and held that income pursuant to the terms of the deed we have mentioned.

From the income of the trust, payments were made to Mrs Vegners totalling $3,504 per year, and the propriety of those payments was established by the annual resolutions of the trustee which were made in the exercise of the discretion conferred by the trust deed. As Mrs Vegners' entitlement was not disclaimed by her, she was assessable to tax on the sums which were paid to her by the trustee for her own benefit. Mr Coles submitted that the sums were paid or applied to the benefit of Mr Ray Vegners, but the submission runs contrary to the facts which were that the sums were paid by

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the trustee to Mrs Vegners out of the income of the trust and that the trustee's resolutions specified that the amounts were for her benefit. The trial Judge was correct in holding that the income which Mrs Vegners received and to which she was presently entitled was assessable as part of her income.

If, as Mr Coles has submitted, what occurred was contrary to the terms of clause 5 of the matrimonial agreement, Mrs Vegners' remedy lies under that agreement, not under the Income Tax Assessment Act.

It is unnecessary for us to deal with the several other matters that were touched upon by Mr Coles in his oral and written submissions. These matters were fully and adequately dealt with by the trial Judge.

For reasons we have given, the appeal is dismissed with costs.

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