Clark v Inglis
[2010] NSWCA 144
•29 June 2010
NEW SOUTH WALES COURT OF APPEAL
CITATION:
Clark v Inglis [2010] NSWCA 144
FILE NUMBER(S):
2009/298412
HEARING DATE(S):
6 May 2010
JUDGMENT DATE:
29 June 2010
PARTIES:
Kathryn Margaret Clark (1st Appellant)
Pamela Ruth Wood (2nd Appellant)
Helen Margaret Inglis (Respondent)
JUDGMENT OF:
Allsop P McColl JA Macfarlan JA
LOWER COURT JURISDICTION:
Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):
2008/1595
LOWER COURT JUDICIAL OFFICER:
Brereton J
LOWER COURT DATE OF DECISION:
30 June 2009
LOWER COURT MEDIUM NEUTRAL CITATION:
Wood v Inglis [2009] NSWSC 601
COUNSEL:
T F Bathurst QC, B Burke (Appellants)
B W Walker SC, J E Thomson (Respondent)
SOLICITORS:
Courtney & Co Solicitors (Appellants)
Smith Lawyers (Respondent)
CATCHWORDS:
TRUSTS AND TRUSTEES – discretionary trust – powers of trustees – legitimacy of accounting approach – trustee entitled to treat unrealised gain on investments as “income” – permissible practice according to commercial accounting standards and principles – trustee validly determined to treat unrealised gain as “income” – acquiescence in annual financial accounts
WORDS AND PHRASES – construction of trust deed – “income”
LEGISLATION CITED:
Income Tax Assessment Act 1936 (Cth) Div 6 & s 97
Trustee Act, 1925 (NSW) s 63
CATEGORY:
Principal judgment
CASES CITED:
Commissioner of Taxation v Bamford [2010] HCA 10; 246 ALR 436
Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (In Liq) [2005] HCA 70; 225 CLR 488
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (Carden’s Case) [1938] HCA 69; 63 CLR 108
QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270
Re Spanish Prospecting Co Ltd [1911] 1 Ch 92
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; 78 CLR 47
McBride v Hudson [1962] HCA 5; 107 CLR 604
Sun Insurance Office v Clark [1912] AC 443
Wood v Inglis [2008] NSWSC 1147; 68 ACSR 420
Wood v Inglis [2009] NSWSC 601
TEXTS CITED:
R W Parsons Income Taxation in Australia (1985, Law Book Co), ch 2
DECISION:
Grant leave to appeal from the orders of the Equity Division on 7 July 2009.
Direct a notice of appeal be filed within seven days substantially in the form in the White Books filed adding to that notice the parties joined to the application on 6 May 2010.
Dismiss the appeal.
Order that the appellants pay the respondents’ costs of the appeal, including the application for leave to appeal.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
2009/298412
ALLSOP P
McCOLL JA
MACFARLAN JATuesday 29 June 2010
CLARK v INGLIS
Judgment
ALLSOP P: This is an application for leave to appeal against orders made in the Equity Division (Brereton J) after the hearing of separate issues: Wood v Inglis [2009] NSWSC 601. The appeal, should leave be granted, was heard concurrently. The issues before the learned primary judge and this Court concerned the accounting for income in a discretionary trust set up by the late Dr William Inglis, who died on 11 October 2007.
Background
On 22 September 1982, Dr Inglis by deed of trust established the Inglis Research Trust (the “Trust”) of which Inglis Research Pty Limited (the “Company”) was the trustee.
Dr Inglis was survived by his second wife, Helen Margaret Inglis (the cross-claimant in the proceedings below), four children of his first marriage: Kathryn Margaret Inglis-Clark, Michael William Inglis, Pamela Ruth Wood and Fiona Jane Inglis (the second to fifth cross-defendants, respectively) and by the one child of his second marriage, William Keith Inglis (the sixth cross-defendant). The Company was the first cross-defendant.
The class of potential beneficiaries included Dr Inglis, his wife and his children. Dr Inglis held eight of ten shares in the Company. Helen Inglis and Michael Inglis held one share each. Those three were, until 2003, the directors of the Company. In 2003, Kathryn Inglis-Clark replaced Michael as a director.
The funds of the Trust were invested in shares, the corpus of the fund at the time of Dr Inglis’ death being over $2 million.
From 1982 to 1998, the accounts of the Trust were prepared by
Mr Wilhem Jansen of Ernst & Young. In those accounts, the share portfolio was valued at the lower of cost and net realisable value. In 1999, a new accountant, Mr Tierney of Manser Tierney & Johnston, took over responsibility for the preparation of the accounts. Thereafter (that is from the financial year ended 30 June 1999 onwards) the accounts were prepared on the basis of marking the share portfolio to market, that is revaluing it to market value and taking the net movement up or down to the profit and loss account as income, or expense. For each of the financial years ended 30 June 1999, 2000, 2001, 2002, 2004, 2005 and 2006, there was an increase in the value of investments. For the year ended 30 June 2003 there was a small decrease.
In these years (other than 2003), the income referable to these increases in value of investments (though unrealised) was distributed to beneficiaries, including Dr Inglis, and lent by him to the Trust. No sale of assets took place; there was no distribution or movement of cash; the accounts, however, recorded such transactions. The total amount distributed to Dr Inglis’ account from 1999 was $1.18 million, providing a loan account balance as at 30 June 2006 of $1,357,580.
Dr Inglis’ estate included the debt due to him by the trust referable to his loan account.
In his last will made 7 December 2005, Dr Inglis left the rest and residue of his estate, which included the debt due to him on his loan account, to Helen Margaret Inglis.
Following Dr Inglis’ death the children of the first marriage formed the view that the accounting treatment of Mr Tierney was mistaken and should be reversed. Helen Margaret Inglis initially agreed to this. She and Kathryn Inglis-Clark, as directors of the Company, signed a resolution on 19 November 2007 to the effect that the Company, as trustee of the Trust, direct the accountants to prepare accounts for the financial year ending 30 June 2007 on the basis that non-current investments were shown at the lower of cost and recoverable amount and to prepare a reconciliation of the resultant difference in the beneficiary loan accounts. The next day, 20 November, they signed a further resolution confirming the reduction of the deceased Dr Inglis’ loan account to $46,576 as at 30 June 2007 and $61,900 as at the date of his death, as a result of the removal of the “unrealised capital gain”. This reduced the loan account by $1,179,739.61. Shortly thereafter, Helen Margaret Inglis refused to cooperate further with this reorganisation of the affairs of the Trust. In particular, she refused to sign cheques in payment of eleven specific legacies. Disputes arose as to the transfer of shares in the Company, the removal of directors and the constitution of the board. It is unnecessary to describe any of these matters other than to refer to the judgment of Barrett J in relation to this: Wood v Inglis [2008] NSWSC 1147; 68 ACSR 420.
In early 2008, Pamela Ruth Wood began proceedings requiring Helen Margaret Inglis do certain things for the administration of the estate. The summons also sought advice pursuant to the Trustee Act, 1925 (NSW), s 63. In those proceedings, Helen Margaret Inglis brought the cross-claim, parts of which were determined by the primary judge.
The essential question resolved by the learned primary judge and which was debated on appeal was the legitimacy of the accounting approach adopted by Mr Tierney and whether or not there had been, through that approach, valid distributions to Dr Inglis such that upon lending back to the company his loan account was as reflected in the accounts up to 30 June 2006 prior to his death.
The approach of the primary judge
The primary judge saw three questions to resolve:
(a)whether the trustee could, consistently with the trust deed, lawfully treat movements in the value of investments as income and distribute it to beneficiaries;
(b)whether the trustee in fact determined to include movements in net market value of investments as income; and
(c)whether the trustee in fact made the disputed distributions.
(Questions (a) and (b), but not (c), were in contest on appeal.)
Whether movements in the value of investments could be lawfully treated as income
The cross-defendants asserted that unrealised gain on the investments could not be characterised as income. The primary judge dealt with this argument at [11]-[17] of his reasons as follows:
“[11] As to income, the Trust Deed provided that the Trustee stood possessed of the Trust Fund upon trust until the Perpetuity Date to apply so much of the income (if any) in any year as it thought fit for the maintenance, education, benefit or advancement in life of all or such one or more of the Eligible Beneficiaries in such shares and manner as it should at any time before the end of that year determine (clause 3(a)(i)); to pay so much of the income then remaining as it shall think fit to all or such one or more of the Eligible Beneficiaries in such shares and manner as it should at any time before the end of that year determine (clause 3(a)(ii)); subject thereto to accumulate and invest so much of the income as it thought fit (clause 3(b)); and in default of any exercise of those discretions in respect of any year, for Dr Inglis absolutely so long as he was alive at the distribution date (clause 3(d) and 14th Schedule). Any determination under clause 3(a) or (b) was irrevocable (clause 3(c)).
[12] The Trust Deed contained no definition of ‘income’. However, clause 6(f) empowered the Trustee:
to determine whether any property or moneys held by the Trustee constitutes capital or income and the trustee’s decision in this respect shall be binding on all persons provided that any distribution of assets to the Trustee and any receipt or profit which is received or made by the Trustee which distribution receipt or profit is included in the income of the Trust Fund in accordance with any relevant income tax legislation shall be deemed to be income of the Trust Fund notwithstanding that at law it may be capital of the Trust Fund unless the Trustee shall on or before the last day of the year after such profit is made or receipt or distribution received declare in writing that the provisions of this sub-clause shall not operate in relation thereto. In the event of any such declaration being made then the distribution, receipt or profit in question shall be capital of the Trust Fund; …
[13] While I accept that authorities from the field of income tax law are not irrelevant on this question, they are also not decisive; moreover, the proviso contained in clause 6(f), set out above, demonstrates that the Trustee’s treatment of income and capital in the Trust accounts did not have to accord with its treatment for income tax purposes.
[14] I do not accept that it cannot be said that a profit has been made (or ‘incurred’, for the purposes of clause 10 of the Trust Deed), just because it has not been realised. Comparison of the value of the assets of an entity at the end of the relevant period with their value at the beginning of that period is one well-recognised means of ascertaining profit [Re Spanish Prospecting Co Limited [1911] 1 Ch 92, 98; QBE Insurance Group v ASIC (1992) 38 FCR 270, 284-5 [53] – [57]].
[15] Two independent expert accountants – Mr Shields and Professor Walker – as well as Mr Jansen, gave evidence. The cross-defendants submitted that the evidence of Mr Shields and Mr Jansen should be preferred; to the extent of any relevant difference, I disagree, as I found Professor Walker eminently qualified, and his opinion thorough, logical and well-supported by reference to authoritative professional publications and standards; although it was said that there were significant differences between the accounting needs of superannuation and insurance trusts on the one hand – practice in connection with which formed part of the basis of his opinion – and discretionary family trusts on the other, these differences were not elaborated and are not obvious, at least to the extent of why market value accounting would be inappropriate in the latter but not the former context. But it matters little, as all three accountants agreed that the market value accounting methodology adopted by Mr Tierney was permissible, albeit that Mr Shields and Mr Jansen thought it imprudent. Even if it were imprudent – a proposition that must be doubted, given its widespread use in connection with superannuation trusts – that would provide no basis for concluding that it was unauthorised by the trust deed. Nothing in the Trust Deed, nor any relevant accounting rule or regulation, precluded the Trustee from adopting it. Moreover, consistent with Professor Walker’s evidence, if the market revaluation method of accounting were adopted, then it would be inappropriate to treat increases in the value of investments other than as income. Accordingly, even without recourse to clause 6(f), the Trustee was entitled to treat movements in the market value of investments as income for the purpose of the trust’s accounts.
[16] That conclusion is only reinforced by clause 6(f). I do not accept that the reference in clause 6(f) to ‘property or moneys held by the Trustee’, coupled with the definition of ‘property’, means that the reach of the clause does not extend to ‘unrealised capital gains’; the purpose of the clause is plainly to avoid disputation as to whether receipts, profits and distributions received by the trust are capital or income by empowering the Trustee to make that determination. The effect of treating ‘unrealised capital gains’ as income is that so much of the value of a share (which is expressly within the definition of ‘property’) as reflects that gain is treated as income. As has already been observed, the proviso contained in clause 6(f) demonstrates that the Trustee may chose to treat as capital in the Trust accounts what is income for income tax purposes (although a specific declaration to that effect is required); likewise it may (and without any such specific declaration) chose to treat as income in the Trust accounts what is capital for income tax purposes. In that context, submissions that ‘unrealised capital gains’ are not income in the ordinary sense of the word are beside the point.
[17] Accordingly, the Trustee was entitled to treat the movements in the net value of investments as income. Accounts prepared on that basis were nonetheless ‘proper accounts’. Moreover, even if the ‘unrealised capital gains’ were not income, they could be distributed as capital under clause 5(a), which gave the Trustee a discretion to apply capital in favour of any eligible beneficiary at any time before the Perpetuity Date.”
Whether the Company (as trustee) in fact determined to treat movements in market value as income
The submissions of the cross-defendants before the primary judge were that:
(a)Mr Tierney had acted under the mistake that he was following Mr Jansen’s practice;
(b) the approach was not justified on the basis of prior accounting practices of the Company or the Trust;
(c) no instruction was given to Mr Tierney to change the accounting practice;
(d) the Company did not formally adopt any change in accounting practice or the allocation of net movement to Dr Inglis’ loan account;
(e) no determination was made under clause 3(a) or (b) of the deed that the sum allocated to Dr Inglis’ loan account on account of unrealised capital gain was an application or payment of income or an accumulation of income; and
(f) no determination or decision was made under clause 6(f).
Mr Tierney gave evidence and was cross-examined. His evidence was accepted by the primary judge. No attempt was made on appeal to challenge these findings, ground one of the draft notice of contention being abandoned. Mr Tierney said that he assumed from an item in earlier accounts providing for diminution in value that the previous accounting policy had been to mark assets to market. He said he did this mistakenly believing that he was following the policy adopted by Ernst & Young. The primary judge found it “astonishing” that Mr Tierney could have made this mistake. Mr Tierney himself described it as “implausible”. Under strong cross-examination, he refused, however, to accept that he had been instructed by Dr Inglis. Thus, the primary judge found (at [21] of his reasons) that there was no express resolution of the Company as trustee, or a direction of Dr Inglis, to Mr Tierney to change the methodology.
The primary judge, nevertheless, concluded (at [38] of his reasons) that the Company, as trustee of the Trust, through Dr Inglis, accepted the accounts from 1999 and thereby validly determined to treat the increase in market value of investments as income from the financial years ending 30 June 1999 to 30 June 2006. The primary judge’s reasoning was contained in [23]-[37] of his reasons as follows:
(a)For each financial year from 1999 to 2006 a balance sheet and profit and loss account for the Trust was prepared as required by cl 10 of the deed by Mr Tierney from records supplied by Dr Inglis. For each of those years a market value methodology was used bringing to account unrealised gains on investments as income, distributing that income to Dr Inglis and crediting those distributions to his loan account.
(b)For each such financial year accounts were prepared for the Company by Mr Tierney which recorded liabilities incurred as trustee, including to Dr Inglis on his loan account.
(c)Each year in March or April, Mr Tierney forwarded to Dr Inglis a bound set of financial accounts for the Company and the Trust for signature and for record purposes. The Company, but not the Trust, accounts made provision for signature. There was evidence that Dr Inglis signed the 1999, 2000, 2001 and 2002 accounts and there were minutes recording resolutions of meetings of the Company for those years (with the exception of 2000) and also 2003 and 2004 adopting the annual accounts. The primary judge inferred that similar documents existed for 2000, 2005 and 2006.
(d)The primary judge inferred that all Company accounts were signed. Each contained resolutions as follows:
“The Financial Statements of the Company for the year ending 30 June 2004, as compiled by Manser Tierney & Johnston, together with the Director’s report and Director’s declaration thereon were presented and it was resolved that they be approved and adopted.”
(e)Dr Inglis took an interest in the financial affairs of the Trust and was aware of the state of his loan account.
(f)The annual resolutions distributing income to beneficiaries conformed, though not always completely, with distributable income including increases in market value of investments. Where there was a lack of conformance, the primary judge found that arbitrary estimates had been adopted for the purposes of the resolution.
(g)The tax returns of the Trust and of Dr Inglis reflected a different approach. That was accepted by the primary judge as a function of Mr Tierney’s views that the unrealised gain (even if taken in as income and distributed to the beneficiaries, as here) was not taxable to a taxpayer in Australia.
(h)Dr Inglis as the controlling mind of the Company had actual authority to make all relevant decisions for the Trust.
(i)The inference was that the Company, through Dr Inglis, approved and accepted the accounts, on a basis that treated increases in the value of the investments as income and distributed such to the beneficiaries, including Dr Inglis, even if it be the case that he may not have looked behind them to examine precisely how the loan accounts were composed or the distributable income derived. Nor did it matter that there was no express authorisation for the change in accounting policy, or that it may have arisen from a misunderstanding.
(j)Dr Inglis made his last will on the footing that a substantial loan account subsisted and would form an asset of his estate.
(k)The single relevant mind, of Dr Inglis, in two capacities (as beneficiary creditor and corporate debtor) understood and intended that the Trust adopt accounts and become indebted to him. That result was consistent only with the act of the Company in adopting the impugned market value methodology.
(l)The power under clause 6(f) was sufficiently exercised when the Company accepted the annual accounts. There was no requirement for that decision to be made by an instrument in writing.
(m)Clause 8(d) of the trust deed did not require a minute or writing as a condition of the validity of the decision by the Company.
The conclusion of the primary judge proceeded principally on the basis of cl 6(f): that there was a determination that property constitutes income. That would only be necessary if the increase in value of investments was otherwise capital. As shall be seen, the expert evidence revealed the entitlement to treat that increase as income on the basis of accepted accounting principles. In this circumstance, and on the basis that the Company and the Trust accepted and adopted the accounts treating the increases in value of investments as income, no determination under cl 6(f) was necessary. This was the proposition contained in ground two of the draft notice of contention.
Whether the Company (as trustee) in fact made the disputed distributions
As the primary judge pointed out, whether or not the Company as trustee made the distributions to Dr Inglis is not of great significance, since cl 3(d) of the trust deed provided that should any income not be dealt with otherwise in accordance with the deed, the trustee shall “hold the same upon trust for” Dr Inglis.
The primary judge noted that there were resolutions resolving to distribute the distributable amount. It was contended that it could be inferred from the evidence of Mr Tierney that these meetings did not take place. The primary judge found, however, that Dr Inglis had authority to act for the Company and that resolution of a duly convened meeting of the Company was not necessary; or, in the alternative, there was the default distribution under cl 3(d).
The primary judge at [43] of his reasons concluded as follows on this question:
“[43] Accordingly, I conclude that, pursuant to clause 3(a) and/or 3(d) of the Trust Deed, there was a valid and effective distribution of the whole of the income shown as such in the annual accounts for each year in question to Dr Inglis, to the extent that it was not validly distributed to William or Mrs Inglis, so that his loan account stood at $1,357,580 as at 30 June 2006. Apparently uncontroversial adjustments to the loan account for drawings during 2006/7, and distributions for 2006/7 and up to the date of death, produce the result that the trust was indebted to Dr Inglis on his loan account at the date of his death for $1,242,640.20.”
The primary judge then addressed the question as to whether the obligation of the Company to repay Dr Inglis’ estate had been subsequently released or otherwise extinguished. This part of his Honour’s reasons rested on the assumption of the failure of the arguments of the cross-defendants that the income had not been distributed and lent back. His Honour dealt with the events after the death of Dr Inglis and concluded that there had been no extinguishment. No attempt was made on appeal to agitate these issues.
On 7 July 2009, the primary judge made orders to give effect to his reasons as follows:
“1. Declare that the purported resolutions of the first cross defendant Inglis Research Pty Limited as trustee of the Inglis Research Trust dated 19 and 20 November 2007 respectively were beyond power and void insofar as they purported to revoke irrevocable and absolute distributions previously made to Dr William Inglis.
2. Order that the first cross-defendant pay the Executors of the estate of Dr William Inglis $1,390,259.94.
3. Judgment for the cross-claimant against the first cross-defendant in the sum of $240,910.12.”
Only order 2 was in issue on the appeal.
The original summons for leave to appeal was deficient for want of parties, Michael William Inglis and the Company. This was rectified by the filing of an amended summons in Court, adding these parties as respondents.
The arguments on appeal and the disposition of the appeal
The primary contentions put on behalf of the applicants were:
(a)the unrealised gain on the investments was not and could not be income, and
(b)no determination was made to treat it as such under cl 6(f) of the trust deed.
The first question was a legal proposition derived both from the terms of the trust deed and independently from the law.
The second question was a question of fact.
A number of propositions were put by Mr Bathurst QC who, with Mr Burke, appeared for the applicants. Before turning to the central submission of Mr Bathurst, two collateral matters concerning the second, factual, question should be noted. The first concerned the tax treatment of the Trust’s affairs. There could be no doubt that the consequence of the distribution of the unrealised gain on investments to beneficiaries (if valid, intended and effected) was to make the beneficiaries, including Dr Inglis “presently entitled to a share of the income of the trust estate” for the purposes of the Income Tax Assessment Act 1936 (Cth), Div 6 and s 97 in particular. In such circumstances, the distributed income fell within the assessable income of the beneficiaries. What is income for the purposes of Div 6 is a question principally for the trust deed: Commissioner of Taxation v Bamford [2010] HCA 10; 246 ALR 436. The treatment in the tax returns of the Trust and the beneficiaries tended against the primary judge’s factual conclusion that a relevant determination was made for cl 6(f) of the trust deed.
Secondly, and also relevant to the factual question, it was submitted that the course that was adopted (if effective) by the making of the distribution and the lending back of the distribution placed the Trust’s solvency in peril and this tended to support the argument that no such potentially damaging determinations were made.
These introductory submissions insinuated, but did not state, that there existed a relevant impropriety or breach of duty (fiduciary or otherwise) in the treatment of the financial affairs of the Trust in the accounts. No such case was run below.
The central proposition upon which the applicants relied on the first issue was that regardless of accounting principles or of income tax law or of company law concerning the availability of profit for the declaration and distribution of dividends, unrealised capital gain, per se, is not property – whether for this trust deed or at law.
The provisions of the deed relevant to this question were as follows:
(a) “Property” was defined in cl 1(j) as meaning:
“… real and personal, movable or immovable property of any description and wheresoever situate including (without limiting the generality thereof) policies of insurance or assurance, securities, cash and choses in action”
(b) “Securities” was defined in cl 1(k) as meaning:
“… shares, stock debentures and notes of any kind and rights thereto and options therefor of or issued by any Company or any interest in a unit trust”
(c) “The Trust Fund” was defined in cl 1(n) as meaning:
“(i) the Initial Sum,
(ii)any further or additional property which any person may donate to or vest or cause to be vested in the Trustee to be held upon the trusts and with and subject to the powers and provisions hereof,
(iii)any accumulations of income by the Trustee under the provisions of Clause 3(b) hereof, and
(iv)the property for the time being held or acquired by the Trustee in pursuance of the exercise of its powers and authorities under this Deed or representing the Initial Sum, the further or additional property (if any) aforesaid and the accumulations referred to in paragraph (iii) of the sub-clause”
(d) There was no definition of “income” or “capital”.
(e) Relevantly, cl 3 dealt with income as follows:
“3. (a)The Trustee shall stand possessed of the Trust Fund UPON TRUST until the Perpetuity Date to:
(i)apply so much of the income (if any) thereof in any year as the Trustee shall think fit for the maintenance, education, benefit or advancement in life of all or such one or more to the exclusion of the others or other of the Eligible Beneficiaries and if more than one in such shares and in such manner generally as the Trustee shall at any time or times before the end of that year determine, and/or
(ii)pay so much of the said income then remaining as the Trustee shall think fit to all or such one or more to the exclusion of the others or other of the Eligible Beneficiaries and if more than one in such shares and in such manner generally as the Trustee shall at any time or times before the end of that year determine.”
(Clause 3(b) dealt with accumulation.)
…
“(c)Any determination made pursuant to sub-clauses (a) and (b) of this Clause shall be irrevocable with respect to the income of the year to which the determination relates.
(d)Should any income not be paid applied accumulated or otherwise dealt with in accordance with sub-clauses (a) and (b) of this Clause the Trustee shall hold the same upon the trusts (if any) set out in the Fourteenth Schedule.”
(Dr Inglis was named in the 14th schedule.)
(f)Clause 5(a) dealt with the application of capital and was relevantly as follows:
“The Trustee may at any time before the Perpetuity Date convey or transfer the whole or any part of the capital of the Trust Fund or or pay any sum or sums (either in addition to or in substitution for any share of income) to all or such one or more to the exclusion of the other or others of the Eligible Beneficiaries.”
(g)Clause 6 dealt with the powers of the trustee, cl 6(f) of which was set out by the primary judge ([14] above).
(h)Clause 8 dealt with rights and privileges of the trustee: cl 8(a) dealt with remuneration; cl 8(b) provided for the costs of administration to be charged against income; cl 8(c) dealt with the lack of obligation of the trustee in respect of disclosure of documents to the beneficiaries; cl 8(d) dealt with the exercise of trustee’s powers and discretions. Its terms were otherwise dealt with by the primary judge is a manner that does not call for discussion.
(i) Clause 10 dealt with accounts as follows:
“At the end of each year the Trustee shall cause to be prepared a balance sheet showing inter alia the assets and liabilities of the Trust Fund as at the end of the year and a profit and loss account showing inter alia the profit and loss incurred during the preceding year and the Trustee may have these accounts audited at the expense of the Trust Fund or the income thereof as the Trustee shall determine by a registered public accountant (who may be a partner of a Trustee or a director or shareholder of the Trustee) selected by the Trustee.”
Mr Bathurst submitted that the primary judge distracted himself with questions of profit – the real question being whether there was or could be income, under the deed and at law. Profit can exist and be identified as an accretion of value between two points of time: Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 esp at 98, and QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 at 284-289 and as such can inform or create profit. It was not, and could not be, however, income.
It was submitted that what was said by the High Court in Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (In Liq) [2005] HCA 70; 225 CLR 488 at 503-505 [42]-[46] supported the proposition that the concept of profit is wider than income, and that notions of profit should not be imposed on to the terms of this deed when it speaks of income.
It was necessary for Mr Bathurst to submit that the accountants who gave evidence were fundamentally mistaken. Dr Walker, on the one hand, and Mr Shields and Mr Jansen, on the other, disagreed as to the appropriateness of Mr Tierney’s treatment of unrealised gain on investments as income in the accounts; but none said it was not an available accounting treatment. Mr Bathurst submitted that there must be an identifiable fund derived or gained from the activities of the trust for there to be income. He submitted that the increase in value of static investments was not income, with the exception perhaps of trading stock and matters of that nature. He relied on Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; 78 CLR 47 and ordinary notions of income.
Whilst it can be accepted that the notion of profit is different from income, I cannot agree with the submission that the trust deed and the law do not permit unrealised increases in value of investments to be treated as income.
The definitions of “Property” and “Securities” in the deed are apt to cover listed shares. The property is so much of the shares as represents the gain in value. The issue is whether unrealised accretions in value of such shares can fall within the concept of income. This is a question to which no legal standard exists. It is not constricted by concepts available in taxation law, as to which see generally R W Parsons Income Taxation in Australia (1985, Law Book Co), ch 2. No case or legal principle or statute was cited that such increase in value could not be characterised as income referable to shares. That income is conceptually different from profit can be accepted; it does not follow from that that income cannot be represented by unrealised gain, or, that if it be a form of capital it cannot pursuant to the terms of the trust deed be determined to be income.
Crucial to the question is the view of business people and accountants, given the commercial and accounting character of the question. The question being of a business and accounting character in usage and concept, the court should pay heed to the principles, practice and approach of commercial accountancy: Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (Carden’s Case) [1938] HCA 69; 63 CLR 108 at 153-154 (Dixon J); Sun Insurance Office v Clark [1912] AC 443 at 455 and QBE v Australian Securities Commission at 288-289 (per Lockhart J) and the cases there cited.
Here, the accounting evidence was clear. The three accountants set out their agreement and disagreement in a joint report. That agreement included these propositions:
“6. that the accounting policies for The Inglis Research Trust were changed for the year ended 30 June 1999, whereby investments were revalued to market value and revaluation increments and decrements were counted as part of the Trust’s Income. These policies were maintained in subsequent years up till and including that ending 30 June 2006.
7. that the Trust’s income including unrealised increments and decrements on marketable securities was distributed to the beneficiaries from 1999 to 2006.”
Mr Jansen (with whom Mr Shields agreed) stated that “counting revaluation increments and decrements as part of income is permissible” (emphasis added), though he was of the view that such an approach was imprudent.
Dr Walker, whose evidence the primary judge preferred (there being no complaint on appeal about this) stated that accounting standards, principles and practice permitted the practice. The joint expert report stated:
“Walker also maintains that AASB 1041 is only one of several authorities that indicate that the accounting treatment adopted by the Trust was valid and acceptable. Other authorities are cited in Walker’s report in paragraphs 15-22, paragraphs 42-51, paragraph 56, and paragraphs 79-84. Further, he notes that the accounting profession’s Statement of Accounting Concepts SAC 4 (cited in paragraphs 79-81 of his report) was withdrawn in 2005, and replaced by the Australian Government’s Australian Accounting Standards Board with Framework for the Preparation and Presentation of Financial Statements (July 2004). The Framework document was applicable to annual reporting periods beginning on or after 1 January 2005. The Framework document further reinforces the point that the recording of increments arising from the revaluation of marketable securities to reflect current market values at balance date as part of income was an appropriate and accepted accounting treatment. The Framework document includes the following under the heading of ‘Income’:
The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent (paragraph 74).
Gains represent other items that meet the definition of income and may, or may not, arise in the course of ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in this Framework (paragraph 75).
Gains include, for example, those arising on the disposal of non-current assets. The definition of income also includes unrealised gains, for example, those arising on the revaluation of marketable securities and those resulting from increases in the carrying amount of long term assets … (paragraph 76).
…
Walker reiterates that the Framework document provides an authoritative explanation of the accounting concept of ‘income’ and that has cited the Framework document (and other definitions of the concept of ‘income’) to reject claims set out in various Pleadings that the accounting concept of ‘income’ does not encompass unrealised gains arising from the holding of marketable securities, and that the accounting treatment adopted by the Trust from 1999 to 2006 was incorrect and that a reversal of that treatment was ‘necessary’.
…
Walker reiterates the points in paragraph 79 of his Affidavit: that the passage quoted by Mr Shields was not a definition of the concept of ‘revenue’. Rather, it is an extract from an accounting standard, namely, paragraph 6.1 of AASB 1041 and only deals with the circumstances when revenue from certain types of sale transactions are to be recognised. He notes that the inclusion of unrealised gains in the market value of investments as part of income is explicitly recognised in authoritative literature, including Statement of Accounting Concepts SAC 4 and in the AASB’s Framework for the Preparation and Presentation of Financial Statements (2004) cited above in paragraph 16 of this report.
…
Walker believes that Shields and Jansen’s comments about the distribution of losses are hypothetical as The Inglis Research Trust had not incurred net losses. He reiterates that there are a range of precedents whereby unrealised gains in the value of investments are included as part of income in accord with requirements of accounting standards. In relation to the precedent provided by practices in the superannuation industry, superannuation funds had commonly valued investments at market values before 2003, in accord with their trust deeds, so if it is implied that these practices only reflected regulatory intervention that implication is ill-founded.
…
Walker considers that the balance of the deceased’s loan account was correctly calculated in terms of accounting procedures adopted by the Trustees up until 30 June 2006, and reflected valid and appropriate decisions of the Trustee to distribute income (having regard to the fact that ‘income’ had been calculated in terms of a valid and acceptable accounting treatment and in a manner consistent with the Trust Deed). He rejects any suggestion that (from an accounting perspective) such a treatment was incorrect, or unlawful.”
The position of Messrs Jansen and Shields on permissibility of the approach was summarised as follows in the joint document:
“Jansen and Shields agree that the accounting treatment adopted by the Trust was permissible from an accounting perspective but imprudent from a financial management and taxation perspective for the reasons outlined in paragraph 14.”
In the absence of a definitive legal standard to the contrary, the clear views as to the accounting standards permitting the approach are persuasive. The views of Dr Walker, in particular, were clear. The conception of “income” encompasses both revenue and gains. “Revenue” is the kind of concept to which Mr Bathurst directed his submissions. “Gains”, on the other hand, need not be realised, if they represent increases in economic benefit. This was accepted by Mr Jansen and Mr Shields.
No argument was put on appeal as to the legal (as opposed to merely accounting) standard set by accounting standards such as AASB 1041.
The judge accepted this accounting evidence and no reason was put forward to gainsay its relevance for the determination of the question here. Ronpibon is not authority to the contrary; the lack of assistance obtained by the High Court in Sun Alliance at 505 [44] from Carden’s Case was in a different context and related to a later passage in Dixon J’s reasons.
The acceptance of the accounting evidence of Dr Walker and the recognition of the permissibility of the approach by Messrs Jansen and Shields mean that no determination under cl 6(f) was necessary to treat the unrealised gain as income. The accounts treated it as such under accepted accounting concepts. Clause 6(f), concerned as it is with determinations that capital is income or income is capital for trust purposes, was not necessary as a basis to treat the unrealised increases in value as income.
Notwithstanding this lack of centrality of cl 6(f), I will address the second question. Was a determination made under cl 6(f) of the deed?
I have already referred to the two introductory submissions put by Mr Bathurst on this question.
Mr Bathurst submitted that acquiescence in the accounts was not a determination to treat either the capital profit in each year as income or the accretion in value of property as income. He submitted that the “resolutions” of the Trust dealing with income referred to by the primary judge at [29] of his reasons were drawn up after the event and were not operative. Further together with the tax returns, they reveal no determination under cl 6(f) was made.
I reject these submissions. For the reasons identified by the primary judge there were clear acts of the Company, as trustee, determining that increase in the value of investments would be treated and held as income. Mr Bathurst accepted the authority of Dr Inglis. No case of breach of duty (fiduciary or otherwise) or of vitiating mistake was made. The treatment by the accounts of “movement in net market value of investments” as income was effective, in all the circumstances, to characterise such as income under the trust deed.
These corporate acts were sufficient to lead to the conclusion that the Company and the Trust treated the unrealised gain as income, being an available accounting approach. On this basis, as I have said, no determination under cl 6(f) was required. If, however, the long term nature of the investments vested them with the character of capital, for the reasons given by the primary judge there was a determination by the Company as trustee to treat such gain (on this hypothesis, capital) as income.
In assessing these corporate acts of the Company as trustee it is to be recognised that it is for the Company as trustee, within the limits of the terms of the trust and the law, to determine what is income: McBride v Hudson [1962] HCA 5; 107 CLR 604 at 623.2 and 623.8-624.
For the above reasons, the orders that I would make are:
1.Grant leave to appeal from the orders of the Equity Division on 7 July 2009.
2.Direct a notice of appeal be filed within seven days substantially in the form in the White Books filed adding to that notice the parties joined to the application on 6 May 2010.
3. Dismiss the appeal.
4.Order that the appellants pay the respondents’ costs of the appeal, including the application for leave to appeal.
The result of the accounting treatment by Mr Tierney and of the case would appear to raise serious taxation issues by reference to taxation returns made for the relevant years. No suggestion of impropriety was made in the proceedings. I suggest none. Nevertheless, the proceedings raise considerations of the previous tax treatment of these gains. No doubt appropriate disclosure either has been, or will be, made to the revenue authorities to the extent considered appropriate.
McCOLL JA: I agree with Allsop P’s reasons and the orders his Honour proposes.
MACFARLAN JA: I agree with Allsop P.
**********
LAST UPDATED:
30 June 2010
6
9
2