CASE 29/96

MD Allen SM

J Block SM

Administrative Appeals Tribunal

Decision date: 1 May 1996.

MD Allen and J Block (Senior Members) (a) The Trustee sought the review of decisions by the Respondent disallowing objections by the Trustee against assessments for the years ended 30 June 1988 (the ``1988 year'') and 30 June 1989 (the ``1989 year''), in each case in respect of an amount assessed for tax under Section 99A of the Income Tax Assessment Act 1936 (Cth) (the ``Act'');

(b) the Mother sought review of a decision by the Respondent disallowing an objection by her in respect of an amended assessment referable to the year ended 30 June 1991 (the ``1991 year'') and pursuant to which the Respondent assessed the Mother for tax arising from the disallowance to the Trust (of which the Trustee is the trustee) of interest deductions in respect of both the 1991 year and the prior year (the ``1990 year'');

(c) the ``relevant years'' for the purpose of these reasons are the 1988 year, the 1989 year, the 1990 year and the 1991 year. The 1990 year is a relevant year because of its impact on the amended assessment in respect of the Mother for the 1991 year;

(d) the applications by the Trustee and by the Mother are linked, and by consent, were heard together; the Trustee and the Mother are collectively referred to as the ``Applicants''.

2. The Applicants were represented by Mr D E Grieve QC and the Respondent was represented by Mr A H Slater QC and Mr J Bartos. Oral evidence was given by the Mother and by a partner in the firm of accountants and auditors which acts as such in relation to the family and the Trust; that partner is referred to as ``L''; the firm in which he is a partner is referred to as the ``Accountants''. The Tribunal received sworn statements by each of the Mother and by her husband (the ``Father''); the Tribunal accepted into evidence the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 and also a number of exhibits tendered by the parties, and including in particular as Exhibit R1, a folder of documents referable to the Trust. The exhibits include also Exhibit A1 which is a document styled ``Outline of Case'' dated 27 March 1996 prepared by Mr Grieve, and Exhibit R4 which is a document entitled ``Outline of Respondent's Submissions''

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prepared by Mr Slater and Mr Bartos and dated 27 March 1996; we note that the two outlines submitted on behalf of the parties were of considerable assistance to the Tribunal.

3. The decisions relate to Division 16F of the Act; as a matter of convenience all of those sections which are relevant for the purposes of these decisions are gathered and set out in the clause 3; it may be noted that some of the quoted sections are of peripheral relevance, the two sections which are most relevant being sections 159GZE(3) and 159GZG(4); emphasis, where relevant, has been added by us.

Apportionment of amount of foreign debt interest:

``159GZV(1) Where:

  • (a) an amount of foreign debt interest is, apart from this Division, allowable as a deduction in calculating under section 95 the net income of a trust estate of a year of income; and
  • (aa) subsection (2) does not apply; and
  • (b) the greatest total foreign debt of the trust estate at any time in the year of income exceeds the foreign equity product of the trust estate of the year;

a proportion of the amount of the foreign debt interest ascertained in accordance with the formula



  • E is the amount of the excess referred to in paragraph (b); and
  • D is the amount of foreign debt referred to in that paragraph;

is not so allowable as a deduction.''

``Foreign debt interest''

``foreign debt interest'' means interest payable on foreign debt; [159GZA]

``Foreign Debt'':

``159GZF(3) In this Division, `foreign debt' , in relation to a trust estate, means the balance outstanding on any amount owing by the trustee of the trust estate, where:

  • (a) interest is or may become payable to a foreign controller, or to a non-resident associate of a foreign controller, of the trust estate in respect of the amount owing;
  • (b) the interest is or will be, apart from this Division, allowable as a deduction from the assessable income of the trust estate of any year of income; and
  • (c) except in the case of interest that is taken to be payable to a foreign controller or non-resident associate under section 159GZN or 159GZO - the interest is not, or would not be, assessable income of any year of income of the foreign controller or non-resident associate to whom it is or becomes payable.''

Foreign controller:

``159GZE(3) For the purposes of this Division, where:

  • (a) a non-resident is the trustee of a trust estate;
  • (b) a non-resident, either alone or together with an associate or associates:
    • (i) has substantial control of the voting power in a trust estate;
    • (ii) has a direct or indirect beneficial interest in at least 15% of the corpus or income of a trust estate; or
    • (iii) is capable, under a scheme, of gaining such control or such an interest; or
  • (c) the trustee of a trust estate is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a non-resident, either alone or together with an associate or associates;

the non-resident is a foreign controller in relation to the trust estate.''


```scheme' means:

  • (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  • (b) any scheme, plan, proposal, action, course of action or course of conduct, whether there are 2 or more parties or only one party involved:''


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``159GZC(1) A reference in this Division to an associate of a person (in this subsection called the `primary person' ) is a reference to:

  • (a) where the primary person is a natural person, other than in the capacity of a trustee:
    • (i) a relative of the primary person;
    • ...
    • (v) a company where:
      • (A) the company is, or its directors are, accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the primary person, of another person who is an associate of the primary person by virtue of another subparagraph of this paragraph, of a company that is an associate of the primary person by virtue of another application of this subparagraph or of any 2 or more such persons; or
      • (B) the primary person is, the persons who are associates of the primary person by virtue of sub- subparagraph (A) of this subparagraph and the preceding subparagraphs of this paragraph are, or the primary person and the persons who are associates of the primary person by virtue of that sub-subparagraph and those subparagraphs are, in a position to cast, or control the casting of, at least 15% of the votes in the company or beneficially entitled to receive, directly or indirectly, at least 15% of any dividends that are or might be paid, or of any distribution of capital that is or might be made, by the company;''

```relative' [section 6], in relation to any person, means any of the following, namely:

  • (a) the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person or of his or her spouse; and
  • (b) the spouse of that person or of any other person specified in paragraph (a);''

Foreign equity:

``159GZG(4) In this Division, `foreign equity' , in relation to a trust estate in relation to a year of income, means the amount that, if:

  • (a) regard were had only to the use of the trust property in producing assessable (non-resident beneficiary) income in relation to foreign controllers, or non- resident associates of foreign controllers, of the trust estate; and
  • (b) a trust estate balance sheet were prepared at the end of the year of income or, where the trustee of the trust estate ceased (other than temporarily) to derive assessable income of the kind referred to in paragraph (a) at a time before the end of the year of income, at that time;

would be shown in the balance sheet as beneficiaries' equity, reduced by the balance outstanding on amounts owing to the trustee of the trust estate (other than short-term trade credit amounts) by foreign controllers, or non-resident associates of foreign controllers, of the trust estate (other than short-term trade credit amounts) by foreign controllers, or non-resident associates of foreign controllers, of the trust estate.''

Foreign equity product:

```foreign equity product' means:

  • ...
  • (b) in relation to a partnership or a trust estate, in relation to a year of income - the amount ascertained by multiplying the foreign equity of the partnership or trust estate of the year of income by 3;''


Assessable (non-resident beneficiary) income:

``159GZB(2) Where the whole or a part (which whole or part is in this subsection called the `non-resident amount' ) of the share of a beneficiary of a trust estate in the net income of the trust estate of a year of income is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia, the amount of assessable income of the trust estate of the year of income to which the non-resident amount is attributable is, for the purposes of this Division, assessable (non-resident beneficiary) income of the

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trust estate of the year of income in relation to the beneficiary.''

4. The Applicant is the Trustee of a trust set up for the benefit of the Mother and Father and their children; the deed in respect of the trust (which is a discretionary family trust, and which is referred to as the ``Trust'') was made on 28 December 1984 and is referred to as the ``Trust Deed''. As a matter of convenience we set out in this clause 4 the relevant provisions of the Trust, (emphasis, where relevant, having been added by us):

``2. (a) For the purposes of this Deed the 'Vesting Day' means the day upon which shall expire the period of seventy-five (75) years after the date of this Settlement or the day upon which shall expire the period of twenty-one (21) years after the death of the last survivor of the descendants now living of His Late Majesty King George VI whichever day shall first occur, or such earlier date as the Trustee may at any time after the date of execution of this Settlement in writing or by oral declaration subsequently recorded in writing or in the case of a corporation by oral resolution of its Boards of Directors passed in the manner for the time being provided in its Articles of Association, appoint to be the Vesting Day.


5. The expression `the beneficiaries' wherever used in this Deed shall mean and include the following:-

The Father.

The lawful wife or widow from time to time of the Father born before the Vesting Day.

Any former wife of the Father born before the Vesting Day

Any child of the Father born before the Vesting Day.

Any grandchild of the Father born before the Vesting Day.

Any great grandchild of the Father born before the Vesting Day.

The lawful husband, widower, wife or widow from time to time of any child, grandchild or great grandchild of the Father PROVIDED THAT such husband, widower, wife or widow was born before the Vesting Day.

Any proprietary company in which any of the beneficiaries referred to in this clause has a beneficial interest in at least twenty- five (25%) percent of the issued shares which confer the right to vote at any general meeting whether in its own capacity or in its capacity as trustee of any trust or settlement.

6. Until the Vesting Date the Trustee shall stand possessed of the income of the Trust Fund derived by it in any financial year ending on the 30th day of June or such portion of such income as the Trustee may in its absolute discretion determine upon trust absolutely for the beneficiaries or any one or more of them (exclusive of the other or of them) and in such shares and proportions (whether varying or uniform) as the Trustee shall in its absolute discretion determine prior to midnight on the 27th day of June in such year and in the event of the Trustee failing to make any such determination as aforesaid with respect to the income or any portion thereof then such income or such portion (as the case may be) shall be held upon trust absolutely for any lawful wife or widow of the Father as shall be living on the 30th day of June in such year provided however that should there be no wife or widow of the Father then living as aforesaid then for any child or children of the Father as shall be living on the 30th day of June in such year and if more than one in equal shares as tenants in common provided further that should there be no child or children of the Father then living as aforesaid then for any grandchild or grandchildren of the Father as shall be living on the 30th day of June in such year and if more than one in equal shares as tenants in common provided further that should there be no child or children of the Father then living as aforesaid then for any grandchild or grandchildren of the Father as shall be living on the 30th day of June in such year and if more than one in equal shares as tenants in common provided further that should there be no grandchild or grandchildren living as aforesaid then for such other of the beneficiaries (excluding such beneficiaries as may be corporations or institutions) as shall be living on the 30th

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day of June in such year and if more than one in equal shares as tenants in common.


10. Upon the Vesting Day the Trustee shall stand possessed of the capital of the Trust Fund subject to any prior application thereof pursuant to Clause 12 upon trust to distribute the same as follows:-

  • (a) To the beneficiaries or any one or more of them (exclusive of the other or others of them) and in such shares and proportions (whether varying or uniform) as the trustee shall in its absolute discretion determine on or prior to the Vesting Day.
  • (b) In default of determination under sub-clause (a) of this clause then the capital of the trust fund shall be distributed to such of the children of the Father as shall be living on the Vesting Day and if more than one in equal shares as tenants in common provided however that should there be no child or children of the Father then living as aforesaid then to any grandchild or grandchildren of the Father as shall be living on the Vesting Day and if more than one in equal shares as tenants in common.
  • (c)... (not relevant)


12. The Trustee shall have power in its absolute discretion and from time to time and prior to the Vesting Day to pay or apply the whole or any part of the corpus of the Trust Fund towards the maintenance, advancement, education (by travel or otherwise) or benefit in any way whatsoever of any one or more of the beneficiaries (to the exclusion of the other or others) and where such beneficiary is an infant in that case to pay or transfer the same or any part thereof to the parent or guardian of such infant or to the person with whom such infant may for the time being be residing without being responsible to see to the application thereof.''

It may be noted in brief that clause 13(p) of the Trust Deed allows the Trustee to determine whether any money is to be treated as capital or income.

5. There are five children (the ``Children'' and each ``Child'') of the Mother and Father all of whom are non-residents of Australia and who are referred to by the initial letters of their first names and being E, M, C, A and P. Of the Children, A resides in the United States of America whereas the other Children reside in Hong Kong, where the Mother and Father resided prior to taking up residence in Australia.

6. The first and most crucial decision in relation to the Trust, and in respect of each of the Trustee and the Mother, is as to whether or not the Children were foreign controllers within section 159GZE of the Act.

7. Mr Slater informed us at the commencement of the hearing that the Respondent did not intend to argue the applicability of the test set out in section 159GZE(3)(b)(i) of the Act.

8. (a) Section 159GZE(3)(b)(ii) (the ``third test'') requires consideration of the nature and extent of the interests of the beneficiaries in the Trust; in addition, it requires consideration of the meaning to be attributed to the term ``direct beneficial interest''. For this purpose it is necessary to consider whether or not all or any of the rights of objects in discretionary trusts, vested (but defeasible) rights and contingent rights are beneficial interests in the trust estate. The term ``indirect beneficial interest'' is dealt with in section 159GZH(3) and is relevant where interposed entities held a beneficial interest on behalf of a non-resident; that section does not however furnish assistance as to what is meant by a beneficial interest for the purposes of the third test.

(b) One author has described the term ``beneficial interest'' as: ``A right of substantial enjoyment or equitable interest, as opposed to merely nominal ownership or legal interest.'': E R Hardy Ivamy, ``Mozley & Whiteley's Law Dictionary'', 1993, 11th Edition, Butterworths.

(c) Any uncertainty as to the meaning of ``beneficial interest'' is to some degree alleviated by the decision of the High Court in
Commissioner of Stamp Duties (NSW) v Bradhurst (1950) 81 CLR 199. In that case, the Court had to consider whether or not a beneficial interest accrued or arose by survivorship or otherwise on the death of the deceased. The members of the Court considered the decision in
Adamson v Attorney-General [1933] AC 257, and approved the statements in Adamson's Case, that both vested and contingent interests in trust estates are beneficial interests. In Adamson's Case, a trust

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was settled, the income and capital of which were to be held for the benefit of such of the settlor's children as the settlor should appoint during his lifetime and in default of appointment the son was to have a share of two- fifths of the estate with the remainder to be divided equally among all of the other children of the settlor alive at the settlor's death. Lord Warrington of Clyffe, with whom Lord Blanesburgh agreed, opined at 277:

``... before [the settlor's] death each child had a beneficial interest, but one that might be destroyed either by an exercise of the power of appointment or by the death of the child in the lifetime of the deceased; on his death without exercising his power the beneficial interest of each child became absolute and indefeasible.''

(d) That passage referred to in paragraph (c) was quoted by Latham CJ, who dissented on another issue, and Williams J in Bradhurst's Case (1950) 81 CLR 199 at 214 and 223 respectively. Whilst this latter authority is perhaps not directly relevant, it nevertheless provides us with some guidance as to what is meant by ``beneficial interest''. In our opinion, both vested but defeasible interests, and also contingent interests can aptly for this purpose be described as beneficial interests.

(e) The interest of the Mother in the income of the Trust is a vested but defeasible interest and as such, a beneficial interest in the income of the estate for the purposes of the third test;
Queensland Trustees Ltd v Commissioner of Stamp Duties (1953-54) 88 CLR 54,
Lutheran Church of Australia South Australia District Incorporated v Farmers' Co-operative Executors and Trustees Ltd (1970) 121 CLR 628 per Kitto J at 653-654,
Chief Commr of Stamp Duties (NSW) v Buckle & Ors (1996) 96 ATC 4098 at 4102 to 4103 per Sheller JA. Clause 6 of the Trust Deed provides that the taker of income in default is ``any lawful wife or widow of the Father as shall be living on the 30th day of June in such year...''. As the Mother was the wife of the Father when the Trust was settled, we consider that her interest in income vested in the Mother and that any alteration in her status subsequent thereto would constitute a condition subsequent to that vesting: see H A J Ford and W A Lee ``Principles of the Law of Trusts'' 1996 Law Book Company at paragraph 7300. It follows in our view that the Mother has a beneficial interest in the entirety of the income of the Trust.

(f) The Children have contingent interests in both corpus and income; in the case of income they will become vested but defeasible beneficiaries when the Mother is no longer the lawful wife or widow of the Father. As to corpus, the children have an interest contingent upon their surviving until the Vesting Day.

(g) We deal with the nature of the rights of the discretionary objects in the Trust in some detail later in these reasons. Assuming for the moment that they do not have beneficial interests as referred to in the third test, the third test is satisfied because the Children, together with their Mother (who is an associate) have all the beneficial interest in income, and have all of the beneficial interest in corpus. If the discretionary objects do have beneficial interests, the third test is nevertheless satisfied because all of the beneficiaries are either the Children themselves or persons who are necessarily associates of the Children; it is to be noted in the context that in respect of corporate discretionary objects a 25% test is imposed by the Trust Deed whereas the statutory test (having regard to the definition of ``associate'') is 15%.

9. (a) The manner in which section 159GZE is to be interpreted was the subject of an article by Mr I C F Spry QC which appeared in the March 1989 issue of the Australian Tax Review. As regards section 159GZE(3)(b)(ii) (``third test'') Mr Spry said:

``This provision depends upon whether a relevant person `would' receive the whole or a fraction of a distribution, but it does not set out any assumptions as to whether or not particular discretions of trustees have been exercised. In the case of a discretionary trust, should it be assumed that no discretions have been exercised positively, so that the presumptive beneficiaries (that is, the default beneficiaries) are deemed to have taken? This approach is more reasonable than a second approach involving an assumption that the relevant discretions have been exercised positively in a particular way, since it is not possible to establish any legislative intention in favour of preferring one way of exercising discretions over another. A third approach involves an argument that this sub-section cannot apply at all in the case of discretionary trusts if

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both non-residents and residents are within the relevant class of potential recipients of benefits. On this argument it is put forward that since the application of the sub-section depends on a hypothetical distribution, and since it is not possible to know in advance how on that distribution the trustees of the trust would exercise their discretions, it cannot properly be said that a non-resident or non-residents `would' receive the whole or any part of that distribution.

Sub-section 159GZH(3) is relevant to another question relating to the construction of s. 159GZE(3)(b)(ii). The latter sub- paragraph does not refer to a `right' to or `beneficial ownership' of at least 15 per cent of corpus or income, but rather merely to a `beneficial interest' in at least that percentage. But many persons may, for example, have a beneficial interest in a given percentage without having a definite right to receive more than a small share of that percentage or indeed, in some cases, with only a contingent right or a right subject to divestment. On a strict view those in these latter categories are capable of falling within the sub-paragraph, although there is an argument of weight that this is not so if they are merely persons with a possibility or spes that a discretionary power will be exercised in their favour. (It has been held in the contest of English revenue legislation that such persons are not properly described as having `interest': Gartside v. Inland Revenue Commissioners. Whether this analysis is correct in any particular case depends however on the context in which the term `interest' is used. That term is not of such a definite meaning that it is incapable of applying to those with a mere possibility or spes if a sufficient intention that it should so apply is found in its context). However, in the present case the fact that s. 159GZH(3) in dealing with indirect beneficial interests, apparently is concerned with whether or not there is a right to receive the whole or the relevant fraction may well be found to provide sufficient support for the view that a similar analysis applies in relation to direct beneficial interests.

In regard to direct beneficial interests also a special difficulty arises in regard to discretionary trusts, although the deeming provisions of s. 159GZH(3) do not apply here, being concerned with indirect, as opposed to direct interests. Here, also, it may be argued that the relevant provisions should be applied on the basis that presumptive beneficiaries (that is, the default beneficiaries) are deemed to have a material direct interest and that this is not the less so because their rights may be detracted from by the adverse exercise of discretions. However, this position is by no means clear, and this obscurity provides a further illustration of the fact that thin capitalisation provisions have been drawn with sufficient attention to the particular difficulties that are raised by discretionary trusts.''

(b) Mr Spry's article raises the possibility that because in a discretionary trust (as opposed to a unit trust or fixed trust), no beneficiary has an interest which is quantifiable, the third test threshold of 15% may not be capable of being reached. We do not think that this can be correct. A discretionary trust is a type of trust and we think that the legislation must be interpreted having regard to the nature of such a trust. Although nothing much turns on it, we note that this much was recognised by paragraph 22 of IT2479 and Exposure Draft Ruling 43, now withdrawn, in paragraph 23.

10. (a) The definition of ``beneficiaries'' contained in the Trust Deed makes it clear that, as set out in clause 9 of the Outline by the Respondent, the only persons with a beneficial interest of any kind in the Trust Fund and whether as to income or corpus were at all relevant times (and in each relevant year):

  • (1) the Children,
  • (2) persons who are ``relatives'' of the Children;
  • (3) companies which fall within the definition of Associates.

(b) In the specific context of section 159GZE(3)(b)(ii), it is possible in our view to look to the aggregation of what would otherwise be unquantifiable separate interests. It is therefore possible to say that under the Trust Deed, a non-resident and associates will have, together, 100% of the beneficial interests in income and corpus. It is important to note that for the purposes of section 159GZE associates include both resident and non-resident associates; this may usefully be contrasted with

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section 159GZG(4) where foreign equity is calculated by reference to non-residents and their non-resident associates.

(c) In relation to the conclusion referred to in paragraph (b), we do not aggregate the various interests of the beneficiaries into one single interest. It has long been recognised that this cannot be done.

The decision in
Gartside v IRC [1968] AC 553, involved a discretionary trust with a non- exhaustive list of beneficiaries. The Trustee did not have to distribute income. It was not argued that those beneficiaries together had a single interest in the whole of the trust fund. As Lord Reid stated in that case at 605 to 606:

``But otherwise two or more persons cannot have a single right unless they hold it jointly or in common. But clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his alone.

I think that this idea of a group or class right must have arisen in this way. Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes, you cannot tell what any one of the beneficiaries will receive until the trustees have exercised their discretion. But you can say with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income. You have an equation x + y + z = 100 although you do not yet know the value of x or y or z. And that may lead to important results where the trust is of that character. But that is not this case.''

(d) In
Sainsbury v IRC [1970] 1 Ch 712, the Trust Deed required the Trustee to make distributions of income. Ungoed-Thomas J rejected the notion of a quantifiable group interest formed from an aggregation of the single interests of beneficiaries:

``Does then the totality of individual objects have `interests in possession' within section 43?

It was argued that as the distribution directed to be made by clause 24 of the will from `time to time' had to be distributed between the objects in being, then the objects in being, at any rate if suri juris, were entitled to dispose of the income or any part of it, for all the separate unquantifiable interests do not constitute separate quantifiable interests nor one quantifiable interest. There can be one quantifiable interest only if the interest of the objects is a group interest and this the Crown concedes cannot exist. The reference to a class or group of objects under a discretionary trust is merely a convenient form of reference to indicate individuals who satisfy requirements to qualify as objects who may separately receive benefits under the exercise of the discretion (a discretion in the case of a non-exhaustive trust to make any and what distribution between objects). To treat separate unquantifiable interests as quantifiable seems to me to fuse and confuse the conception of a group persona with the separate rights of individuals.''

[1970] Ch 712 at 725.

(e) Thus it is evident that the various beneficiaries under a discretionary trust do not share in one common interest in the trust estate itself. But this does not mean that the aggregation of single interests is of no consequence. Such an aggregation means, as Lord Reid stated in Gartside at p. 706, that the collection of individual rights extends to the whole of the trust property, be it income or corpus. Hence ``x + y + z = 100''. In
Sir Moses Montefiore Jewish Home v Howell and Co (No 7) Pty Ltd [1984] 2 NSWLR 406 it was held that the beneficiaries of a discretionary trust where the class of objects is described exhaustively can invoke the rule in
Saunders v Vautier (1841) 41 ER 482 to compel a trustee to terminate the trust:

``The question then is whether objects of a discretionary trust, having such an interest, can join in terminating the discretionary trusts. I consider that the objects constitute the entire range of persons entitled to call for the administration of the trust, and, accordingly, they represent the only persons interested in its due administration. It does perhaps seem odd, as pointed out in Jacobs' Law of Trusts in Australia, 4th ed (1977) at 538, that all the objects should collectively enjoy a beneficial ownership entitling them to invoke the rule in Saunders v Vautier which is different in character from the aggregate of their individual interests. Nevertheless, I consider that such

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entitlement does exist. I accordingly agree with the view stated in Jacobs (at 539) that the rule in Saunders v Vautier does encompass a claim by such objects to call for the trust fund. This view is supported by the decision Re Smith;
Public Trustee v Aspinall [1928] Ch 915 which in turn relied upon the Court of Appeal decision Re Nelson which is reported as a footnote to the report of
Re Smith [1928] Ch 920(n). Likewise, Simonds J in Re Beckett's Settlement expressed the same view (at 285):

`it is quite true that in one sense the objects of a discretionary trust have an interest in the fund which is being administered for their benefit. It is so far true that if the whole of the fund is applicable for their benefit, and they are of full age, they are together entitled to put an end to the discretionary trust. If authority is needed for that obvious proposition it is to be found in Re Smith [1928] Ch 915.'

Further reference may be made to the like view expressed by the learned author of Pettit Equity and the Law of Trusts, 3rd ed (1974) at 86. Accordingly, subject to a further consideration applying in this instance (to which I shall refer later) the objects entitled to the corpus of a trust fund are entitled, through the medium of Saunders v Vautier, to terminate a discretionary trust of intermediate income.''

: per Kearney J at 411.

This decision is quite consistent with the concept that ``x + y + z = 100''. It is a logical extension of the notion that the single interests of discretionary beneficiaries can extend to the whole of the income of a trust estate.

(f) The class of objects in Sir Moses was closed, whereas the class in the Trust is not. We consider, however, this distinction does not preclude us from coming to the conclusion that the aggregated rights of the beneficiaries in this context cover the entire corpus (and income) of the Trust. This arises from the fact that section 159GZE(3)(b)(ii) is concerned with the collated interests of non-residents and their associates. In the specific context of the thin capitalisation rules contained in the Act, it does not matter that class of objects is not entirely closed; this is so precisely because the only possible additions to the class are associates of non- residents. Therefore the interests of the non-residents and their associates can be said to extend to 100% of both income and corpus.

11. (a) This leads us to the question as to whether or not the interest of an object in a discretionary trust can be described as a beneficial interest for the purposes of the third test.

(b) The objects of a discretionary trust, considered apart from any other interests arising from default or contingency, have a right to be duly considered by the Trustee for benefits under the Trust;
In re Beckett's Settlement [1940] Ch 279, Queensland Trustees Ltd v Commissioner of Stamp Duties (1953-54) 88 CLR 54, Gartside v Inland Revenue Commissioners [1968] AC 553, Sainsbury v Internal Revenue Commissioners [1970] 1 Ch 712, Lutheran Church of Australia South Australia District Incorporated v Farmers' Co- operative Executors and Trustees Ltd (1970) 121 CLR 628 and
Re Weir's Settlement Trusts [1971] Ch 145.

(c) As Lord Denning MR stated in Gartside v Inland Revenue Commissioners [1968] AC 553 at 566 when that case was before the Court of Appeal:

``Every person who is an object of a discretionary trust has a right in respect of the trust fund, even when there is power to withhold it and accumulate the surplus. He has a right to be considered by the trustees as eligible for a payment to be made to him.''

(d) In his judgment in Gartside when that case was before the House of Lords, Lord Wilberfore described the right of the discretionary beneficiary as follows:

``No doubt in a certain sense a beneficiary under a discretionary trust has an `interest': the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity.''

: [1968] AC 553 at 617.

(e) There is some debate about whether or not such a right or interest is or is not proprietary. One text has described the rights of discretionary beneficiaries in the following way:

``The objects have... proprietary interests, in the nature of choses in action, separate from the trust fund or res.''

: I J Hardingham and

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R Baxt Discretionary Trusts 1984 Second Edition, Butterworths, at 136.

Others have not viewed the right as a proprietary interest: see the comments of Smith J in
Re Goldsworthy [1969] VR 843 at 849.

(f) If the chose in action which the discretionary beneficiaries have in relation to the Trust is a proprietary interest, it is not an interest in the trust property, but rather one separate from it. In
Re Beckett's Settlement [1940] Ch 279, trustees had a discretion to apply any or all of the income from trust funds to maintain the settlor's daughter and her issue during the lifetime of the daughter. That case dealt with a provision of the Trustee Act 1925. Simonds J stated at 285:

``I have to decide whether an object of a discretionary trust is on the true construction of the words, `entitled to any prior life or other interest, whether vested or contingent'. I think... it would not be right to predicate of a person who is the object of a discretionary trust that he is entitled to a vested or contingent interest in the trust fund... [T]he object of a discretionary trust has an interest in equity in the trust fund, yet he would not be appropriately described as a person entitled to an interest, vested or contingent.''

(g) Mr Slater contended that although the decision in Gartside is commonly understood to stand for the proposition that mere discretionary objects have rights to be considered and rights to compel an accounting, they are nonetheless beneficiaries even though their interests are not quantifiable; he contended also that Gartside must be considered in the context of the fact that it was a fiscal decision in respect of which the only issue was as to whether a quantifiable interest passed on the death of an object. It is relevant to note in this context that Mr Slater referred in his closing submission to
McPhail v Doulton [1971] AC 424 involving a discretionary trust with no gift over in default, and where it was held that the court would treat the power as one which must be exercised, or failing exercise would be treated as exercised equally among the beneficiaries.

(h) Whether or not discretionary objects have beneficial interests within the third test, the result is the same, and the third test is satisfied. It is thus unnecessary for us to come to a conclusion as to whether or not their interests are beneficial interests.

12. (a) We have, as set out previously, come to the conclusion that the third test is satisfied because of all beneficial interests of whatever nature in the Trust, are necessarily held by non- residents and their associates. Again for reasons set out previously, we consider that whether or not the discretionary objects have beneficial interests as required by the third test, the Children have beneficial interests (and being their contingent interests) and the Mother has a vested but defeasible interest, which is a beneficial interest. It is conceivable (although not likely) that the interest of the Mother could be categorised as a contingent interest rather than a vested interest, because although she was in fact in each relevant year the lawful wife of the Father, her default interest in income endures only for as long as she is his wife or widow.

(b) The term ``beneficial interest'' as referred to in the third test is (as set out previously) not defined, and the Explanatory Memorandum to the bill which introduced Division 16F (``Explanatory Memorandum'') does not furnish any relevant assistance.

(c) We think it likely that the matters canvassed by these decisions are of such importance that our decisions will not be the final word on the subject. This being so, it behoves us, if only as a matter of completeness, to contemplate the possibility raised by Mr Spry that the term ``beneficial interest'' should be construed so as to be confined to an absolute interest in possession or a present entitlement in relation to a trust. Section 159GZE is not in its terms temporal; it does not in other words specify that the tests relate to a particular year or a year end. We assume that this was deliberate; section 159GZG(4) is by contrast a section which is in its terms temporal. On this hypothesis (and it is that only) a contingent interest is not a beneficial interest; it is conceivable that on the same hypothesis, a vested but defeasible interest is also not a beneficial interest. If this interpretation is correct, the third test does not in any relevant year apply, simply because, even on an aggregation basis, the test has failed. Even assuming that the Mother's vested but defeasible interest is beneficial, whereas that of the Children is not, the third test requires that the Children have some beneficial interest before aggregation of the beneficial interest of

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the Mother can apply (see paragraph 18 of EDR 43).

(d) This line of reasoning leads to the conclusion that family discretionary trusts will seldom be affected by Division 16F of the Act, a conclusion which is contradicted by IT2479 and EDR43. We would have thought though that the legislation could have been drafted so as to clarify what precise interests are included in the concept of ``beneficial interest''. IT2479 in paragraph 23 specifies that it relates to a foreign controller's irrevocable interest in the corpus of the trust, but the meaning of this phrase is not explained.

13. The test set out in section 159GZE(3)(b)(iii) (the ``fourth test'') was dealt with by Mr Slater briefly. The fourth test will apply where non-residents and their associates are capable under a scheme of gaining control. Mr Slater said (Transcript p. 85):

``In a sense paragraph 3 is irrelevant because they already have it and they do not need a scheme to gain it; nonetheless it is technically applicable.''

We do not agree with this contention; there was no evidence before us of any scheme (however widely that term is defined) which would lead us to consider that the Children (and their associates) were thus able to gain control.

14. The fifth test in its terms contains (inter alia) three concepts, ie directions, instructions and wishes; plainly the third concept is in accordance with its ordinary meaning the least peremptory. However, the fifth test requires that the Trustee ``be accustomed'' or ``under an obligation'' or ``might reasonably be expected to act'' in accordance with those, ``direction, instructions or wishes''. A family discretionary trust where the resident parents control the trust even though from time to time they consult with or even solicit the views of their non-resident children will not be caught where it cannot be said that the trustee is accustomed or might reasonably be expected to act in accordance therewith. Mr Grieve argued (Transcript p.75) that the fifth test will apply only where the Trustee is ``accustomed in the sense of invariably acts in accordance with the directions etc or if not invariably at least in the majority of instances...''.

We cannot agree with this contention, and indeed the wording of the fifth test does not support it. However, we do accept that the fifth test cannot apply where the conduct in question is isolated, or even occasional. On the contrary the fifth test connotes recurrent conduct. In the end result it will always be a question of fact as to whether in any particular instance, the requisite conduct takes place with a degree of recurrence which is sufficient for this purpose; the question of recurrence may in our view be linked to the importance (or unimportance) of the relevant matters. We consider that where the matters in question or most of them are of a minor nature, it is less likely that the fifth test will be satisfied; where by contrast the matters in question or most of them are substantial, control within the fifth test will be more likely.

15. The Mother gave evidence through an interpreter. While we accept her evidence, we did not find it particularly helpful; and it was not by any means conclusive. Mr Slater did not cross-examine the Father; the Father's affidavit which is cast in similar, but not the same terms, as those in respect of the Mother, is equally non-conclusive of the issues.

16. L, the Accountant who gave evidence, has had a long relationship with the family going back to the time when he and E were students. Indeed he came to act in respect of the establishment of the Trust because of his relationship with E. He said that his function in relation to the Trust was of a quasi-managerial nature, and not confined to the function of an accountant. L, however, gave evidence primarily with reference to the documents contained in Exhibit R1; it may be noted that although his evidence was in general acceptable:

  • (a) L said initially that he took instructions from one or more of the Children in only about one percent of cases; that percentage however was subsequently amended so as to refer to 5%;
  • (b) L said that during the summer months the Father and Mother went to Hong Kong to live with E, and it is for this reason that he would correspond with E. He said also that while he is fluent in Cantonese, he does not find it as easy to write in Cantonese as he does in English; there was, however, at least one recorded instance of his writing in Cantonese. We do not think that his evidence in this particular context can be accepted unreservedly; the language of his communications, in particular with E, but also with other Children does not, as one

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    might have reasonably expected, contain language which would indicate that L was in effect seeking instructions from the parents through the relevant Child or Children. On the contrary the language of these communications is suggestive rather of a dealing by L with the relevant Child or Children as principals.

17. Appendix B to Exhibit R4 (``Appendix B'') is a summary prepared before the hearing (and thus before L or the Mother gave evidence) of documents in Exhibit R1 which are or may be relevant. It is in our view so admirable a summary that it is convenient to reproduce it, for the purposes of these reasons, (edited for the purpose of confidentiality), more particularly having regard to the fact that L's evidence did not, to any substantial extent, contradict.

``A. The Trust was established and its terms were determined on the instructions from E. See the documents behind tab 8, and in particular:

  • (a) E initiated the establishment of the trust (Docts 8.1-8.7).
  • (b) E nominated herself, her sister M and her brother C as beneficiaries of the proposed Trust (see the telex from E to L dated 9 October 1994, Doct 8.8).
  • (c) In his reply dated 15 October 1984 (Doct 8.10), L informed E that for the family trust purposes it would be too restrictive to have only the three nominated beneficiaries and that the solicitors had drafted a wider beneficiaries clause, but he went on to assure E that `however the ultimate control still rests with the three shareholders in the company [at that time E, M and C] except your father'.
  • (d) All the written instructions came from E.
  • (e) the documents dealing with the establishment of the Trust were sent to E (see letters from the Accountants Docts 8.9, 8.10, 8.1 and 8.14).
  • (f) Some of the Accountant's fees were paid for by the non resident beneficiaries (see the letter from C to the Accountants dated 12 November 1985, Doct 8.12).

B. E arranged the borrowings on behalf of the Trust from a non-resident finance institution, provided security, paid interest and repaid a part of such borrowings:

  • (a) The loans were taken out in the name of the Father and the Mother and E (see Docts 9.1 and 9.17).
  • (b) The initial advance of HK$1,071,800 ($A200,000) was made on 2 December 1985 (see Doct 9.1, 9.3). The advance was secured by a first mortgage dated 28 April 1986 on a cash deposit provided by the Father and the Mother and E (see Docts 9.4 to 9.12).
  • (c) The borrowings were increased on 27 November 1986 by a further advance of HK$761,550 ($A150,000). Additional security for this further advance was provided by way of a third party mortgage on a cash deposit provided by E and her husband (see Doct 9.17).
  • (d) The interest payments on the two loans were paid by E (see Doct 9.36), a document prepared by the Accountants in response to an enquiry by the Respondent. It records payments of interest on the above loans by E.
  • (e) The initial advance was repaid by E on 2 June 1987 (see receipt 13196, Doct 9.13).

C. In November 1986 E made an advance of A350,000 to the Trust apparently without any security or formalities (see Docts 9.15 and 9.16).

D. The 27 November 1986 loan from the non-resident finance institution was refinanced by P through his company, D1 without any reference to or the knowledge of the officers of the Trustee: see Docts 9.19-9.35, and in particular:

  • (a) On 5 July 1990 L (the company secretary), wrote to E seeking details of the interest paid by her on the Trust's borrowing from the non-resident finance institution for the half year ended 31 May 1990 (see Doct 9.19).
  • (b) In response, on the same day P sent L a receipt from D1 for payment of interest said to have been received from the Trustee for interest for December 1989 to May 1990 (Doct 9.20).
  • (c) L evidently unaware of the reason for this `receipt', asked P to explain it by letter dated 9 July 1990 (Doct 9.21).

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  • (d) P advised that his company had `taken over' the loan, a circumstance not notified to the company's Australian officers. He advised L of the details of the calculation of the amount of the `receipt' (Doct 9.22). However, P's calculation and `receipt' overlooked the circumstance that the debt discharged by his payment had been not $HK700,000 but $HK761,500. When this was drawn to his attention by L, he recalculated the interest payable to D1 (Doct 9.24) and issued a corrective receipt for the difference. The directors of the Trustee were not consulted about this increase in the Trust's indebtedness to P's company.
  • (e) At L's request, a loan agreement was executed on 22 November 1990 (some twelve months after the advance was made). A copy of the loan agreement is Doct 9.26-9.29. The afixation of the common seal of the Trustee was witnessed by C, who was not an officer of the Trustee.
  • (f) Interest payable by the Trustee as trustee to D1 was again calculated by P (not the directors or secretary of the Trustee) and notified to L (Docts 9.30, 9.31), who was also told (in June 1991, for the first time) to pay it to Macau (Doct 9.32).

E. Between July 1987 and February 1988 the Trustee contracted debts for borrowings in excess of $A1,100,000 organised by P, apparently without being aware of the identity of the lender:

  • (a) On 21 July L asked P to organise payment of $A500,000 for settlement in respect of the PC and W Street properties purchased by the Trust (Doct 10.1). The method for settlement of the loans, and the reasons for recommending adoption of that method, were advised to P on 20 January 1988 (Doct 10.2).
  • (b) On 8 February C and P were asked to organise payment to the Trustee of the required funds of $HK1,000,000 (Doct 10.3).
  • (c) Not until 12 August 1988 (with a reminder on 25 August), did L contact P to establish the identity of the lender in relation to four advances exceeding $A1.1m (Docts 10.4 and 10.5).
  • (d) The lender was subsequently identified as D2 (see the letter from the Accountants to the Respondent dated 14 June 1989, (Docts 10.6, 10.7).
  • (e) D2 is a company owned by M, her husband and P (see Doct 10.9).

F. The non-resident beneficiaries actively participated in decision concerning acquisition, disposal and management of the Trust's properties:

  • (a) C and L discussed with the Accountants the feasibility of purchasing the property at KH (see Doct 11.1).
  • (b) On 16 December 1987, L wrote to E requesting her approval for transfer of a lease in relation to the above property (see Doct 11.3). At the bottom of that document is L's handwritten note `approved by E by phone 4.30pm 16.12.87'. The memorandum of fees of the Accountants dated 11 January 1988 (Doct 11.4) records `transmitting the relevant documentation to E to seek her approval in regard to the proposed transfer of the lease'.
  • (c) The working paper by the Accountants (Doct 11.6) indicates that the transactions in relation to the above property were at the request of E.
  • (d) In November 1987 the decisions to terminate the existing managing agent of the Trust's properties and the appointment of the new agents were taken by E (see Docts under Tab 12).
  • (e) The letter from the new agents, to the Accountants dated 1 March 1988 (Doct 12.16) confirms that they were dealing with and reporting to E rather than the company's officers (see also the Accountants' account (Doct 12.11)).
  • (f) In June 1988 E on behalf of the Trustee sought the Accountants' advice on purchase of a property at A (see her letter dated 21 June 1988 (Doct 12.22) and the Accountants' reply (Doct 12.23) and the Accountants' narrative to the memorandum of fees, dealing with this property - `Attending to company director regarding the proposed purchase of A.' (Doct 15.6)).

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  • (g) The memoranda of fees of the Accountants' record other instances of involvement by E:
    • (i) `Attending to E regarding rent review of squash court'.
    • `Attending to E and follow up meeting with tenants regarding rent review situation.' (page 15.8)
    • (ii) `Attending to E regarding signing of the development application.' (page 15.10)
    • (iii) `Discussions with E regarding M Investments and progress with Q development application.'
    • `Attending to E regarding investment in K property.' (page 15.27)
    • (iv) `Attending to the Mother, E, and E's husband regarding company management and investment properties.' (page 15.29)

G. Acquisition of property at CC by C clearly demonstrates the intermingling of the affairs of the non-resident Children with those of the Trust and their exercise of control or influence over the Trustee (see documents under Tab 15):

  • (A) The property was to have been initially purchased by the Trustee but at some later stage C decided that the property would be purchased in the Mother's name (see the letter from C dated 12 November 1987 (Doct 14.1)).
  • (B) The property is beneficially owned by C (see the letters from C to agents dated 24 March 1987 (Doct 14.18) and 14 December 1989 (Doct 14.21)).
  • (C) The purchase was partially financed by C (see the letter from P to the Accountants dated 8 January 1988 (Doct 14.3) and the response from the Accountants dated 7 January 1988 (Doct 14.5)).
  • (D) Bridging finance for the acquisition of the property was provided by the Trustee (see the fax from the Accountants to C dated 14 January 1988 (Doct 14.7)).
  • (E) The balance of the purchase price was advanced by an Australian bank as per the facility letter dated 10 January 1988 (see Doct 14.22-14.24).
  • (F) The Trustee authorised the Australian bank to debit future interest on the above loan against the Trustee's bank account and also to adjust the previous debits in the Mother's personal account against the Trustee's account (see the letter from L to the Australian bank dated 30 June 1988 (Doct 14.27)).''

18. Mr Slater was asked, given that Appendix B was prepared before L (or for that matter the Mother) gave evidence, whether he wished to amplify it in any way. See in this context page 97 of the Transcript and following; in particular:

  • (a) apart from institutional moneys, the Trust was funded to a considerable extent by the Children. As Mr Slater said (and we agree) ``it was really their money'' and ``it is hardly surprising... they would have a role to play in deciding what was done'';
  • (b) the D1 borrowing was made up by P ``as he went along'';
  • (c) P played a particularly active role in the W Street Property, directing that the Trustee was not to exchange contracts without his approval;
  • (d) M resolved certain union disputes related to the W Street Property;
  • (e) the Appendix B documents demonstrate the role of the Children; what is required (per Mr Slater's contention and with which we agree) is that they be among the class of people whose wishes, instructions and directions, effectively determine the Trustee's actions.

19. The evidence indicated that the Father and Mother and Children constitute a united and close knit family, and one moreover with considerable experience and expertise in real property. There were times when the distinction between the affairs of the Trust and the affairs of one or more of the Children became blurred, and in particular where property was acquired or proposed to be acquired by one of the Children, and where nonetheless the Trust would furnish financial assistance related to the acquisition.

20. The shareholders in the Trust at all relevant times were the five Children. As set out in the Outline by the Applicants, management of the Trust is pursuant to Article 95 of the Articles of Association of the Trust vested in its directors. We accept the

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submissions of Mr Grieve in this context that the fact that all of the shareholders in the Trustee are non-residents has no bearing on the application of section 159GZE.

21. Mr Grieve argued, in relation to the fifth test, that strictly construed, the result would be that the Trustee might or would act in breach of the Trust, and moreover that the directors of the Trust who are the Father, the Mother and a resident friend might be required to act in breach of their fiduciary obligations to the Trust. We do not think that any such argument is valid. The ``directions, instructions, or wishes'' of the Children appear to have related to what the Trustee did in the ordinary course, ie invest in real property, let out that real property, employ agents, borrow moneys for the purposes of acquiring that real property and related matters. It is of course true to say that if the Children or any one of them had requested the Trustee to carry out an act in breach of its trust, the Trustee would have been entitled to refuse to comply. There was no evidence to suggest that the Children made such a request and there is no reason to suppose that because the Trustee allowed the Children to play so relevant a role in the management of the Trust, that the Trustee was or might have been in breach of its powers or obligations.

22. As to whether the Father and Mother were the final arbiters is not, in our view, to the point; what is plain though, within the language of the fifth test, is that one or more of the Children expressed wishes (although some of those ``wishes'' appear to have been akin to ``directions'' or ``instructions'') and the Trustee was accustomed to act on them and did in fact act on them. Indeed, and in particular as regards certain financings, it is more appropriate to say that the Trustee implemented decisions already taken by one or more of the Children, and where the relevant Children acted in this regard as if in the place of the Trustee. We agree with Mr Slater's submission that the failure of any of the Children (and particularly E) to give evidence gives rise to an inference that their evidence would not have assisted the Applicants;
Jones v Dunkel (1959) 101 CLR 298.

23. In the circumstances we have come to the conclusion that, in respect of each of the relevant years the fifth test also was satisfied and that the Children were foreign controllers in each of them. We note in this context that each of D1 and D2 were at all relevant times associates.

24. We turn next to refer to section 159GZG(4) which deals with the foreign equity of a trust estate was criticised (not without reason) by Mr Grieve as being imprecise. Paragraph (a) refers to assessable (non-resident beneficiary) income, and it is clear, having regard to the fact that the word ``and'' appears at the end of paragraph (a), that section 159GZG(4) will not apply, and there can be no foreign equity or foreign equity product, where in any relevant year there is no such assessable (non-resident beneficiary) income. This being so, the 1988 year and the 1991 year assessments do not allow for any calculations of foreign equity product.

25. Paragraph (b) of section 159GZG(4) is rather more complex. It refers in its terms to ``assessable income of the kind referred to in paragraph (a)''. The intended meaning of these words is not clear; it could be construed (and we prefer this construction) so as to refer to the net income of the trust estate distributed in a relevant year to the non-resident beneficiaries; it is also possible (although not in our view likely) that it is intended to focus attention on the type of income distributed to the non- residents, ie dissected as to its component parts. This may not be an issue in some cases; it is relevant in this instance because it is clear that the income in the 1989 year was derived from a capital gain, arising from the sale of two properties. Mr Slater contends that a capital gain although made income by force of section 160ZO is not trust income, and this notwithstanding that clause 13(p) of the Trust Deed allows the Trustee to determine whether any money is income or capital.

26. In its distribution resolution for the 1989 year the Trustee simply distributed income. It did not in its terms specify that it was distributing a capital gain but since there was no other income, its resolution must of necessity have related to the capital gain. The resolution might more happily have been framed so as to refer to ``net income of the trust estate'' as defined in the Act, but it is clear that that is what was intended.

27. The final paragraph of section 159GZG(4) requires the preparation of a notional balance sheet at year end (or earlier where the second limb of paragraph (b) applies), reflecting the equity of the non-

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resident beneficiaries. The final paragraph of the section may be apposite for unit or fixed trusts (leaving aside where relevant differences between income units and capital units) but it is hard to comprehend what is intended in the context of a discretionary trust, involving as it usually does, discretionary objects, default beneficiaries, and beneficiaries with vested but defeasible interests. The paragraph could in our view have been framed so as to clarify this aspect.

28. Mr Slater argued that there will be no foreign equity where, in the context of a capital gain, the relevant asset has been disposed of. He contrasted a capital gain with income derived from sales of trading stock, on the basis that although some of the trading stock has been sold, its proceeds will be on hand or will have been used to acquire other trading stock. A comparison with trading stock is not, in our view, altogether apt because the closing stock mechanism ensures that profit is calculated by reference, inter alia, to closing stock.

We do not agree in any event that the section must be interpreted on the basis that the asset (or its proceeds) are on hand. An analogy with revenue assets was not argued; however revenue assets could be sold giving rise to income, which is trust income in its ordinary sense, and it would not in our view be correct to argue that there is in such event no foreign equity. In any event (and assuming this is a necessary element) there was no evidence before us that the proceeds of sale of the capital assets were not on hand at year end.

29. We consider that the words ``income of the kind referred to in paragraph (a)'' refers to the assessable (non-resident beneficiary) income contemplated by paragraph (a), and that they do not require a dissection of that income or an analysis of its components. Income may be derived by way of example from trading stock, sales of revenue assets, capital gains, passive income (such as rent, dividends or interest) or a combination (and this is not intended to be a complete list of all possible categories) yet it is in the last resort only passive income (leaving aside trading stock complications arising from the closing stock mechanism) in respect of which the relevant asset is on hand. In the case of other assets (again leaving aside the trading stock complications) the relevant asset will not be on hand although proceeds may be on hand unless used to acquire other assets or perhaps to discharge debt or pay expenses, fees or costs. There was no evidence before us as to whether the proceeds of sale of the two properties were on hand, but we do not think that this can be decisive. It is hard to believe that the legislature envisaged that foreign equity and foreign equity product would be calculated only by reference to assets on hand. Imagine a trust with interest income, revenue asset sales and capital gains made income through section 160ZO. We do not think that foreign equity is confined in such a case to the assets which gave rise to the interest component. If the asset or its proceeds must be on hand in order to allow foreign equity, the extent to which the accounts must be dissected can readily be imagined; assuming by way of simple example only that a part of the sale proceeds are on hand a part having been used to pay costs, a part has been used to discharge debt and the remainder has been distributed; if this concept is correct a tracing or proportioning exercise which could be complex would be required. We cannot accept that there was a legislative intention that foreign equity would be allowed only where all of the proceeds were on hand. So unfair a result requires in our view (and despite Mr Slater's well organised argument) a clear legislative intent, and the section does not contain such an indicative intent.

30. The Explanatory Memorandum sets out at p. 75 that ``The definition of equity broadly follows the shareholders' funds concept found in company accounts''. There are of course important differences. Section 159GZB(1) makes it clear by way of example that a loss will be relevant for partnerships, but not, because of the absence of those words from section 159GZB(2), for trusts.

31. Although referred to briefly in the T Documents IT2479 and EDR43 (now withdrawn) were not argued by Counsel, and in our view correctly. They are not helpful to the issues before us. Paragraph 23 of IT2479 refers (as does paragraph 22 of EDR43) to an irrevocable interest in corpus; assuming (although this is by no means clear) that an irrevocable interest is equivalent to an absolute interest, and if an absolute interest in corpus is required there will seldom, if ever, be foreign equity in a discretionary trust, and this cannot have been intended. The Explanatory Memorandum (p. 78) states:

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``The beneficiaries' equity will be in effect the interests of foreign controllers and their non-resident associates in the corpus (including accumulations) of the trust that represent assets used to produce Australian- sourced assessable income of foreign controllers and their non-resident associates.''

32. To say that where paragraph (a) is satisfied, foreign equity is denied where the relevant asset is not on hand, does not appear to us to be correct. The fact that the income in question for the 1989 year is referable to a capital gain does not in our view have the effect that the non-residual beneficiaries who derived parts of it, have no equity under the required notional balance sheet. On the contrary, these beneficiaries have interests in the whole of the trust estate, and not only those components (on a dissection) which gave rise to the relevant income. The mere fact that, as is the case in this specific instance, the whole of the income is referrable to a capital gain, cannot in our view be decisive.

33. The second limb of paragraph (b) requires a notional balance sheet earlier than at year end where the income referred to in paragraph (a) ceases. The second limb is likely, in our view, to be relevant where the trust is terminated on a date prior to year end, but not where some only of the income ceases.

34. The final paragraph of section 159GZG(4) does not tell us how the equity of the non-resident beneficiaries is to be calculated. It would have been possible no doubt to make it clear that the calculation is made on a proportionate basis, ie pro rating the income distributed to non-resident beneficiaries against the total income for the year. That section 159GZG(4) is tested by reference to each year, is clear. We consider that the juxtaposition of paragraphs (a) and (b) with the final paragraph of the section require that the notional balance sheet be prepared on the basis that the share of assets of the trust estate referable to the non-resident beneficiary income is calculated in this manner. We think that it was intended (as appears from the Explanatory Memorandum) that on a year by year basis, the non-resident beneficiaries' share of all (and not just some) of the trust assets be calculated by reference to their proportionate share of the trust equivalent of shareholders' funds. We accept that this interpretation requires a degree of possible strain to the language of the section, but we believe that it is necessary to give effect to the relevant legislative intention. See paragraph 9.25 of ``Statutory Interpretation in Australia'' 4th Edition by Pearce and Geddes:

Commissioner of Stamp Duties (NSW) v Simpson [1917] 24 CLR 209 Burton J referred to the literal rule as that which should be applied to taxing statutes as it is applied to any other statute... If the Act in the end leaves a doubt as to its meaning the taxpayer is to be given the benefit of the doubt.''

And see also the citation in that decision of Viscount Haldane LC in
Lumsden v IR Commissioners [1914] AC 877 at 896, and the summary by Lord Russell of Killowen in
IR Commissioners v Westminster (Duke) [1936] AC at 24-5.

35. Mr Grieve conceded that K (a company controlled by two of the Children) is a resident company; K was the recipient of the residue of the 1989 year income. There was no evidence before us as to amount of net income distributed to and assessed in the hands of K. An amount was specified in the Applicants' Outline but we did not understand Mr Slater to accept that this amount is correct, and the specification of that amount in the outline is not, in our opinion, evidence of its correctness. (That is not to say that we doubt that statement or either Mr Grieve's initial or amended and subsequent calculations.) We therefore consider that in respect of the 1989 year we should remit the assessment to the Respondent, with a direction that he allow a deduction referable to foreign equity and foreign equity product on the basis that the foreign equity of the non-resident beneficiaries is that proportion of the net assets of the Trust as at the 1989 year end expressed by the proportion of aggregate assessable (non- resident beneficiary) income in relation to the total net income for the 1989 year of the Trust.

36. It follows of course that in respect of the 1989 year the additional tax component will reduce, but otherwise we agree with Mr Slater's contention that we have no jurisdiction (having regard to section 14ZS(2) of the Taxation Administration Act) to review the rate. We note though that in this particular instance, and if we had been vested with jurisdiction, we would have been inclined to delete the 5% ``penalty'' component given the complexity of the

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legislation and the fact that the Applicants relied on legal and accounting advice.

37. We note that the fact that 1988 year and 1989 year assessments were made under section 99A of the Act, is not an issue between the parties.

38. Accordingly we confirm the assessments for the 1988 year and the 1991 year against the Trustee and the Mother respectively, and remit the 1989 year assessment to the Respondent for reassessment in accordance with these reasons.

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