Case R32

Judges: HP Stevens Ch
BR Pape M

TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 9 April 1984.

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T.J. McCarthy (Member)

In his reasons the Chairman has set out the facts in this reference and I gratefully adopt those facts.

2. Although this is the first trust-stripping scheme case to arise for decision, the hearing only occupied a short time. As I have a clear view of the matter, I will also be brief.

3. The main submission advanced on behalf of the Commissioner was that the additional units, i.e. the ``Limited Income'' units, which were purportedly created on 8 June 1978 by a written resolution of directors of the Trustee pursuant to cl. 6(3) of the Trust Deed, were not validly created in accordance with the provisions of the Trust Deed, so the distribution to the Ezroh (Relief) Fund was not a distribution of trust income to a beneficiary.

4. By virtue of the terms of cl. 6(3), the Trustee could only create additional units ``with the consent of the Unitholders''. Clause 13 provided:

``Any consent of the Unitholders and any direction of the Unitholders to be given in pursuance of this Deed shall be given in writing signed by all the Unitholders who are at the time of the giving of any such consent or direction sui juris, other than in the case of a Unitholder which is a corporation. Any consent or direction which is to be given by a Unitholder which is a corporation shall be given effect to only where a resolution or minute in writing favouring the giving of that consent or direction shall have been signed by all the directors of that Unitholder, either personally or by a director's attorney. Any such consent direction writing resolution or minute in writing may consist of several writings or documents in like form, each signed by one or more of the Unitholders who are sui juris at that time or by one or more of the directors of a Unitholder being a corporation or his or their attorney.''

5. Because there was no relevant ``resolution or minute in writing'' signed by all the directors of each corporate unitholder, the Trustee was not authorised to create the additional units. Counsel for the taxpayer argued that this was merely a procedural matter, but clearly it is not. To adopt and adapt the words of Fletcher Moulton L.J. in
Mosely v. Koffyfontein Mines Ltd. (1911) 1 Ch. 73 at p. 84 in relation to the creation of new share capital: ``till [the additional units are] created [those units do] not

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exist at all''. The Ezroh (Relief) Fund was therefore not at any relevant time a unitholder and in my view the provisions of the Trust Deed and the circumstances of the payment of $135,000 to the Fund are such that the payment could not be regarded as anything but an unauthorised payment by the Trustee.

6. In view of this conclusion it is unnecessary to deal with the Commissioner's further arguments that if the additional units were validly created they were not validly issued or that if the additional units were validly created and issued, the true character of the payment of $135,000 was different from its ostensible character.

7. On the basis that the Fund was not an authorised beneficiary, counsel for the taxpayer submitted that cl. 11(1) of the Trust Deed provided for automatic entitlement of the unitholders to all of the trust's net income (i.e. the net income determined in accordance with trust law), so that sec. 99 was inapplicable in any event. Clause 11(1) provided:

``The Trustee shall hold the net income of the Trust Fund for each Accounting Period in trust for the Unitholders in proportion to the number of Units of which they are respectively registered as Unitholders on the last day of that Accounting Period.''

8. Thus it was said that the proportional entitlements of the three unitholders - A Family Trust, B Family Trust and M Family Trust - were 45%, 45% and 10% respectively and those unitholders should have been assessed under sec. 97(1) on those proportions of the ``net income of the trust estate'', i.e. the tax concept defined in sec. 95, so they should be taxed on 45%, 45% and 10% of $144,904 and the Commissioner's sec. 99 assessment should be set aside. In my opinion this argument was clearly raised by para. 4 of the notice of objection which was as follows:

``The said Trust, being a Unit Trust, was and has been at all material times so constituted that the trustee thereof is not assessable under sec. 99 or 99A, since all income thereof is held for the beneficiaries thereof so as to be included in their assessable incomes under sec. 97 and 98; and accordingly, there could not be any income of the Trust of the year of income to which a beneficiary was not presently entitled during the year of income or which was assessable under sec. 99 or 99A.''

9. In reply to that argument, counsel for the Commissioner first submitted that the payment of $135,000 was an authorised distribution or payment by the Trustee even though not to a unitholder and that this amount should be deducted before arriving at the net income of the trust for trust law purposes. However, I have already stated my view that the Trustee made an unauthorised payment of $135,000. In any event, it would not alter the proportional entitlements of the unitholders to the net income of the trust for trust law purposes.

10. It was next submitted on behalf of the Commissioner that the words ``that share of the net income of the trust estate'' in sec. 97(1) (as in force at the relevant time) mean ``that amount'' and not ``that proportion'' of the net income of the trust estate. If I may say so, this appeared to me to be merely a formal submission as it was not really supported by legal argument.

11. It is true that the adoption of the ``proportion view'' may in some situations lead to practical difficulties. It is also true that over the years the Taxation Office has fluctuated from one view to the other, but in my opinion the provisions of Div. 6 do not admit of any real doubt on this particular question.

12. The opening words of sec. 97(1) are ``Where any beneficiary is presently entitled to a share of the income of a trust estate'' and not, to echo the comment of Kitto J. in
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of T. 69 ATC 4084 at p. 4090 , to share of the net income of a trust estate, which is the tax concept defined in sec. 95. Obviously the draftsman has sought to relate the concept of present entitlement not to the net income for tax law purposes (which is, after all, an artificial tax amount) but to the net income for trust law purposes. Having determined the applicable proportional entitlement, the operation of the present entitlement concept is spent and the beneficiary is to be taxed on that share or proportion of the net income of the trust estate.

13. If any further support is needed for this construction, it will be found in the way sec. 99 was drafted. Section 99 does not refer to an amount to which no beneficiary is presently entitled (although that is the shorthand description used in practice) but rather to a

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residue (if any) of the net income of the trust estate after sec. 97 and 98 have been applied. This form of drafting shows that the draftsman was well aware that the concept of present entitlement was not designed to relate to the tax law figure. I suppose it could be said that the draftsman of sec. 101A (which was introduced by sec. 16 of Act No. 58 of 1941) took a different approach because he made reference to ``income to which no beneficiary is presently entitled''. However, sec. 101A dealt with a special situation and in my view it does not affect the construction of the earlier enacted provisions.

14. As I am clearly of the opinion that the words ``that share'' in sec. 97(1) mean ``that proportion'' it is unnecessary to specifically refer to previous Board decisions and articles where the merits of the two competing views have been discussed. The adoption of either view can give rise to practical difficulties and in the final analysis what has to be determined is the proper construction of the statutory provisions.

15. The only other matter to which I should refer is the interim distributions which the Trustee made on 8 March 1978 to the unitholders in accordance with cl. 11(2) of the Trust Deed. But these distributions did not alter the proportional entitlements of the beneficiaries and in my opinion sec. 25(1) or 26(b) could not apply here as well as sec. 97(1) so as to tax the beneficiaries twice or three times in respect of their taxable portions of the net income of the trust estate.

16. For the above reasons I would reverse the Commissioner's decision on the objection and set aside the sec. 99 assessment which the Commissioner made.

Claim allowed