Commissioner of Inland Revenue v. Ward.
Members:North P
Turner J
McCarthy J
Tribunal:
Court of Appeal - New Zealand
North P.: An appeal from the judgment of Tompkins J. allowing an appeal from the decision of the Board of Review which dismissed an appeal by the respondent against assessments made by the Commissioner of Inland Revenue against her in her capacity as a trustee under a deed of trust.
The essential facts are these: On 16 September 1959 the respondent executed a deed of trust in favour of her children or their issue in respect of certain land therein described. The following provisions require to be recorded -
``NOW THESE PRESENTS WITNESS that the Trustee DOES HEREBY DECLARE that she the Trustee shall henceforth hold and stand possessed of the said piece of land and of all other money, chattels, shares, bonds, debentures, realty, or other property or assets of any kind whatsoever that may at any time hereafter be acquired by or paid or transferred to the Trustee in any manner whatsoever to be held upon the trusts hereof and of all moneys investments and property from time to time representing the same and any accumulation of income thereon (hereinafter called `the trust property') and the income to be derived therefrom upon the trusts and with and subject to the following powers and provisions in addition to the powers and authorities conferred by law upon a Trustee: -
1. TO hold the trust property as well the capital as the income accruing therefrom upon trust for such of the children of the said Austen Beecher Ward and Joyce Elayne Ward as shall attain the age of twenty-one years as tenants in common in equal shares Provided that if any such child shall die before the trust property is distributed leaving a child or children him or her surviving who shall attain the age of twenty-one years such issue shall take and if more than one equally between them the share of the trust property which his her or their parent would have taken had he she or they been alive at the date of distribution of the trust property, but the Trustee may utilise the whole or such portion of both the capital and the income of such share of the trust property as the Trustee shall in the Trustee's own sole discretion think fit for the maintenance education advancement or benefit of such issue during his her or their minority.
...
4. THE Trustee may pay the whole or any part of the trust property to any child who shall be entitled under the Trusts hereof or may pay the same to the credit of any such child at the Post Office Savings Bank or may apply the same in payment of any sum for which such child shall or may be liable or in payment of any sum or sums which the Trustee shall in the Trustee's discretion consider to be directly or indirectly for the benefit of any such child notwithstanding that such child may not have attained the age of twenty-one years.''
For the years ending 31 March 1963, 1964 and 1965 the appellant assessed the respondent as trustee with income tax on the whole of the income earned by the trust. The respondent objected to these assessments and contended that certain income which had been credited by her to her four children in equal shares should be separately assessed. The Board of Review upheld the assessments made by the appellant but, on appeal to the Supreme Court, Tompkins J. was of opinion that the respondent's objection was well founded and he allowed the appeal. The appellant now appeals to this Court upon the ground that the judgment was erroneous in law.
In this Court counsel for the appellant conceded that the assessments stood or fell on the view this Court took regarding the legal effect of the steps that were taken by the trustee in the year ending 31 March 1963, and it is therefore not necessary for me to have regard to what transpired in the years 1964 and 1965. At the stage of the appeal, counsel
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for the appellant further conceded that there was no provision in the trust deed expressing a contrary intention to the exercise by the trustee of the power conferred on her by sec. 40 of the Trustee Act 1956. The case, therefore, centres round the steps that were taken by the respondent pursuant to the provisions of that section read in conjunction with the provisions of sec. 155 of the Land and Income Tax Act 1954. In these circumstances it will be convenient if I record the relevant provisions of both these sections.Section 40 reads -
``(1) Where any property is held by a trustee in trust for any person, for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property -
(a) During the infancy of any such person, if his interest so long continues, the trustee may, at his sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance or education (including past maintenance or education) or his advancement or benefit, the whole or such part, if any, of the income of that property as may, in all the circumstances, be reasonable, whether or not there is -
(i) Any other fund applicable to the same purpose; or
(ii) Any person bound by law to provide for his maintenance, education, advancement, or benefit; and
(b) If the person on attaining the age of twenty-one years has not a vested interest in that income, the trustee shall thenceforth pay the income of that property and of any accretion thereto under subsection two of this section to him until he either attains a vested interest therein or dies, or until failure of his interest:
Provided that, in deciding whether the whole or any part of the income of the property is during a minority to be paid or applied for the purposes aforesaid, the trustee shall have regard to the age of the infant and his requirements and generally to the circumstances of the case, and in particular to what other income, if any, is applicable for the same purposes;...
(3) This section applies in the case of a contingent interest only if the limitation or trust carries the intermediate income of the property....''
Section 155 reads -
``With respect to income derived by a trustee the following provisions shall apply:
(a) If and so far as the income of the trustee is also income derived by a beneficiary entitled in possession to the receipt thereof under the trust during the same income year, the trustee shall in respect thereof be deemed to be the agent of that beneficiary, and shall be assessable and liable for income tax thereon accordingly, and all the provisions of this Act as to agents shall, so far as applicable, apply accordingly....
(b) If and so far as the income of the trustee is not also income derived by any beneficiary as aforesaid, the trustee shall be assessable and liable for income tax on that income in the same manner as if he were beneficially entitled thereto, save that the rate of tax shall be calculated by reference to that income alone, and that (the trustee shall be entitled to a deduction by way of special exemption of two hundred pounds for the purpose of assessing ordinary income tax, and shall not be entitled to any further deduction by way of special exemption for the purpose of assessing either ordinary income tax or social security income tax):
Provided that in any case where a trustee is required or is empowered at his discretion to pay or apply income derived by him to or for the benefit of specified beneficiaries or to or for the benefit of some one or more of a number of specified beneficiaries or of a specified class of beneficiaries, a beneficiary in whose favour the trustee so pays or applies income shall be deemed to be entitled in possession to the receipt of the amount paid to him or applied for his benefit during the income year by the trustee under the trust:
Provided also that where the income of the trustee is also income derived by any beneficiary who is an infant but whose interest in that income is vested, the beneficiary shall for the purposes of this section be deemed to be entitled in possession to the receipt of that income under the trust during the same income year:...''
On 29 March 1963 the respondent executed the following document -
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``I, Joyce Elayne WARD , Trustee under Trust Deed dated 16th September 1959, hereby determine that the Income of the Trust for the year ended 31st March 1963 shall be disposed as follows:
To be retained and added to the capital of the Trust 699 14 6 To be held for the credit of my four children in equal shares 3,540 0 0 -------------- Total income derived from sales of land 4,239 14 6 --------------In addition the interest to be credited on the Post Office Savings Bank account shall be held for the credit of my four children in equal shares.
DATED this 29th day of March 1963.
The trustee's declaration was carried into effect in the books of the trust but the appropriate entries were not made until after 31 March 1963. No part of the income credited to the four children was, however, paid to them until some years later when the amounts standing to their credit in the books of the trust were paid into separate Post Office accounts. It may be helpful if I mention that the second proviso to sec. 155 was introduced in 1941 in order to change the law as it had been declared in
Doody
v.
C. of T.
(1941) N.Z.L.R. 452
;
6 A.T.D. 103
(N.Z. App.)
, where
Smith
J. held that in the case of an infant it was not only necessary that he should have a right to the income but, even if it is absolutely vested, be entitled to the actual receipt thereof under the terms of the trust during the income year in question and, accordingly, as an infant could not during the income year demand receipt of his income or sue for it but must submit to the accumulation of any unexpended balance by the trustee at his discretion, he could not be said to be ``entitled in possession'' to the receipt of that income under the trust during the same income year. In
C. of T.
v.
Johnson and Maeder
(1946) N.Z.L.R. 446
;
8 A.T.D. 301
,
Callan
J., who delivered the principal judgment, said (pp. 463-464)
-
``The learned Judge, invoking sec. 90, held that the income of the infants was `derived' by them, although it was not and could not be paid to them because of their incapacity to give receipts therefor. But, nevertheless, he held that under the legislation as it then stood, it did not come under sec. 102(a), because although the infants' income was absolutely vested, they were not entitled to the actual receipt thereof during the income year in question. It is reasonable to infer that the amendment made later in the same year was intended to change the law as it had been declared in Doody's case. Such an inference is supported not merely by consideration of the dates and general subject-matter of the decision and the enactment, but by the circumstances that the enactment, like the decision, is restricted to the case of an infant beneficiary. Doody's was a case in which an infant's indefeasibly vested income was held nevertheless not to be his income. It is reasonable to interpret the amendment as changing that.''
Before us, Mr. Orr, for the appellant, was inclined for a time to argue that there was insufficient evidence to show that the trustee, in determining to exercise her statutory power under sec. 40, had had regard to the matters she was required to consider under the proviso to that section. As I indicated during the argument, in my opinion, it is not open to the appellant so to argue in this appeal for it is plain that the decision of the Board of Review rested solely on the fact that the moneys credited to the infant children ``nevertheless continued to be intermingled or merged in the capital funds of the trust and so remained throughout the years to which these proceedings relate''. The Board of Review accordingly held ``that there was no application of such moneys in the 1963 year within the meaning of the first proviso to sec. 155 or sec. 40 of the Trustee Act '' and the Board added that ``in view of that conclusion, we do not find it necessary to discuss the question of the meaning to be given for example to the word `benefit' as used in the statutory provisions above referred to''. The attitude adopted by the appellant is expressed in the case stated in these terms -
``... the appellant as trustee had not effectively exercised her discretion in favour of the beneficiaries in that no moneys had been paid or applied in their favour and that the document dated the 29th day of March 1963 and such entries in account as were made were not sufficient in law to bring income derived by the
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trustee within the ambit of either of the provisos to sec. 155(b) of the Land and Income Tax Act 1954.''
In view of the way the case was run before the Board of Review and in the Court below, in my opinion, this Court must proceed on the basis that the respondent trustee, when she purported to exercise the power conferred on her by sec. 40, did have regard to the various matters she was called upon to consider before deciding to apportion the income for the year ending 31 March 1963 in the way she did. Therefore, as I see the matter, the sole question which this Court is called upon to determine on this appeal is whether as a matter of law the steps taken by the respondent were sufficient to enable her successfully to contend that her children were deemed to be entitled in possession to the receipt of the amount paid to them or applied for their benefit during the income year.
Mr. Orr's next submission was that as the declaration of the respondent was made two days before the date which had been adopted by the respondent over a period of years for the preparation of the yearly accounts of the trust, the trustee was in no position to determine what income was available for distribution or accumulation until 31 March 1963, for losses might have been sustained in the succeeding two days which might have resulted in no income being available for that year. It is quite true that trustees must exercise their discretion as and when the income becomes available for they have no power to bind themselves for the future: see Snell's
Principles of Equity,
26th Ed., p. 149, citing
Re Vestey's Settlement
;
Lloyds Bank Ltd.
v.
O'Meara
(1950) 2 All E.R. 891
, at p. 895
, which contains a passage in the judgment which was not reported in the authorised reports ((1951) Ch. 209). There is, in my opinion, no substance in this submission either, for surely it was a matter for the trustee to determine what income was presently available and there is nothing before this Court which would justify the conclusion that the income purported to be allocated was not presently available. It is no answer for Mr. Orr to submit as he did that the trust accounts for the year ending 31 March 1963 disclosed insufficient liquid assets available for this purpose. Indeed, I doubt whether in any event he is right in his contention for, as Mr. McKay pointed out, there were sufficient liquid assets presently available; but, however this may be, that is a question of fact which was not considered by the Board of Review and certainly is not a point that can be taken in this Court, which is only concerned with matters of law.
I come now to Mr. Orr's third submission which, in my opinion, goes to the heart of the case. he contended that on the admitted facts the trustee neither paid nor applied the income in question to or for the advancement or benefit of the children in terms of sec. 40 and consequently the appellant was correct in assessing the whole of the income derived by the trustee for the year ending 31 March 1963, under sec. 155(b). The substance of his argument was that the word ``apply'' read in its context required the trustee to take the positive step of there and then applying the income for the benefit of the children and that it was an insufficient exercise of her discretionary power to make a declaration followed by the crediting of the income to the children in the books of the trust. In short, as nothing was paid out of the trust the income had been retained in the trust and not applied and therefore the Commissioner was correct in the assessments he made. In making this submission Mr. Orr relied very largely on the judgment of
Barrowclough
C.J. in
Montgomerie
v.
Commr. of I.R. (N.Z.)
(1965) N.Z.L.R. 951
;
14 A.T.D. 102
.
It is therefore necessary that I should examine in some detail the judgment in that case.
The deed of trust in that case provided that the trustee should hold the trust property ``to apply the income produced therefrom, or so much thereof as may from time to time be necessary, for or towards the education, maintenance, advancement in life or benefit of the children of the trustee... provided however that the share of either of the above-named children in any accumulation of income made by the trustee under the powers hereafter granted (whether such accumulations be apportioned between the above-named children or not) shall if such child die before the 30th day of June one thousand nine hundred and eighty-three (1983) immediately divest in favour of the survivor of the above-named children to the intent that the share of either child in such income or any accumulations thereof shall be vested while he or she is living but shall on his or her death before the 30th day of June 1983 immediately divest''. The deed of trust
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contained rather unusual additional powers under which the trustee might apply the income equally or unequally between the beneficiaries and from time to time in any manner vary or alter any share of any such income or any beneficiary or any share of accumulations of such income allotted to such beneficiary. In the trust accounts for the year ending 31 March 1960, there was a statement showing a net farming profit of £ 972.16.7 which contained an entry which stated that the profit was ``divided between the two children''. In the balance sheet for the same year there was shown on the liability side this entry -``Beneficiaries' accounts --
Montgomerie, Jeannette 486 8 4
Montgomerie, Graeme 486 8 3
------------
972 16 7''
------------
These entries were made by the secretary of the trust on the instructions of the trustee. No part of the income derived by the trustee in the year in question was paid out for the maintenance of the beneficiaries and the whole of it still remained in the bank account of the trust. In these circumstances, the Commissioner took the view that the income ``was not also income derived by any beneficiary within the meaning of that phrase in sec. 155''. It was argued for the trustee that the entry under the heading ``Beneficiaries' accounts'' showed that the beneficiaries were creditors and that there was no legal bar to either of them demanding and suing for the amounts shown opposite their respective names. The learned Chief Justice rejected this submission on the ground ``that the trust had not only kept the money in its bank account but had also treated it as capital and invested it again along with other trust property which it held in terms of the trust'' and he said -
``At all events the income was retained in the Glendale trust and I think also that it is correct to say that it was accumulated.... If the income was accumulated by being added to the capital of the trust fund or property, that would completely dispose of the submission that in respect of it the beneficiaries were creditors who had a right to demand payment of their debt.''
He accordingly accepted the finding of the Board of Review that the entry did not establish as a fact that the two beneficiaries were creditors in the sense contended for. Counsel for the trustee, in the alternative, argued that if the beneficiaries were not creditors at least the trustee held the moneys on their behalf under a separate trust. This argument too was rejected by the Chief Justice. There then follows the crucial passage in his judgment (at p. 956) -
``Nevertheless an argument was addressed to me as to the true construction of that word in that context and I proceed to consider whether on the facts of this case the income can properly be said to have been `applied' within the meaning of that word in the first proviso. The facts are that the income was retained and accumulated by being added to the capital of the trust fund. At all events it was retained in the trustee's hands even if it was not accumulated. In my opinion the Legislature could not have intended that that which was retained should be regarded as having been applied. Applied is the very antithesis of retained. It was so regarded by Eve J. in
Re Peel ; Tattersall v. Peel (1936) Ch. 161 , at p. 164; (1935) All E.R. Rep. 179 , at p. 181 - `Such a procedure would involve retention not application'. That was said in a somewhat different context but I think the distinction is equally applicable in construing the first proviso to para. (b) of sec. 155. The word `applied' is used in conjunction with `paid' and whilst of course it must have a somewhat different connotation, nevertheless noscitur a sociis, and in my opinion the income cannot be said to be `applied' unless there is some dealing with it that is akin to payment - some parting with the possession and control of it. My conclusion is that if the income was accumulated, i.e. added to and invested with the capital - as I think it was in this case - and even if it was simply accumulated in the sense of being retained not in a new and separate trust but in the original trust it cannot be said to have been `applied' within the meaning of that expression in the first proviso to para. (b) of sec. 155 of the Land and Income Tax Act 1954.''
In reaching his conclusion, the learned Chief Justice was obviously influenced by what Eve J. had said in Re Peel. It would appear, however, that his attention was not drawn to
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the subsequent decision of the English Court of Appeal in Re Vestey's Settlement (supra), which is the principal case relied on by the respondent as justifying the steps she had taken in crediting a proportion of the income to each of her four children in the year ending 31 March 1963.In Re Vestey's Settlement, the English Court of Appeal was concerned with an elaborate settlement made by Lord Vestey and Sir Edmund Vestey but the problem before the Court appears related only to such trusts as applied to the funds settled by Sir Edmund Vestey. Clause seven which fell for consideration was expressed in these terms -
``Edmund's trustees shall pay or apply the income of Edmund's fund... unto or in any manner for the support or benefit of all or any one or more of the following persons for the time being in existence (whether now living or hereafter to be born)... such payment or application to be made at or for such times in such shares in such manner and upon any such terms and conditions whatsoever as Edmund's trustees in their discretion shall from time to time think proper, and so that the same shall in no case give any right of continued or future receipt or enjoyment of any income or the benefit thereof.''
There was then a series of provisos, one of which enabled, for certain limited periods, an accumulation of the income during a specified period. Apart from that proviso permitting limited accumulation the direction in clause seven plainly, as Sir Raymond Evershed, Master of the Rolls, pointed out, ``is a trust imposing a duty on the trustees to pay or apply the income in the manner indicated''. The deed contained a provision requiring the trustees to keep minutes regarding resolutions passed in the exercise of the discretions vested in them. The trustees from time to time passed resolutions allocating specified sums to certain beneficiaries. These sums so set aside in the books of the trust for the benefit of certain infant beneficiaries were then invested by the trustees. Several questions fell for consideration, some of which are irrelevant so far as the present case is concerned. For the reasons I have earlier mentioned, I find it convenient to cite passages from the judgments of Sir Raymond Evershed and Jenkins L.J. as they appear in the All England Reports. Sir Raymond Evershed M.R. said (at pp. 895-896) -
``There are, I think, two quite separate questions. The first question is: Whether such an operation fell at all within the relevant words of cl. 7 of the settlement. Did the operation constitute either a payment to the infants or an application for their benefit? It is not suggested that it could be an application for their support, and, therefore (to be effective) it must be either a payment to the infants or an application for their benefit. Harman J. was of opinion that it was neither, and that the operation, being outside the ambit of the discretionary trust, was wholly ineffective.''
Then having referred to other matters with which we are not concerned, the Master of the Rolls returned to discuss in closer detail the first question he was called upon to consider. He said (at p. 898) -
``Is what the trustees did either a payment to any of these infants or an application for his or her benefit? Harman J. gave a negative answer to both questions. He said that, according to the ordinary sense of our language, a resolution that a large sum of money should belong to infants, or be divided between them, followed by the method which had to be adopted, because some of these infants, being about two or three years of age, certainly could not possibly give any kind of receipt, was not a payment in any ordinary sense of the word. Counsel for the adult beneficiaries analysed for us the characteristics which, according to his argument, must be necessary if one is to say of an operation that it amounts to a payment. For example, it must postulate that the money paid passes altogether from the hands of the payer to the hands of the payee, and all property in it goes to the payee. Secondly, there must with the payment be something in the nature of a discharge to the payer. I say `something in the nature of a discharge', for counsel for the adult beneficiaries does not contend that one cannot have a payment unless one can produce a receipt signed by a person of full years. Still, there must be something, says he, which constitutes a discharge, though I am not clear that that something need necessarily be any activity on the part of the payee. For myself, I incline to the same view on this matter as Harman J. I am not satisfied that what the trustees did can
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fairly be described as a payment to any of these infants, or that the trustees ever so regarded or intended it to be. I need not, however, express a final view, because, whether or not it be a payment, I have come to the conclusion that these operations did amount to applications of these moneys for the benefit of the infants.''
A little later on the Master of the Rolls referred to Re Peel which was relied on by Barrowclough C.J. in Montgomerie's case and said (at p. 899) -
``The essential difference between Re Peel and this case seems to be that, in the present case, it cannot be predicted of the income, or any part of it, that it is in any event given to any of these infants. The first effect of the resolution of the trustees was to give to each infant a specific portion of the income, and without that resolution the infant was entitled to no part of it at all. That seems to me to provide a very marked difference, and enable, and, indeed, require, the Court to say that what is here done cannot be regarded as mere retention, as was the operation impugned in Peel's case. If Peel's case is out of the way, it comes down to this, as a matter of ordinary common sense and the use of the language: Is a provision, to take John Vestey's case, that £ 12,000 shall belong to John Vestey an application for his benefit? If the question be fairly posed in that way, it seems to me impossible to give any but an affirmative answer. It is surely for his benefit that the trustees should resolve that £ 12,000, which it was in their discretion to apply to any one of a considerable number of persons, should belong to John Vestey, I, therefore, with all respect to Harman J., come to the conclusion (and I think I am unfettered by Re Peel, which seems quite a different case) that the first part of this resolution did amount to an application for the benefit of the infants.... In other words, I think that the effect of each of the resolutions was so to exercise the discretion that in each case each one of these infants became absolutely entitled to a particular sum of money so appropriated, and, sec. 31 being inapplicable, those appropriated sums have now become part of the infants' respective estates.''
Asquith L.J. was content to agree both with the conclusions and reasoning of the Master of the Rolls, but Jenkins L.J. delivered a reasoned judgment in which he said (at pp. 900-901) -
``I entirely agree with what Sir Raymond Evershed M.R. has said to the effect that such allocations were, at all events, applications of income for the benefit of the infants in whose favour they were made. Apart from any such allocation, no infant had any right to claim any part of the income, but was merely eligible to participate in any authorised distribution that the trustees might from time to time determine to make. An allocation of the kind here carried out would have the effect of making a certain provision for the infant concerned, and I cannot doubt but that the making of such a provision would be the conferring of a benefit on the infant, so that the application of income for that purpose would be an application for the infant's benefit.... I agree that in a strict and literal sense there can be no payment unless there is not only a hand to pay but also a hand to receive and a recipient capable of giving a receipt. Thus, in the strict and literal sense, there can be no payment to an infant. Words such as these, however, must be construed in their context, and, inasmuch as this is a discretionary trust in favour of a class of persons which, ex necessitate, includes infant beneficiaries, I would be disposed, if it were necessary to do so, to put a wider interpretation on the expression `pay', and include in it the transaction consisting of the allocation of a share of any year's income to an infant absolutely, although, owing to his infancy, no receipt is possible. The different meanings that may be attached to expressions connoting `payment', according to the context in which they appear, are illustrated, on the one hand, by
Re Banbury (1950) 2 All E.R. 250 where a provision in the will under which the trustees were to set aside an annual sum of £ 15,000 free of tax was held by Danckwerts J. to be a provision for the payment of a stated amount free of income tax within the meaning of sec. 25(1) of the Finance Act 1941, though, in truth, the transaction was not in the strict sense of the word a `payment', but merely the transfer of an amount from one account to another in the hands of the same trustees. On the other hand, in
Re Salaman (1908) 1 Ch. 4 ; (1907) 2 Ch. 46 it was held that the setting aside of investments to meet a legacy did not amount to payment
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of such legacy. Those cases illustrate the proposition that the meaning of the word `pay', like any other word, must depend on the context in which it is used, and, therefore, speaking for myself, were it necessary to the decision to do so, I would be disposed to hold that the transactions here under consideration could be warranted as payments within the meaning of cl. 7. At all events, as I have said, I entirely agree with Sir Raymond Evershed M.R. that they were applications for the benefit of the infants. It follows, therefore, that these transactions had the effect of entitling the infants concerned absolutely to the amounts allocated to them respectively.''
A little later on Jenkins L.J. said (at p. 902) -
``In this case, however, it is plain that no infant has, under the terms of the trust, any share or interest whatever in the income, unless and until the trustees, in the exercise of their discretion, decide to pay or apply to or for the support or benefit of that infant some part of the income from time to time in hand. When that event happens, when the trustees decide to apply some part of the income in hand for the benefit of an infant, or to pay it to an infant if the wider interpretation of that expression to which I have referred is admissible, then it seems to me that the infant becomes absolutely entitled to the amount in question by a new title consisting of the exercise of the trustees' discretion in the infant's favour, the infant having previously been merely a person eligible to benefit under the discretion.''
Now, in my opinion, it emerges very clearly that each of the three Lords Justices who sat in Vestey's case was prepared to adopt a wider meaning of the word ``apply'' than commended itself to Barrowclough C.J. in Montgomerie's case. In Montgomerie's case the judgment of the learned Chief Justice rested on two grounds. In the first place he was of opinion that the true effect of the steps taken by the trustee resulted in the income being accumulated by being added to the capital of the trust fund and he accordingly rejected the submission made on behalf of the beneficiaries that they were creditors who had a right to demand payment of their debt. If this interpretation of the facts be right then no doubt the judgment was correct. In this connection, moreover, it is important to notice that the trustee was authorised ``to vary or alter... any share of accumulations of such income allotted to such beneficiary''. This provision was therefore at least capable of an interpretation that even accumulated income which had been allotted to a particular beneficiary did not become his absolute property. It is, however, the second ground upon which the learned Chief Justice rested his judgment that is important in the present case. He adopted the view expressed by Eve J. in Re Peel that the retention of the income was something quite different from an application of the income and he accordingly expressed the opinion that the word ``apply'' when used in conjunction with the word ``paid'' made it necessary that there should be some dealing with the income which was akin to payment, in short ``some parting with the possession and control of it''.
Before proceeding any further, it is perhaps as well to spend a moment or two considering just what Re Peel did decide. That case was concerned with a deed of covenant executed by the father of a son on his marriage the effect of which was that in the event of the husband's death during his father's lifetime, he would pay to the trustees an annuity of £ 1,000 in trust for the wife so long as she should remain the widow of his son and on her death or remarriage ``upon trust to pay or apply the sum... to or for the benefit of the children or child for the time being living of the intended marriage''. The infant defendant was the only issue of the marriage which was dissolved on the wife's petition and on the subsequent death of her first husband, the covenant in favour of the child of the marriage came into operation. In the meantime the wife had remarried. It would seem likely that the trustees formed the opinion that her second husband could provide for the immediate needs of the child of the first marriage. At all events the trustees maintained that according to the true construction of the deed of covenant they were at liberty to accumulate the whole or any part of the yearly sum and to hold such accumulations for the benefit of the infant after he had come of age. The wife took a different view and contended that the deed was not to be construed as a mere power but as creating a trust under which the trustees were bound to apply the funds for the purposes therein named. Eve J. reached the conclusion that the construction contended for by the wife was the correct one and it was
ATC 6059
in these circumstances that he held that the trustees had no power to retain any part of the fund for the purposes they suggested for as he said ``such a procedure would involve retention, and not application, and be a breach of trust''. It will be seen at once, then, that that case is entirely different from Montgomerie's case and quite different, too, from Vestey's case and the present case. This difference was recognised by Sir Raymond Evershed in Vestey's case where he pointed out that ``the essential feature in that case, to my mind, is that the sum which was there being dealt with was a fund which had already been settled, in any event, on the infant in respect of whom the discretion was being exercised'', whereas in Vestey's case, which the Master of the Rolls was considering, the effect of the resolution of the trustees was to give each infant beneficiary a specific portion of the income, and without that resolution the infant was entitled to no part of it at all. He accordingly came to the conclusion that he was unfettered by Re Peel and ``that the first part of this resolution did amount to an application for the benefit of the infants...'' who ``became absolutely entitled to a particular sum of money so appropriated...'' which ``have now become part of the infants' respective estates''. To similar effect is the judgment of Jenkins L.J. who expressed the view that the learned Judge in the Court below had ``overlooked the important change of title, if I may so describe it, in favour of the infant which such an allocation would bring about''.Mr. Orr submitted that in Vestey's case, much more attention was given by the Judges to the meaning of the word ``benefit'' and too little attention to the meaning of the word ``apply''. But I am of opinion that when the judgments of the Master of the Rolls and Jenkins L.J. are carefully considered, it is apparent that they were both of opinion that if the effect of the resolution was to give the infant beneficiaries an absolute interest in income in respect of which previously they had only a contingent right, that did amount in law to an application within the meaning of the word ``apply''. Jenkins L.J. indeed was much disposed to give the word ``pay'' in itself a wider meaning than it might in other circumstances bear. While, then, it is true that in Vestey's case the infant's income was in one sense retained by the trustees, it was nevertheless in the opinion of both of them an application of the income and not a ``mere retention''.
Mr. Orr made the further point that in Vestey's case at least the income which had been retained by the trustees was apparently separately invested, but in my opinion, no particular attention was given to this circumstance by either the Master of the Rolls or Jenkins L.J. The retained income, if I may call it such, remained in the trust and continued to form part of the trust property. I read Vestey's case therefore as laying down the principle that if a trustee takes the necessary step of exercising a power ``to pay or apply'' income for the benefit of infants, who only have a contingent interest in the income, it is immaterial whether the income is immediately used for the benefit of the infants and is sufficient if it is allocated to them in terms which makes the parts of the income so allocated the separate property of each infant. Mr. Orr then went on to draw attention to the fact that in Vestey's case there was an imperative trust to pay or apply the income year by year for the benefit of certain named beneficiaries, whereas in the present case there being no express power in the deed, sec. 40 merely gives the trustee a discretionary power. In some circumstances this might be an important consideration but it must not be overlooked that in Vestey's case the trustees did possess a discretion entitling them to determine which of the beneficiaries should receive accrued income and in what proportions. Now in the present case it is plain that the children of the trustee have only a contingent interest in the income and the capital of the trust. Their right to succeed depends on their attaining the age of 21 years. Moreover, it is necessary to bear in mind that the words ``the trust property'' is a defined term in the present deed and includes as well as the capital of the trust any accumulation of income. Accordingly if Mr. Orr be right in the submissions he has made and the true position be that the income allotted to the four children is to be treated as accumulated income, they continue to have no more than a contingent interest in that income. I will a little later on return to consider whether the distinction Mr. Orr sought to draw between the present case and Vestey's case is well founded but before doing so there are two further submissions which were made by Mr. Orr which it is necessary that I should consider.
ATC 6060
Mr. Orr referred to the recent decision of the House of Lords in
Re Pilkington's Will Trusts
(1964) A.C. 612
.
This case was concerned with the power contained in sec. 32 of the English
Trustee Act
1925. This section makes provision enabling a trustee, in his discretion, to pay or apply any capital moneys subject to a trust for the advancement or benefit of any person entitled to the capital of the trust property or of any share thereof whether absolutely or contingently on his attaining any specified age or on the occurrence of any other event provided that the sum so paid or applied does not exceed in amount one-half of the presumptive of vested share or interest of that person in the trust property. Mr. Orr, I think, quite rightly submitted that this case, dealing as it does with a different section, was only of limited relevancy but he relied on it as authority for his submission that in the case of a capital advancement at all events, the fund so advanced must be taken right out of the trust estate and devoted to the benefit of some person who holds it clear of the limiting trusts of the settlement under which the power of advancement is exercised. I have no doubt that that is true in the case of an advance of a capital sum for it is of the very essence of the exercise of the power that the capital sum so advanced ceases to form part of the trust property but I do not regard
Pilkington's case
as any authority for the view that in the case of income which is the fruit of the trust property, the same considerations apply and I do not regard that case as in any way weakening the conclusion reached by the English Court of Appeal in
Vestey's case
relating to the allocation of accrued income. Nevertheless,
Pilkington's case
provides a very clear indication of the willingness of their Lordships to adopt a more benevolent construction of the words ``pay'' or ``apply''. Lord
Reid
expressed himself as being only reluctantly persuaded by Viscount
Radcliffe's
reasoning to agree that sec. 32 of the
Trustee Act
1925 could be applied to the case there under consideration. He said: ``I do not think that it is disputed that the main purpose of the appellants' scheme and its main benefit to the infant Penelope is avoidance of death duties and surtax'' and he expressed the view that what was proposed to be done in that case ``certainly seems to me far removed from the apparent purpose of the section and considerably beyond anything which it has hitherto been held to cover'' and he continued (at p. 629)
-
``Nevertheless I am compelled to recognise that there is no logical stopping place short of that result. You cannot say that financial benefit from avoidance of taxation is not a benefit within the meaning of that section. Nor can you say that the section only authorises payments for some particular or immediate purpose or that the benefit must be immediate and certain and not future or problematical. And again you cannot say that the beneficiary must consent to the course which the trustees have decided is for his benefit for that would rule out all payments where the beneficiary is under age.''
He accordingly felt obliged to agree with the reasoning of the principal judgment delivered by Viscount Radcliffe who, after referring to the fact that the word ``advancement'' was always recognised to be a ``large word'', the word ``benefit'' was the largest of all, continued (at p. 635): ``So much for `advancement', which I now use for brevity to cover the combined phrase `advancement or benefit'. It means any use of the money which will improve the material situation of the beneficiary''.
Mr. Orr finally submitted that it must not be overlooked that in the present case this Court is concerned with an assessment made by the Commissioner of Inland Revenue and, accordingly, in final result the present case fell to be determined under the provisions of sec. 155 of the Land and Income Tax Act 1954. I find difficulty in seeing the force of this submission, for in my opinion sec. 155 in its present form, containing as it does the two provisos, make it plain that in the view of the Legislature it was considered just that a beneficiary in whose favour a trustee had paid or applied income during the income year should be deemed to be entitled in possession to the receipt thereof under the provisions of sec. 155(a). Likewise, an infant beneficiary who is possessed of a vested interest in the income is to be similarly treated. Furthermore, in view of the provisions of sec. 92, it is immaterial that the derived income has not been actually paid or received by the taxpayer and it is sufficient that it has been credited in account or accumulated. I am accordingly of opinion that both under sec. 40 of the Trustee Act 1956 and under sec. 155 of the Land and
ATC 6061
Income Tax Act 1954, the problem is the same, namely, what steps have to be taken by a trustee before it can be said that he has paid or applied income for the benefit of the beneficiary during the income year.In the light of the authorities I have referred to, I find myself brought to the conclusion that the declaration of the trustee in exercise of the power conferred on her by sec. 40 of the Trustee Act 1956 did have the effect of immediately vesting a specific portion of the income in the year ending 31 March 1963 in her four children and that in result there was a change in title from a contingent interest to an absolute interest in the sums allotted to them. In my opinion, once the declaration was made by the trustees, it was immediately effective and could not be revoked. As I have earlier said, without the declaration the four children merely had a contingent interest in the income which only became vested in them together with the capital of the trust if they attained the age of 21 years. Once the trustee made her declaration the sums allotted to her children, although not immediately paid out to them, became their absolute property and would form part of their individual estates in the event of their death under the age of 21 years. In my opinion then the conclusion reached by the English Court of Appeal in Vestey's case is to be preferred to the more limited approach which found favour with Barrowclough C.J. in Montgomerie's case. I do not think the distinction sought to be drawn by Mr. Orr between the present case and Vestey's case is well founded.
In result, then, I agree with the conclusion reached by Tompkins J. in the Court below and accordingly I am of opinion that the appeal should be dismissed.
Accordingly, the majority of the Court being of that opinion, the appeal is dismissed with costs to the respondent $150 and all reasonable disbursements.
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