Hobbs v Federal Commissioner of Taxation

(1957) 98 CLR 151
31 ALJ 616
11 ATD 248

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(Judgment by: Dixon CJ, Williams J, Webb J, Kitto J, Taylor J)

Between: Hobbs
And: Federal Commissioner of Taxation

Court:

Judges:
Dixon CJ
Williams J
Webb J
Kitto J
Taylor J

Subject References:
Income tax (Cth)

Judgment date: 4 September 1957

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Judgment by:
Dixon CJ
Williams J
Webb J
Kitto J
Taylor J

DIXON C.J. delivered the judgment of the Court:

This is a case stated under s. 198 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1956. The appeal in which the case is stated is an appeal against an assessment that was made under s. 102 of the Assessment Act 1936-1952. The appeal is by trustees of a settlement who had been assessed in pursuance of the provisions of that section. Sub-section (3) of s. 102 excludes the operation of the previous sections of Div. 6, that is to say ss. 95 to 101, when the commissioner is of the opinion that he should act under s. 102 which gives him a particular power. The tax which is assessed when s. 102 is applied is of a special character. It is expressed in s. 102, sub-s. (2) as follows:

"The amount of the tax payable in pursuance of this section shall be the amount by which the tax actually payable on his own taxable income by the person who created the trust is less than the tax which would have been payable by him if he had received, in addition to any other income derived by him",

so much of the net income of the trust estate as falls within the paragraphs which re-state the conditions which attract the operation of s. 102. Those conditions are expressed in sub-s. (1) of the section and they fall into two paragraphs, (a) and (b). It is with the second, par. (b), that this case is concerned, but it is convenient to state the effect of both paragraphs. (at p158)

Section 102 (1) says:

"Where a person has created a trust in respect of any income or property (including money) and -

(a)

he has power, whenever exercisable, to revoke or alter the trusts so as to acquire a beneficial interest in the income derived by the trustee during the year of income, or the property producing that income, or any part of that income or property; or

(b)

income is, under that trust, in the year of income, payable to or accumulated for, or applicable for the benefit of a child or children of that person who is or are under the age of twenty-one years and unmarried,

the Commissioner may assess the trustee to pay income tax, under this section, and the trustee shall be liable to pay the tax so assessed." (at p158)

In the present case the trust deed forms a settlement in favour of her infant children by a lady, Grace Muriel Hobbs, wife of Alfred Robey Hobbs. She was the party of the first part and the trustees were the parties of the second part. Certain shares were the subject matter of the trust. The indenture, after appointing the trustees, set out certain trusts in favour of infant children. Apparently there are three children still infants, although that does not appear expressly from the case stated. The child with whom we are concerned is Geoffrey Robert Hobbs of whom it is said explicitly in the case stated that he was at all material times an infant. (at p159)

The material trusts of the deed are set out in cl. 3. The clause directs that the trustees should hold the shares upon trust to allocate a parcel of 2,000 shares to each of two infants, Dudley Alfred Hobbs and Geoffrey Robert Hobbs, and 1,000 shares to an infant daughter, Elizabeth Muriel Hobbs. They are all children, two sons and a daughter, of the settlor and of her husband, who is afterwards mentioned in the deed. (at p159)

The trusts are all in the same form and I shall read only the material trust, which is that relating to Geoffrey Robert Hobbs. After directing that the shares, 2,000 in the case of the sons and 1,000 in the case of the daughter, are to be allocated in the books of the trust to the three children, the deed proceeds to direct, in the case of Geoffrey Robert Hobbs, that the trustee shall hold the parcel of 2,000 shares so allocated to the said Geoffrey Robert Hobbs upon trust for the said Geoffrey Robert Hobbs subject to and upon his attaining the age of twenty-five years or marrying under that age provided that if the said Geoffrey Robert Hobbs shall die before attaining the age of twenty-five years and before marrying under that age the said parcel shall be divided equally between the other two parcels and devolve accordingly. That is to say, the direction in the event mentioned is to divide the parcel between the parcel relating to the other son and the parcel relating to the daughter. There are therefore cross gifts over. After the clauses stating the trusts in favour of the two sons and the daughter the deed proceeds:

"Failing the trusts hereinbefore declared or to the extent to which any such trusts shall fail the Trustees shall hold the Trust Estate upon trust for the said Alfred Robey Hobbs if he be then living and if he shall not be then living then upon such trusts as the said Alfred Robey Hobbs shall by Will appoint". (at p159)

Pausing there, it will be seen that the gift to Geoffrey Robert Hobbs is subject to and upon his attaining the age of twenty-five. Notwithstanding the contention to the contrary based on the provisions of the deed relating to the application of income, it appears to be quite clear that that is a contingent gift, contingent upon the beneficiary attaining the age of twenty-five or marrying. (at p160)

The deed then contains quite a number of not unfamiliar clauses with reference to the administration of the trusts. Of these, it is perhaps important to note that there is a power

"to pay or to apply from time to time the whole or any part of the income from that part of my Trust Estate in which any infant may have a vested or presumptive share for the maintenance support education advancement or for the general benefit of such infant in such manner as my Trustees may in their absolute discretion think fit". (at p160)

There is, too, finally, a clause directing the trustees to accumulate and invest all income derived from the corpus of the trust estate or so much thereof as is not applied for any of the purposes therein expressed. The provision goes on:

"All income so accumulated and invested shall be treated as capital provided that recourse may be had to such accumulations from time to time for any of the purposes and to the extent to which the Trustees would be empowered to have recourse were such accumulations retained in the hands of the Trustees as income." (at p160)

In the year of income in question, that ended 30th June 1952, a sum of money became available as income under those trusts for the infant Geoffrey Robert Hobbs. It was in fact not applied for his benefit or paid to him or otherwise disposed of. Certain expenses were deducted from it, but it must be taken, we think, that it fell otherwise within the accumulation clause. It is therefore said to come within the provision of par. (b) of s. 102 (1) on the ground, among others, that it was "accumulated". (at p160)

The question for decison is whether s. 102 (1) (b) applies, in the circumstances we have stated, in respect of the year of income, to the income arising from the parcel of shares allocated to Geoffrey Robert Hobbs and governed by the trust relating to that infant. The question depends on the construction or interpretation of par. (b) of s. 102 (1). It will be seen that there was a sum of money available, that it stood as a sum of income arising from the 2,000 shares which were set aside and appropriated in the books of the trust to Geoffrey Robert Hobbs, an infant. The question is whether that sum of money can be described as income which was, under the trust, in the year of income, payable to or accumulated for, or applicable for the benefit of the child of the settlor, that child being a person who was under the age of twenty-one years and unmarried. (at p160)

We think the answer to the question should be that the sum of money does not come within that description. Paragraph (b) appears to us to be a provision which is directed to a case where there is income which, under the trust deed, in the year of income, is either payable to or accumulated for or applicable for the benefit of the child or children of that person in the sense that the fate of the income must be determined under one or other of those expressions. To state it in other words, the trust must be of such a character that the income must be payable to or accumulated for or applicable for the benefit of the child or children in the year of income. That is to say, it cannot be dealt with otherwise than under these alternatives. (at p161)

In the present case that condition cannot be satisfied. It cannot be stated with certainty that the accumulation is for a particular child or that the income is applicable for the benefit of that child. The trust is contingent, and although it is true that the contingencies are of a kind that make it probable that the child will enjoy the benefit of the accumulation, yet as a matter of law, it is not correct that the income which belongs to the 2,000 shares for that year must be payable to or accumulated for or applicable for the benefit of that child. Geoffrey Robert Hobbs may not attain twenty-five or marry. (at p161)

Considerable discussion has taken place as to the possibility of the word "applicable" bearing the meaning of "may be applied" or the meaning of "must be applied". The view which we take of the clause is hardly expressed by a choice between those two alternatives. We think that the whole clause requires that the disposal of the income in the year in question must be by payment to, accumulation for or application for the benefit of, the child. If you have a case of payment to the child authorised by the trust deed, that of course satisfies the provision. If you have the case of an accumulation for a child that in turn satisfies the provision; if you have neither of these things and a case where the money must be applied for that child, that in turn satisfies the provision. But they are alternatives together covering the ground which the legislature has selected as the test of the special liability. The alternatives together state an entire condition which must be fulfilled in one way or another before the provision is applied to expose the settlor, who has created the trust, to the consequence of having imposed upon his trustee the tax which is stated in sub-s. (2). (at p161)

To fulfil the condition it must be possible to say of the income that under the trust it must in the year of income be payable to or accumulated for or applicable for the child or children and to deal with it otherwise is not within the trust. The fact that the infant is only contingently entitled makes this impossible. (at p161)

In the present case, as we have said, on the failure of the contingent gifts there are cross gifts over, with an ultimate gift to the husband of the settlor or as he may by will appoint under a general power of appointment. That means the conditions which we think are necessary to the application of s. 102 (1) (b) are not fulfilled. (at p162)

The first question in the case stated is as follows:

"Was the said income under the trusts of the said indenture in the said year of income payable to or applicable for the benefit of the said Geoffrey Robert Hobbs within the meaning of s. 102 (1) (b) of the Act?"

That should be answered No. The second question asks:

"Upon the facts herein stated

(a)

is it open to me and

(b)

am I bound to hold that the said income,

under the said trusts in the said year of income was accumulated for the said Geoffrey Robert Hobbs within the meaning of the said s. 102 (1) (b)?"

The answer is "It is not open to the learned judge so to hold". (at p162)

The order will be that the questions are answered as stated and the costs reserved for the judge. (at p162)