Orr v Wendt

[2005] WASCA 199

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(Decision by: Wheeler JA)

Orr
vWendt

Court:

Judges: Owen JA
Wheeler JA
Roberts-Smith JA

Legislative References:
Trustees Act 1962 - 75; 94
Income Tax Assessment Act 1936 (Cth) - 25; 26

Case References:
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) - 163 CLR 199
Re Armitage ; Armitage v Garnett - [1893] 3 Ch 337
Sinclair v Lee - [1993] Ch 497
Bouch v Sproule - (1887) 12 App Cas 385
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1989) - 170 CLR 124
Hill v Permanent Trustee Co of New South Wales Ltd - [1930] AC 720
Re Wilkinson ; Elder's Trustee and Executor Co Ltd v Henry - [1954] VLR 486
Federal Commission of Taxation v Whitfords Beach Pty Ltd (1982) - 150 CLR 355
Shepherd v Federal Commissioner of Taxation (1965) - 113 CLR 385
Commissioner of Income Tax (Queensland) v The Brisbane Gas Co (1907) - 5 CLR 96
Scholefield v Redfern - (1862) 2 Drew & Sm 173; 62 ER 587
Bostock v Blakeney - (1789) 2 Bro CC 653; 29 ER 362 (no apportionment)
Lord Londesborough v Somerville - (1854) 19 Beav 295; 52 ER 363
Re Winterstoke's Wills Trusts Gunn v Richardson - [1938] Ch 158 (apportionment)
Re Mulligan (decd ) - [1998] 1 NZLR 481

Hearing date: 22 June 2005
Judgment date: 21 October 2005

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Decision by:
Wheeler JA

The appeal -- background

[2] This is an appeal from a decision of Commissioner Johnson QC, as her Honour then was, dated 4 March 2004. It resulted from a dispute concerning the conduct of the appellant, as the executor and trustee of the Will of the late Donald Clarence Wendt ("the deceased"). The deceased died on 4 September 1997, leaving a Will dated 6 December 1995 ("the Will"). The second respondent, Joan Agnes Wendt ("Mrs Wendt"), was the second wife of the deceased and the sister-in-law of the appellant. The first respondents are the residuary beneficiaries under the Will and were the plaintiffs before her Honour. They are the adult children of the deceased's first marriage. There was another child, a daughter of the deceased and Mrs Wendt, who received a separate bequest which is not in issue in these proceedings.

[3] Mrs Wendt, who was an elderly lady, died in February this year, and Mr Barry Edward Britza and Ms Dixie Leigh Wallace are executors of her Will. Ms Wallace appeared at the hearing of the appeal out of courtesy to the Court, but took no part in it.

[4] The application before her Honour was commenced by way of originating summons. There were no orders for pleadings. The absence of pleadings had an unfortunate consequence for the conduct of this appeal. I turn to that issue later.

[5] The originating summons was amended on a number of occasions. The relief sought included the following:

1. The [appellant's] decisions in the financial year ending 30 June 1999 and 30 June 2000 to treat the capital gain on the sale of shares of the estate of [the deceased] disclosed in the accounts as income of the Estate for distribution to the life tenant [Mrs Wendt] be reviewed.

[6] It also sought to review the appellant's decision to pay legal fees from the estate in relation to this matter. Consequential upon the first item, it sought payment by either the appellant or Mrs Wendt to the estate of certain sums, being profits on the sale of shares which had been distributed as income, together with interest. Consequential upon the second item, it sought repayment of certain legal expenses. It also sought that the first-named first respondent be appointed co-trustee with the appellant, or, in the alternative, that the appellant be restrained from selling any shares without the express approval of all of the first respondents.

[7] The first respondents were successful in their application, and her Honour made orders for repayment of a variety of sums and made certain consequential orders.

The Will

[8] Before I turn to the structure of her Honour's decision, and to the grounds of appeal, it is convenient to set out the relevant portions of the deceased's Will. They were as follows:

THIS WILL is made by me DONALD CLARENCE WENDT of 51 Minninup Road, Bunbury, Western Australia, Retired Earth Moving Contractor.

...

APPOINTMENT OF EXECUTORS

2.

2.1

I appoint my friend GEORGE STANLEY ORR of 59 Mallee Way, Forrestfield, who is my wife JOAN AGNES WENDT's sister's husband, to be my Executor.

...

DISTRIBUTION OF ESTATE

4.

4.1

Subject to clause 4.2, I give the whole of my estate to my Executor on trust:

4.1.1

to give to GEORGE STANLEY ORR $4,000.00 (four thousand dollars) if he acts as my Executor;

4.1.2

to give my land and house at Capel to my daughter DONNA MARIA GARDNER;

...

4.1.4

to pay the income from the balance of my estate to my wife JOAN AGNES WENDT during her lifetime;

4.1.4.1

my wife JOAN may apply to my Executor to be paid part of the capital if she can establish that her income (including the income she derives from my estate) is insufficient for her reasonable needs;

4.1.5

to give the residue of my estate equally to such of my children DOUGLAS RONALD WENDT, LYNETTE MAY JOHNSTON and LORRAINE McCARTHY (being the children of my marriage to DOROTHY MAY HUGHES) as survive me.

4.2

If any of my children die before me or before attaining a vested interest leaving issue alive at my death then such issue on attaining their majority take equally the share which their parent would otherwise have taken.

4.3

I have not given more to my wife JOAN because I believe I have given her much during my life and I believe she will be able to look after herself sufficiently with the assets and income she has and the income she derives from my Will.

4.4

I have not given more to DONNA MARIA because I believe she will receive a gift under the Will or estate of her mother, my wife JOAN.

...

DEFINITIONS

[There are no relevant definitions.]

SCHEDULE

8. In addition to the powers my Executor has at Law, my Executor shall have the powers, rights, discretions and the indemnity set out in the Schedule to this Will.

SCHEDULE

EXECUTORS POWERS, RIGHTS, DISCRETIONS AND INDEMNITY

EXECUTORS POWERS

A.

My Executor may in his discretion:

1.

exercise any powers given by law;

2.

exercise the powers of a trustee for sale in respect of any assets in my estate including the following specific powers:

2.1

to sell by public auction or private sale, for cash or on credit;

2.2

to postpone any sale without being liable for any loss caused by so doing;

2.3

to retain in its form of investment at my death any part of my Estate, even though it is wasting hazardous or reversionary, without being liable for any loss caused by so doing;

3.

determine whether receipts or outgoings are capital or income or partly income or capital so as to bind the beneficiaries even though the receipts are from a company that has made a decision on the matter;

...

5.

invest or reinvest in or acquire for the purpose of receiving income, interest, profit or capital gain any of the following:

5.1

shares, stock units, debentures, debenture stock, notes including convertible notes, or other securities of a company listed on any stock exchange;

...

15.

use income, capital or both income and capital to pay capital gains tax levied on the disposal of any asset, and apportion liability for that tax; for that purpose to determine what is capital and what is income.

ADVICE FROM ACCOUNTANTS

B.

It is my wish but I do not direct that in making substantial investments my Executor obtain and consider the advice of someone who is experienced and knowledgeable in financial and investment planning and, where appropriate, is also a member of the Institute of Chartered Accountants, the Australian Society of Certified Practising Accountants or the Australian Stock Exchange.

...

LIABILITY FOR LOSSES

D.

I declare my Executor will not be liable for any loss not attributable to:

1.

his dishonesty; or

2.

the wilful commission by him of any act known by him to be a breach of trust.

The issues in the appeal

[9] Her Honour conveniently set out the issues, which in her view arose, at [17]-[19] of her reasons for decision:

17

A number of different issues require resolution in order to conclude the dispute which has arisen in the administration of the deceased's estate. Some are essentially legal in nature and concern the construction of relevant clauses of the Will and a consideration of the Court's powers to review the conduct of a trustee. The following issues fall within this category:

i.

The jurisdiction of the Court to review the executor's actions under s 94 of the Trustees Act 1962;

ii.

The use of extrinsic evidence to determine the intentions of the testator;

iii.

The power of the Court to review the exercise of a discretion by an executor;

iv.

Whether profit on the sale of shares is income or capital under the Will;

v.

Whether profit on the sale of shares can be classified by the executor as income pursuant to cl A3 of the Schedule to the Will;

vi.

Executors/trustees' duties and entitlement to obtain directions from the Court;

vii.

The payment of executor's and beneficiaries' legal fees from trust property;

18

The next category involves the determination of whether there has been in this case any breach of duty. Such a determination necessarily requires an assessment of the evidence and the making of factual findings. The following issues fall within this category:

viii.

Whether the executor has breached his duty in paying to Mrs Wendt the gross profits from the sale of shares;

ix.

Whether the executor has breached his duty in paying both his own and the second defendant's legal expenses in relation to the matters the subject of this claim.

19

The final category of issues addresses the effect of any finding that the executor has acted in breach of trust. The issues are:

x.

Whether the money in dispute should be repaid to the estate:

(i)

by the First Defendant;

(ii)

by the Second Defendant.

The issue of whether the second defendant should reimburse the estate involves a consideration of the application of s 65(8) of the Trustees Act.

xi.

Removal of the executor or the appointment of a co-executor.

[10] So far as this appeal is concerned, items i -- iii are not in issue. Her Honour's findings in relation to items iv and v are critical. For reasons which I will shortly discuss, her Honour was of the view that profit on the sale of shares was capital. Her Honour held that it was not open to the appellant pursuant to cl A3 to classify as income that which was truly capital. Her Honour held that that clause conferred a discretion of a very limited kind and that, if it did purport to confer a broad discretion upon the executor to classify any money as either capital or income regardless of its true nature, it would be void as repugnant to the other clauses of the Will and as being an attempt to oust the jurisdiction of the Court to construe the Will. Those findings about cl A3 are not challenged in this appeal.

[11] Item vi is not strictly in issue, although it was relevant to some of her Honour's later conclusions that there was power in the appellant to obtain directions from the Court in the case of doubt about the proper classification of any moneys, and that in her Honour's view he should have done so. Her Honour's findings as to the legal fees appear to follow on from her findings in relation to the proper classification of the profit from the sale of shares.

[12] So far as breach of duty questions were concerned, it seems to me, from the structure of her Honour's reasons, that she considered those issues arose once she had properly characterised the proceeds from the sale of shares as capital. The question was then whether the appellant was entitled to the protection of cl D of the schedule to the Will, or s 75 of the Trustees Act 1962 (WA). It was in relation to those issues that her Honour found it necessary to consider whether the appellant had been in breach of his duty to act impartially and even-handedly between income and capital beneficiaries. Because she found that he had been in breach of that duty, he was liable to compensate the first respondents for the loss to the estate if that loss was not recovered from Mrs Wendt: [248].

[13] The grounds of appeal complain of her Honour's finding that the profits from the share trading were capital, rather than income. They also attack a number of her Honour's other findings.

[14] However, the appellant contends that it is only necessary to go to the other grounds if the appellant is unsuccessful in relation to the question of whether, on a proper construction of the Will, the profits from the share trading which was undertaken were income rather than capital. By contrast, the first respondents submit that, even if her Honour was incorrect in that determination, the originating summons, which sought to have the Court review the decision to treat that profit as income, gave rise, not only to the question of the proper characterisation of that profit as income or capital, but also to the question of whether it was open to the appellant, acting fairly and impartially as between beneficiaries, to engage in the activity of share trading which he undertook with a view to obtaining income for Mrs Wendt.

[15] There was therefore some controversy between the parties, before us, as to what was a proper understanding of the originating summons. As a matter of first impression, it does not seem that her Honour understood it as raising directly the question of whether the appellant should have engaged in share trading. As a matter of first impression of the summons, the decision of the appellant which is attacked, is the decision to pay the proceeds of the share trading to Mrs Wendt, rather than the decision to engage in share trading for the purpose of producing income in the first place. Had that latter decision been intended to be the subject of an attack, it should, in my view, have been raised as a specific question, perhaps in the alternative, in the originating summons.

[16] Of course, given the complexity of the issues in this case, it would have been better had there been an order for pleadings. However, since the parties were content to have the Court consider the submissions which were made to her Honour in order to determine for itself whether the decision to engage in share trading for the purpose of producing income was properly in issue at trial, I have had regard to the various submissions made to her Honour. At trial, the first respondents provided both opening and closing submissions. Paragraphs 3, 4 and 5 of the opening submissions read as follows:

3.

The primary question is therefore the question of the capital gains. The issues concerning capital gains are as follows:

(a)

Is the capital gain on the shares 'income' of the estate?

(b)

if not, does clause A3 of the Schedule to the Will allow the first defendant to classify it as income?

(c)

should the second defendant repay the money to the Estate?

(d)

should the first defendant repay the money to the Estate?

4.

In relation to legal fees, the questions are:

(a)

whether the fees should be paid; and

(b)

whether the fees should be repaid by either the trustee or the life tenant.

5.

Finally, the Court will need to consider whether a mechanism for preventing any further breaches of trust are necessary, including:

(a)

the appointment of another trustee;

(b)

restrictions of the trustee's ability to sell shares.

[17] It is plain enough from those submissions that the only breaches of trust alleged in relation to shares, are in relation to the decision to pay the profit on the sale of shares to Mrs Wendt as income. No broader question was identified.

[18] In closing at trial, the first respondents' written submissions noted that the defendants had submitted that the disputed amounts from the sale of shares were to be classified as income, "as they were produced with the intention of creating an income stream for [Mrs Wendt]" (para 11). The primary submission in relation to that which was made by the first respondents was that the cases upon which the appellant relied to establish that those profits were income were distinguishable. The first respondents' submissions then dealt with the submission made by the appellant to the effect that cl A3 gave a discretion to classify amounts as either income or capital, and the primary submission in that respect was that no such discretion was conferred. However, by para 28 of their written closing submissions, the first respondents submitted that even if cl A3 did confer a discretion of the type for which the appellant contended, that discretion had to be exercised in a way that was fair and impartial as between all beneficiaries and that if he was exercising any discretion of that kind, the appellant had not exercised it in an even-handed manner.

[19] It is clear, in my view, from the submissions made at trial by the first respondents that the question of lack of impartiality upon which they then sought to rely arose only if the profits from the sale of shares were to be classified as capital (in which case, those issues would be relevant to whether the appellant should be relieved from liability) or if there was a discretion in the appellant to classify them as income, notwithstanding that they might otherwise be regarded as capital. The assertion that it was a breach of trust for the appellant to undertake the activity of share trading with a view to producing an "income stream" which could be paid to Mrs Wendt, formed no part of their case at trial, and cannot therefore be relied upon now. As we pointed out to counsel for the first respondents, a case of that kind might have been conducted quite differently at trial.

The share trading

[20] Before considering her Honour's reasons for decision, it is desirable to set out in a little more detail what profits were in issue. The estate of the deceased included, as well as the property at Capel which was left to his other daughter, an aluminium boat and trailer, and a demountable home. The remainder consisted of WA Government bonds to a total value of $166,000, of which $114,000 was to mature on 1 December 1998, shares and/or options in Elders Ltd, Savage Resources Ltd ("Savage"), Carnarvon Petroleum NL, First Australian Resources NL, Hargraves Resources NL ("Hargraves"), Westralian Farmers Co-operative, Wesfarmers Ltd ("Wesfarmers") and Qantas Airways Ltd ("Qantas"). There was also a relatively small amount of cash. The shares and/or options were valued at approximately $86,000 at the time of the deceased's death.

[21] The appellant kept a journal in which he recorded the transactions in relation to the administration of the estate. The transactions in issue here are as follows:

[22] Her Honour made certain findings in relation to the appellant's conduct in relation to administering the estate. She found that, from the outset, he formed an intention to maximise the benefit the income beneficiary would derive. For that purpose, he drew a distinction between shares held by the estate at the time of the deceased's death and shares acquired after the death of the deceased. The shares acquired after the death of the deceased appear to have been purchased with the proceeds of the WA Government bonds and with cash. The appellant identified the shares held at the date of the deceased's death as a capital asset of the estate which he would not trade, while the other shares he regarded as shares acquired for the purpose of making income for distribution to the income beneficiary. He deducted the expenses relating to the share trading on the sale of those after-acquired shares from the profit made and then paid the whole of that net profit to Mrs Wendt. The distributions to Mrs Wendt were made on the basis that the appellant believed, in her Honour's view mistakenly, that those profits were income rather than capital.

[23] The appellant's evidence was that his reason for adopting this course was that the moneys in fixed deposit and in bonds were earning a minimal rate of interest and that those funds were "virtually idle". Her Honour did not make a finding in relation to the reasons given by the appellant, but it is clear that she accepted that his purpose in entering into the trading in the after-acquired shares was, at all times, in order to make a profit from them to be distributed as income. It can be seen that some of the shares were sold after a very short period. The first set of Optus shares was sold after approximately five weeks. The Commonwealth Bank shares were sold within nine weeks of purchase. The longest any shares seem to have been held during the course of the trading in which the appellant engaged was eight and a half months, in respect of the 30,000 Optus shares purchased in March.

Her Honour's classification as capital

[24] In respect of that share trading, her Honour's reasons may be summarised in the following way. Her Honour noted that it was a well-established principle that the words of a Will should be interpreted in the context in which they appear, according to their usual or primary meaning. She adverted to the dictionary definitions of "income". She noted that the appellant and the second respondent relied upon a number of income tax cases and rulings, and in particular upon Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 . I consider that case in more detail shortly. For the present, it is enough to note that her Honour's view was that there was a distinction to be drawn between categorisation of "income" in the context of trusts and the categorisation of "income" for the purposes of income tax law.

[25] Her Honour then turned to a number of cases concerned with the apportionment of moneys between life tenants and residuary beneficiaries. In particular, her Honour quoted from Re Armitage ; Armitage v Garnett [1893] 3 Ch 337. That case concerned a gift of shares as a residue, with the income to be given to another beneficiary. The company in question was wound up and another company bought out the shares, resulting in a profit. The proceeds of the shares were held to be capital even though they came from a reserved dividend fund which could have been distributed as dividends had the company so chosen. Her Honour quoted the well-known passage from Lindley LJ at 346:

What does a man mean when he leaves shares to a tenant for life? He means that the tenant for life shall have the income arising from the shares in the shape of dividends or bonuses declared during the life time of the tenant for life. He does not mean that the tenant for life shall receive profits in any other sense. He does not mean him to have such profits, for example, as arise by a realisation of the shares; he never dreamed of such profits going to the tenant for life.

[26] Her Honour also seems to have been influenced by the consideration that to permit a dealing of this kind in respect of shares acquired after the death of the deceased would permit executors to advance one type of beneficiary over another. Her Honour then concluded that profits derived from trading in shares, whether the shares were acquired before or during the course of the administration of the trust, should be regarded as capital for the purposes of distribution.

Were the profits capital or income ?

[27] It is understandable that her Honour was impressed, as it appears the writers of many judgments and texts since have been, with the succinct, clear and forceful statement of Lindley LJ However, it is, I think, important to note the date at which that statement was made. In my respectful view, it reflects a view about the way in which companies declare dividends, and the reasons why investment in shares may be made, which may now be regarded as a little simplistic, and which is not necessarily applicable in all circumstances. Rather than attempt to set out in my own words why this is so, I would gratefully adopt a number of the observations of Sir Donald Nicholls VC in Sinclair v Lee [1993] Ch 497.

[28] Sinclair v Lee involved a Will with shares left on trust for one beneficiary for life with the remainder to another beneficiary absolutely. The relevant company put forward a proposal for a demerger under which shareholders would, in addition to their existing shares, be issued with a corresponding number of fully paid up shares in a new company, to be allotted in satisfaction of a dividend to be declared by the first company. The case was one of considerable general importance. It can be seen from the report that not only were detailed submissions made by Senior Counsel for the two defendants, but there were also submissions going to issues of principle made by counsel for the Attorney General who appeared as amicus curiae. The case is plainly not on all fours with the present, but it contains a number of thoughtful observations of principle.

[29] In considering the applicable principles, the Vice-Chancellor commenced at 506 with the observation that, in the simplest cases, there is in principle no difficulty in distinguishing between income and capital receipts. He observed:

If a testator ... creates successive interests, with an interest in income followed by an interest in capital, he intends that the person entitled to the income interest, (A) shall have the benefits flowing from the use of the property or the income to be derived from it for the period of his life ... but that the fund shall remain intact for the remainderman, (B) in due course.

At 507 he observed that that simple approach becomes much more difficult to apply when the trust fund comprises shares in a company, the difficulty stemming principally from the fact that companies are not normally required by their internal constitutions to distribute all their profits as they arise. In practice, successful companies may, over a period of years, build up substantial reserves of retained profits. Questions arise about dividend distributions which may be made years later from reserves representing retained trading profits from earlier years. However, of course, distributable but undistributed reserves form a significant part, and often the major part, of a company's working capital, enhancing the company's ability to maintain and increase its profits. The existence of those reserves as part of a company's net worth will be reflected in the market price of the company's shares. It seems to me that the discussion at 506 and 507 demonstrates the somewhat artificial nature of any stark distinction between capital and income in the shares in a modern corporation, the purpose of which is ultimately to ensure an appropriate value and return to shareholders. That task is accomplished both by maintaining the value of the shares (which may on occasion be accomplished by building up significant reserves of undistributed income) and by distributions to shareholders of dividends, which will often represent some or all of the net profits for the year, but which may also be made from reserves built up over previous years, or by way of a return of capital.

[30] As the Vice-Chancellor rightly observed at 508, companies and their trading activities and histories, and the circumstances in which trustees acquire shares, vary so widely that the formulation of a principle of general application is not easy. After canvassing a number of possibilities, any of which might theoretically be adopted as a general principle he then turned to some of the principal authorities. Bouch v Sproule (1887) 12 App Cas 385 is authority for the proposition that in summary, "What the company says is income, shall be income, and what it says is capital, shall be capital" (Fry LJ at 653). The observation is made by the Vice-Chancellor that some other cases then mentioned "show a continuing reluctance by the court to apply the stark dichotomy enunciated in Bouch v Sproule when there exists some ground on which a perceived unfairness to those interested in capital can be avoided" (at 511).

[31] I would add, that to look to the treatment by the company may not be, in all circumstances, a satisfactory way of ascertaining whether a particular receipt is of the nature of income in the hands of the trustee. In the context of income tax law, the focus is not upon the question of the nature of the expenditure made by the payer of the moneys; rather, whether or not a receipt is income will depend upon its quality in the hands of the recipient taxpayer (see GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1989) 170 CLR 124 at 136). It seems to me that a focus on that question in this context better serves the underlying purpose of the rule in Bouch v Sproule , of fairness between different classes of beneficiaries.

[32] Returning to Sinclair v Lee , at 511 and following, Sir Donald Nicholls VC discussed Hill v Permanent Trustee Co of New South Wales Ltd [1930] AC 720, which established five propositions, not necessary to be set out here, relating to the distribution of funds from a limited company to a trustee. The important observation is made in discussion of Hill (at 512) that investment philosophy now is very different from what it was in 1930 when that case was decided. In practice, one of the reasons trustees invest in equities is as a hedge against inflation. I would add to that, in the present context, that the concept of active short-term trading in shares for the purpose of achieving an income appears to have been formerly a rare event. In Re Wilkinson ; Elder's Trustee and Executor Co Ltd v Henry [1954] VLR 486, it is referred to (at 490) as "stock jobbing", and it was necessary to describe it. (As the Will in question in that case appears to have contemplated such an activity and made express provision for it, there is unfortunately no discussion of the way in which the proceeds would be characterised in the absence of such a direction.)

[33] The point of this somewhat laborious description of the reasoning in relation to the admittedly very different facts of Sinclair v Lee , is, I think, that the reasoning in that case, which I find persuasive, has a number of implications for the way in which the characterisation of income should be approached. First, while it is no doubt important to follow well-established authority as to the way in which particular receipts should be characterised, if only so that the complex task of administering trusts may be approached with greater certainty, it may not be desirable, in approaching a receipt which is not directly the subject of such authority, to begin with cases decided in a very different set of investment conditions, and to reason by analogy from them. Second, it is desirable to consider the receipt in a way which is consistent with the underlying presumed intention of the testator, to achieve fairness between beneficiaries, if that can be done in accordance with the meaning of the terms used in the Will and in accordance with any authority directly on point.

The terms of the Will

[34] The first issue to be considered is whether the Will uses the expression "income" in any special sense, or if anything can be gleaned from the context about the meaning of that term. In the present case, there are, it seems to me, only two points of significance in relation to the use of that term. First, it is clear that "income" and "capital" are used in contradistinction in the Will. The income is to be paid to Mrs Wendt, while she may apply for a portion of the capital in the circumstances set out in cl 4.1.4.

[35] The other significant portion of the Will for present purposes is cl A5 of the schedule, which contemplates investment in or acquisition of shares, and is wide enough to encompass the share trading engaged in by the appellant. I would derive no assistance from the expression "income, interest, profit or capital gain" in that clause. Some of the four terms used clearly overlap with each other, and it is not clear whether they are intended to indicate that the testator viewed each as a distinct concept, or whether (as appears more likely) they are simply all used to emphasise that the purpose of the acquisition would be to obtain further moneys or moneys' worth.

[36] The apparent intention of the Will then is that the term "income" should be understood in its ordinary sense, although in a context in which share trading is permitted.

The ordinary meaning of " income "

[37] Turning to the ordinary meaning of the term "income", it appears to me that the income tax cases are of considerable assistance, and, in particular, Myer Emporium is of relevance. By way of background, I would note that the lack of definition of the term "income" in the Income Tax Assessment Act 1936 (Cth), s 25, meant that it was necessary for the courts to determine, for the purposes of that Act, what should in accordance with ordinary concepts and usages, be treated as income. Further, in determining what was income for that purpose, the distinction between income and capital gains which is a feature of trust law, was imported into the income tax cases: Laws of Australia 31.1 [13] and [17]. One would therefore expect the income tax cases to be dealing with income in its "ordinary" sense, in the absence of any special statutory provision to the contrary.

[38] In Myer Emporium , it is plain, in my view, that the Court considered that the receipts there in question were both income pursuant to s 25 of the Income Tax Assessment Act 1936 -- that is, in its ordinary sense -- and also in the special sense of profit arising from the carrying on of a profit-making undertaking pursuant to the particular provisions in s 26(a). It is not necessary, I think, to canvass the facts of Myer Emporium in detail, save to note that the receipt arose as a single, very large sum which resulted from one isolated transaction. At 209-210, Mason ACJ, Wilson, Brennan, Deane and Dawson JJ said the following:

Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a 'one-off' transaction preclude it from being properly characterized as income: Federal Commission of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at pp 366-367, 376.

[39] That the concept of income for trust purposes and for the purposes of s 25 of the Income Tax Assessment Act 1936 would be relevantly the same, appears from the discussion at 215, where their Honours observed:

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. Likewise, the need to distinguish capital and income for trust purposes and other purposes has focused attention on the difference between the right to receive future income and the receipt of that income, a difference which has given rise to the analogical difference between the fruit and the tree: see Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385 at p 396.

...

For present purposes it is sufficient for us to say, without necessarily agreeing with these criticisms, that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed.

[40] The important distinction is, as their Honours noted at 213 in particular, between profits derived in a business operation or in carrying out a profit-making scheme, which are income, as distinct from proceeds of a "mere" realisation or change of investment. Their Honours said in respect of that distinction that:

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective 'mere': Whitfords Beach (1982) 150 CLR at p 383. Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value: see the discussion of Gibbs J in London Australia (1977) 138 CLR at pp 116-188. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

[41] In the present case, her Honour accepted that the appellant had embarked upon what was, in effect, a profit-making scheme of trading in shares. There were relatively few transactions, but they were impressed with the purpose of deriving profit from the outset. It is I think apparent from her Honour's reasoning that had she considered Myer Emporium to be relevant, she would have concluded that it required that the receipts in question here be considered as income. In my view, that case was relevant and applicable.

[42] Counsel for the first respondents relied before us, as before her Honour, on Commissioner of Income Tax (Queensland) v The Brisbane Gas Co (1907) 5 CLR 96 at 104 for the proposition that income tax cases are distinguishable. The Court in that case, which was an income tax case, referred to Bouch v Sproule and observed:

There, what the Court had to do, was to discover what was the meaning of the testator's words. When he said that the tenant for life was to have the income, did he intend to cover the case of a division of past accumulated profits? Here the question is the construction of a taxing Act ... All we are concerned with is the interpretation of the Statute.

[43] That passage, however, is not, properly understood, authority for the proposition that there is in all cases a distinction to be drawn between the use of the term "income" in trust cases and its use in tax cases. In that case, the statute in question was the Queensland Income Tax Acts 1902-4, s 7(iv), which made particular provision for the taxation of dividends. It was therefore not necessary to inquire further into what the dividends might have represented, but only to receipts as dividends, in order to attract the statute. The case is authority for no broader proposition.

Share trading characteristics

[44] When one looks at share trading as a matter of practical reality, there are, of course, a number of factors which will lead to an increase in the value of shares. One of those is the predicted dividend likely to flow from those shares in the relatively near future. For the majority of established companies in which investors are likely to invest for the purposes of both capital growth and dividends, there will generally be a component of the price which reflects anticipated dividends. On the sale of shares by a trustee, no part of the profits is usually apportioned to the income beneficiary, but the reason for this practice seems to result from the difficulty of calculating an appropriate apportionment, rather than stemming from any view that in principle there is no dividend-related increase in value: see Scholefield v Redfern (1862) 2 Drew & Sm 173; 62 ER 587; Bostock v Blakeney (1789) 2 Bro CC 653; 29 ER 362 (no apportionment); cf Lord Londesborough v Somerville (1854) 19 Beav 295; 52 ER 363; Re Winterstoke's Wills Trusts ; Gunn v Richardson [1938] Ch 158 (apportionment).

[45] One can see, from the cases dealing with the non-apportionment rule, that it will sometimes not be just or even-handed as between income and capital beneficiaries to treat all profits from the sale of shares as capital. Of course, it does not follow that all, or any particular proportion, of the increase in value should be treated as income. However, these considerations do add weight to the proposition, which in my view flows from the income tax cases discussed earlier, that the purpose of the trustee and the nature of the trading in shares will be relevant to the characterisation of such profits as income or capital.

[46] That is not to say that it will necessarily be appropriate for a trustee to engage in a course of trading in shares in that way in order to benefit the income beneficiary. Much will depend upon the circumstances of the case, including the proportion of the trust property used in that way, the nature of the shares purchased and sold, the expertise, if any, possessed by the trustee in such transactions, or the nature, if any, of the advice taken by the trustee, together with the personal circumstances of the relevant beneficiaries (such as, for example, the age of the income beneficiary). Just as, in my view, it should be recognised that trading in shares can result in a significant income stream, so it must, of course, be recognised that a purpose of investment in shares is to counteract the effects of inflation by procuring an asset which is likely to increase in value: Sinclair v Lee at 512; Re Mulligan (decd ) [1998] 1 NZLR 481. A trustee who continually traded in shares over a significant period, while always reinvesting no more than the original amount of capital, would be embarking on a course which would ultimately be to the detriment of the residuary beneficiaries. However, as I have noted, the first respondents in this case did not seek to challenge the decision of the appellant to engage in share trading, but only his characterisation of the proceeds of that enterprise.

Conclusion

[47] It is therefore my view that in this case the term "income" is capable of encompassing the notion of profits derived from a process of buying and selling shares, over a relatively short period, for the purpose of making profits from those transactions. Given the finding of her Honour, it is my view that the trading in these shares by the appellant led to profits which should be regarded as income.

[48] It is therefore my view that the appeal should be allowed. Her Honour's finding in relation to the payment of legal fees appears to have followed as a consequence of the view that she reached in relation to the characterisation of the proceeds of the share trading. That follows, I think, from [211] of her Honour's reasons for decision. All the other orders by her Honour are consequential upon those two findings. It therefore seems to me that the appropriate disposition of this matter is that the appeal should be allowed, and the orders made by her Honour quashed. In lieu thereof, I would order that the first respondents' summons be dismissed and the costs of the parties be paid by the estate.