Elecnet (Aust) Pty Ltd (as Trustee for the Electrical Industry Severance Scheme) v Commissioner of Taxation of the Commonwealth of Australia
[2016] HCATrans 237
[2016] HCATrans 237
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Melbourne No M104 of 2016
B e t w e e n -
ELECNET (AUST) PTY LTD (AS TRUSTEE FOR THE ELECTRICAL INDUSTRY SEVERANCE SCHEME) (ACN 080 344 458)
Appellant
and
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
KIEFEL J
GAGELER J
KEANE J
NETTLE J
GORDON J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 11 OCTOBER 2016, AT 10.17 AM
Copyright in the High Court of Australia
MR A.H. SLATER, QC: If the Court pleases, I appear with my friend, MR B.L. JONES, for the appellant. (instructed by Mills Oakley)
MR G.J. DAVIES, QC: If the Court pleases, MR S.J. SHARPLEY, QC and I appear with our learned friend, MR A.T. BROADFOOT, for the respondent. (instructed by Australian Government Solicitor)
KIEFEL J: Yes, Mr Slater.
MR SLATER: Your Honours, this is an appeal from a decision concerning a ruling given by the Commissioner of Taxation under Division 359 in Part I of Schedule 1 to the Taxation Administration Act. There is only one issue in the appeal, and the issue is whether the trust of which the appellant is trustee is a unit trust for the purposes of Division 6C of Part III of the 1936 Act. The appellant is the trustee of a trust known as the Electrical Industry Severance Scheme and in submissions I will call that either the EISS trust, or simply the trust.
Your Honours, the structure of our oral submissions is that we will first go to the factual context apart from the terms of the deed, then to the statutory provisions and their context and the meaning of “unit trust” as it is used in Division 6C, then to the terms of the deed, and finally to matters arising from the judgment of the Full Court and from our friends’ submissions.
In our submission, the issue should be approached not from any a priori assumption about what is or is not a unit trust, but from the viewpoint of the words of the statute, and having examined the words of the statute which did examine the terms of the trust, and applied the words of the statute to the terms of the trust to determine whether the statutory criteria are met.
Your Honours, if I could go first to the factual background. Because this is an appeal from a ruling, the factual context is quite severely limited. It is limited to the scheme which was ruled on. Your Honours will find the scheme at page 72 of the appeal book, starting at about line 37 and through to the top quarter of page 73. The material which goes on from about line 25 of page 73 is concerned with a question which is not in issue in the appeal and that is the question whether the trustee was carrying on a business.
Your Honours, the EISS was established to provide portability and security of termination and redundancy benefits to workers in the electrical industry. Your Honours will see that at about line 46 on page 72. It is an approved worker entitlement fund, as defined in section 58E(b) of the Fringe Benefits Tax Assessment Act. I will not take your Honours to that but for reference your Honours have the CCH legislation – it is on page 1310 of volume 3.
The consequence of it being an approved worker entitlement fund is that no fringe benefits tax is payable on contributions into the fund. The employers are required to pay into the fund for the benefit of their employees under a range of industrial agreements and awards. There are some 1,000 employers and some 31,000 worker accounts and the terms of the trust on which the funds paid in are held by the appellant are set out in the deed, which commences at page 1 of the appeal book. I will come back to that momentarily.
Could I then turn to Division 6C of the 1936 Act? Your Honours will find that in volume 2 of the CCH legislation. I am not sure whether your Honours are using the paper version or an electronic version, but for those who are using the paper version I will give page references. Division 6C is an extension of Division 6B. I am sorry, I said I will give the page reference. It begins on page 1892 of volume 2.
Division 6B was a response to structures which were established in the 1970s whereby first property income and then trading income was diverted from companies to trusts so as to be able to be passed on to superannuation fund and non‑resident beneficiaries without bearing the intermediate burden of company tax. This was at a time when Australia had a classical taxation system for companies, that is, companies paid tax, they paid dividends, and shareholders paid tax on the dividends.
The current system, as your Honours will recall, is that it is an imputation system so the shareholders get the benefit of the company tax. That was not so in the 1970s, so that there was a definite incentive to escape liability to company tax on income. The provisions of Division 6B and subsequently of Division 6C were concerned with taxing the trustee in the same way as a company. There were ancillary provisions in both divisions to deal with distributions to beneficiaries and treat them, in effect, as if they were dividends paid by a company.
The problem which arises in the present appeal arises from the circumstance that Division 6B and Division 6C each use undefined terms, the same terms. One of those terms is the term “trust”. That term appears more than 5,000 times in the present version of the Acts. There was not quite so many in the 1936 version when it was enacted but it was still quite frequently there. Although it is undefined, the word “trust” has a well‑established meaning in equity. Although, if one reads the various texts one will find that a conclusive definition has eluded text writers but it has not been needed by the courts. Courts have never had any difficulty determining what is or is not a trust.
In the context of the Income Tax Assessment Act, this Court decided in a matter of Bamford v Commissioner of Taxation (2010) 240 CLR 481 that the word “trust” as used in Division 6 and, consequentially, in Divisions 6B and 6C, although they were not in issue in Bamford’s Case, took its content from the general law. Your Honours will find that observation on page 501 at paragraph 17.
The expression “unit trust” now appears in over 50 provisions of the combined 1936 and 1997 Acts but it appears without a definition in any of them. Now, we set out in our written submissions at paragraph 31, and I will not repeat what is said there, that there are references to unit trust and units in three categories of provisions. Some of those concern the consequences of the creation of, or dealing with, or extinguishment of units, or entitlements called units.
Those provisions are mostly to be found in the capital gains tax provisions of Part 3‑1 of the 1997 Act. Some of the provisions, a second category, concern consequences for the beneficiary or for the trustee of a trust being a unit trust, and the third category which includes Division 6C is a category of provisions which are concerned with the liability of the trustee to pay tax at corporate rates. It is, in our submission, not necessarily the case that the expression “unit trust” has precisely the same meaning in all three categories of provisions. It depends in each case on the terms and purpose of the part of the legislation in which the expression appears so that the inquiry in the present case, in our submission, begins with the terms of the legislation.
If I may, I will take your Honours next to those and, as I said, in the CCH legislation they begin at page 1892. But may I first take your Honours to section 102S, which is the operative provision and which appears on page 1902 of the print? Section 102S provides that:
The trustee of a unit trust that is a public trading trust in relation to a relevant year of income shall be assessed and is liable to pay tax ‑
and it goes on; I will not take your Honours any further than that. Two things to note there: it is just the trustee of a unit trust, that is all that is said about the nature of the trust, and the unit trust must be a public trading trust. Now, the term “public trading trust” is defined in the legislation and the definitions to a degree go backwards through the Act. So if I could take your Honours for present purposes to section 102R(1)(b), your Honours will find the chapeau to subsection (1) at the foot of page 1901:
A unit trust is a public trading trust in relation to a relevant year of income –
Then we can pass over paragraph (a), because it relates to years which are long past, and go to paragraph (b):
where the relevant year of income is the year of income commencing on 1 July 1988 or a subsequent year –
then the conditions are, first:
(i)the unit trust is a public trust ‑
Second:
(ii)the unit trust is a trading trust ‑
in each case “in relation to the relevant year of income”, and third:
(iii)either of the following conditions is satisfied:
(A) . . . is a resident unit trust –
or it:
(B) . . . was a public trading trust in relation to a year of income preceding –
the present, and:
(iv)is not a corporate unit trust within the meaning of Division 6B –
So one can put aside the fourth requirement for the moment; that simply ensures that 6B and 6C do not overlap. Now, the criteria for being a resident unit trust are in section 102Q, which is on page 1901. I do not think I need trouble your Honours with that. There is no question here that this is a resident unit trust. The criteria for it to be a public unit trust is in section 102P which begins on page 1898, and that provides:
(1)For the purposes of this Division, but subject to the succeeding provisions of this section, a unit trust is a public unit trust in relation to a year of income if, at any time during the year of income:
(a)any of the units in the unit trust were listed for quotation in the official list of a stock exchange . . .
(b)any of the units in the unit trust were offered to the public; or
(c)the units in the unit trust were held by not fewer than 50 persons.
The present is a case where neither (a) nor (b) is satisfied, but (c) is. There is an alternative test in subsection (2) with which your Honours are not concerned, and that is a test the substance of which is that the trust is taken to be a public unit trust if units in the trust that entitled the holder to 20 per cent of the beneficial interests in either income or capital were held by exempt unitholders. That, as I said, is not a matter which need concern your Honours in this case.
Now, the criteria for a unit trust to be a trading trust your Honours will find in section 102N on page 1897 at the foot of the page:
For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:
(a) carried on a trading business; or
(b)controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.
The criterion in section 102N is not relevant to the present appeal. What is a trading business is defined in section 102M. I will tell your Honours that in section 102M – and your Honours will find these definitions on page 1894:
trading business means a business that does not consist wholly of eligible investment business.
The “eligible investment business” definition is on page 1892. But we are not concerned with those questions in this appeal because the only question which arises on the ruling and on the limitation imposed on the proceedings by an order made by the primary judge is the question whether this trust is a unit trust. For that reason, your Honours need not be concerned with any of the qualifying sections, section 102MA to section 102MD.
What is notable about these provisions is that all of them use the expression “unit trust” without definition. There is, however, some aid to construction to be obtained from the terms of section 102M, which is the interpretation provision for Division 6C. The first is to be found in the definition on page 1894 of the word “unitholder”:
unitholder, in relation to a prescribed trust estate, means the older of a unit or units in the prescribed trust estate.
So no more is required than that the person be the holder of one or more units. The term “unit” is defined in section 102M, immediately above that:
unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate.
Your Honours, our friends contend and Justice Jessup in the Full Court found significance in the reference to “prescribed trust estate” in those two definitions and “prescribed trust estate” is a term which is used in section 102T, which deals with the consequences of distributions made by the trustee. However, in our submission, that significance is misplaced for this reason. When one looks at the definition of “prescribed trust estate”, which is also on page 1894, it is no more than a public trading trust in any year of income. The wording of the definition is:
prescribed trust estate means a trust estate that is, or has been, a public trading trust in relation to any year of income.
The definition adds no more than a temporal element. The role of the definition is to deal with the case where the trust estate ceases to satisfy one or more of sections 102N, 102P or 102Q in a year of income. So, for example, one sees it in the definition of “unit trust dividend” at the foot of page 1894:
unit trust dividend . . .
does not include:
(c)money paid or credited, or property distributed, by the trustee of a prescribed trust estate to the extent to which the money . . . is attributable to profits arising during a year of income in relation to which the prescribed trust estate was not a public trading trust ‑
So that income of the trust fund which was generated before it qualified as a public trading trust, for example, by reason that it was generated before it became a public trading trust, is taken outside the scope of unit trust dividend and outside the scope of the special treatment of distributions in section 102T.
The definitions of “unit” and of “unitholder”, in our submission, inform the meaning of the expression “unit trust” as used in all the other provisions of the division. So, for example, section 102P deals with who holds units and who is a unitholder in the unit trust. It uses the term “defined” in section 102M. One finds that on pages 1898 to 9, in each of paragraphs (a), (b) and (c) of subsections (1) and (2). I will not read them to your Honours but I draw your Honours’ attention to them being there.
So, your Honours, the question then is: what can be drawn from the definition of “unit”? Well, there are, in our submission, seven things that can be drawn from the text of the division about the content of the expression “unit” as used in the division. The first comes from the words of the definition itself. It is, however described; it is not necessary that it be called a unit trust, nor that the unit be called a unit. That is perhaps unnecessary to say it is well established in this Court that a label is not decisive.
I will give your Honours a reference, for what it is worth, to the judgment of Justice Windeyer in Radaich v Smith (1959) 101 CLR 209, and one might say that had the draftsman of this trust sprinkled it and decorated it liberally with the words “unit” and “unit trust”, we would probably not be here, but decorating it with those words would not have made any difference to its substance.
The second thing that can be drawn from the definition is that a beneficiary’s interest in the trust estate can be a unit although it is not an aliquot beneficial share in the assets. That is, although the units do not all carry the same and an equal share of both income and capital distributions.
First, it is enough that it is a beneficial interest. Second, it may be in either income or property, not necessarily both. The draftsman appears to have assumed that property did not include income. That is perhaps a slight confusion of concepts but it is clear enough that it does not have to be in both income and property. So, an interest in income only can be a unit and that is not uncommon.
NETTLE J: But why does it flow from that that unit does not bespeak equal rights as between units?
MR SLATER: Because there can be units which have rights in income and others which have rights in capital. The units which have rights in capital have no rights in income. That is an unequal distribution.
NETTLE J: I am sorry, I put the question badly. Why does it bespeak that there does not have to be equality, say as between income units or as between capital units?
MR SLATER: It does not bespeak that but nor does it require it.
NETTLE J: Granted, but it is at best neutral, is it not?
MR SLATER: As among units of the one class, yes. I would accept that. The interest is that comprises a unit may be in any of the income or the property, it need not be in the whole of the income nor in the whole of the property. That is a proposition which I am putting somewhat to the contrary of what your Honour Justice Nettle just put to me but we made that assertion.
We would say that an interest in the trust estate carrying no share of income can be a unit and an interest in some part only of the property and not all the property and not the income can be a unit. So that an interest, for example, in all of the property in Queensland can be a unit even though it carries no interest in the property in Victoria; that is a point which is relevant to the trust in the present case and I will come back to the relevance when we deal with the present trust. The third requirement that can be divined from the definition is that it must be a beneficial interest in income or property of the trust estate.
What is meant by a “beneficial interest” has been the subject of some discussion but this much, at least, can be elicited from the authorities. First, the object of a bare power does not, in right of being such an object alone, have such an interest. The object of a bare power by reason of being such an object has only the right to be considered. I will give your Honours some references to authority without taking your Honours to it but just for convenience. In relation to that proposition, Kennon v Spry (2008) 238 CLR 366 at paragraph 74, citing the famous decision of the House of Lords in Gartside v Inland Revenue Commissioners (1968) AC 553.
Second, the object of a trust power as distinct from a mere power does have such an interest. The trustee must exercise a trust power or the Court will. One will find that proposition discussed and established in the decision of the House of Lords in McPhail v Doulton (1971) AC 424 in the speech of Lord Wilberforce starting at the foot of page 456 and going over to the top of page 457. The other members of the House agreed with his Lordship.
The third proposition is that an object of a power who is also a taker in default has by reason of the latter character a defeasible beneficial interest. The best authority for that is probably the decision of the New Zealand court in Kain v Hutton (2008) 3 NZLR 589 at 25, which was adopted by this Court in Kennon v Spry.
The fourth thing to be said about a beneficial interest is that a contingent interest will suffice to be a beneficial interest. It is a contingent interest which is held in all but income and, indeed, during any year of income, in income itself by unitholders in a unit trust such as was the subject of the decision of this Court in CPT Custodian v Chief Commissioner of State Revenue. It is an interest in property which is contingent on the unitholder being a unitholder at the time the fund is wound up. Until then, the typical deed will say that the unitholder has no interest in any particular asset, although, as the Court said, there is a beneficial interest in the whole of the assets in the sense that the unitholder has an equitable proprietary state in the fund and a right to require it to be duly administered.
Takers in default – that is, those who, in a typical discretionary trust, will take a share in the corpus or a share in the income of a year if the trustee does not exercise a power to appoint elsewhere – are in the same position. One finds that in Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226 at 237, paragraph 21.
I said a moment ago that it is the same in relation to income as in relation to corpus. That is because during the year of income, the amount of the income of a trust estate is unascertained. It cannot be ascertained until the year has concluded. Someone who is a unitholder during the year will not have a vested interest in income, even if the income is to be distributed to all the unitholders equally at the end of the year, because until the end of the year arrives, one cannot be sure that the unitholder will still be a unitholder, or what the income will be.
Your Honours, the fifth point to make about a beneficial interest is that an interest to take effect at a future time, whether it is contingent or vested but not in possession, will suffice. The interest may be defeasible, but it is still a beneficial interest.
Your Honours, I will come back later to why we say that the requirement of a beneficial interest is satisfied in this case, but sticking with the terms of Division 6C and the definition of “unit” in section 102M, the fourth thing to be noted about it is that it is an inclusive and not an exhaustive definition. When one looks at the definitions in section 102M, one finds that some of them are exhaustive definitions – for example, the definition of “net income” means “the total assessable income”. “Property”, on the other hand, includes the chose in action, whereas the “relevant year of income” means “the year of income” et cetera. The section does draw a distinction between those definitions which are exhaustive in the sense that they mean something, and those which are inclusive in the sense that they include, but are not exhausted by, something.
GAGELER J: So what is left? On your interpretation of the definition, what is left?
MR SLATER: What could be included that is not?
GAGELER J: Yes.
MR SLATER: A solely voting interest under a deed as a unit trustee which says that the holder of a unit has the right to vote or the exclusive right to vote but no share in income or corpus would be such a case. There have been trust funds or trust estates which have been created with such rights and we have given some examples in the instances to – if your Honours will excuse me, I have just forgotten the number, I think it is paragraph 20 of our written submissions.
The fifth thing that can be elicited from the provisions of Division 6C is that a unit must be capable of cancellation, extinguishment or redemption. One finds that requirement implicit in the definition of unit trust dividend which refers to payments made on the cancellation, extinguishment or redemption of a unit and excludes them from unit trust dividends which are subject to the operation of section 102T.
KIEFEL J: Is that to acknowledge then that it is something that comes into existence?
MR SLATER: That a unit is?
KIEFEL J: Yes.
MR SLATER: Yes, it is, and I was going to come to that in a moment, if I may ‑ in just a moment, answer your Honour’s question in that way. Before getting to that, if I could just finish dealing with the concept of cancellation, extinguishment or redemption. Cancellation or extinguishment impose no limitation on what is the nature of a unit but redemption, it seems to us, does impose some limitation. It imposes the idea of a discharge of a unitholder’s rights by payment or delivery of property to the unitholder.
That, it seems to us, involves the idea that the interest must be capable of measurement so that the amount payable on redemption can be ascertained. We would say that the measurement is not constrained in its nature. It can be by reference to the terms of the beneficial interest, for example, to an amount or to a share of corpus or of income. It can be by reference to a sum of money. It can be by reference to the transfer of a particular item of property effecting a redemption. It is not necessary that redemption be at something which might be called the “market value of the unit”. The concept of the market value and units tends to be a little fluid depending – because the one depends on – the market value would depend on the rights attached to the unit.
Now, the sixth thing that we draw from the language of the division is that the terms of the instrument regulating the trust estate must be capable of providing for more than one unit because a unitholder is said to be able to hold a unit or units. In our submission, the units may be of different classes. They may confer an interest in income or in property or in both. They may comprise classes conferring different interests, only in income, or different interests only in property. That is the function of the words “in any of” in the definition of “unit”.
KIEFEL J: Taking your (e) and (f) together, Mr Slater, does that mean that any measurement of an interest amounts to a unit, or putting it the other way, any interest capable of measurement can be a unit?
MR SLATER: Yes, although I think we have suggested to the Court that it must be capable of redemption ‑ ‑ ‑
KIEFEL J: Why?
MR SLATER: ‑ ‑ ‑ which may be an additional qualification to what your Honour just put to me.
KIEFEL J: Perhaps.
MR SLATER: It must also be capable of creation, which is the point that your Honour asked me about earlier, which I am about to come to. But, subject to those qualifications, I think the answer to your Honour’s question is yes. Just to finish off what I was saying, at least within a class the entitlements of the units must be capable of measurement or delineation in some way for the purpose of redemption and for the purpose of making distributions which qualify as unit trust dividends in section 102M.
The seventh point is the one that your Honour the presiding Judge put to me a moment ago. The units must be capable of being created on the payment of money or the transfer of property to the trustee and again we think that is implicit in the terms of the paragraph (d) of the definition of “unit trust dividend” which speaks of money paid or property transferred to the trustee for the purpose of the creation or issue of the units.
KIEFEL J: There is a slight distinction between being capable of creation and coming into existence, or is there not? There has to be units in fact at some point, do there not?
MR SLATER: Yes.
KIEFEL J: So the capability of coming into existence is not quite – it is that they do in fact come into existence.
MR SLATER: I responded to your Honour’s question a bit too quickly. For there to be a unit, it must come into existence, yes. For the trust estate to be a unit trust estate it is enough that there is the capacity because in the second case one is dealing with the quality of the trust estate and not with the quality of the unit. Does that answer your Honour’s question?
KIEFEL J: Yes, thank you.
MR SLATER: So, your Honours, we say that what one can draw from these matters is that the concept of “unit” in section 102M is extremely fluid or protean. It is not constrained to a divided share in both income and capital such as is contended for by our friends or was, at least implicitly, adopted by the Full Court below. It is not limited ‑ ‑ ‑
KEANE J: So that it is not to be considered as analogous to a situation of share capital?
MR SLATER: There are two parts to the answer to that, your Honour. The first is that I suspect, but I may be doing your Honour a disservice, that when your Honour speaks of analogous to share capital your Honour is thinking of BHP where there are only ordinary shares and they are all equal.
KEANE J: No, just any company capital structure where there is a subscription to the capital of the company and distributions of the income or capital of the company via shareholding.
MR SLATER: Analogous in the sense that it performs a somewhat similar function, yes. Obviously there is in jurisprudential theory and in a whole range of legal consequences a very substantial difference between a company and a trust and the Full Court ‑ ‑ ‑
KEANE J: Absolutely, but are we not here concerned with a division of the statute that was brought into existence because of a perception of similarity.
MR SLATER: Yes. Yes, we are.
KEANE J: Is the notion of a unit informed by that analogy?
MR SLATER: Informed but not constrained. So there is a ‑ ‑ ‑
KEANE J: While I have interrupted you, looking at 102P(a) and (b) it does seem to contemplate units that are capable of being offered for subscription.
MR SLATER: Yes, indeed it does.
KEANE J: Two people who will become unitholders by subscribing.
MR SLATER: Yes. We do not shy away from that. Obviously, the clear and simple concept, the one which appealed to their Honours below and appeals to our friends, is the simple concept as in, for example, CPT Custodian. I use that as an example of a unit trust which has come before the Court in which there is a description in the judgment of the terms of the instrument.
There is a less full description in Charles Case of the terms of the instrument but still one sees there that the paradigm case, if you put it that way, of a unit trust is one where investors subscribe and the trustee invests. We are not concerned with the paradigm case here. We do not profess to be within the CPT Custodian paradigm. What we do say is that the terms of the definition of “unit” and of “unitholder” and the other language of the division takes the concept of “unit trust” which is undefined to a wider range than the simple case which appealed to the Full Court ‑ ‑
NETTLE J: But only in relation to a ‑ ‑ ‑
MR SLATER: ‑ ‑ ‑ and we say that we fall within that penumbral area between the simple case and the boundary.
NETTLE J: Does it matter that it only does that in relation to a prescribed trust estate?
MR SLATER: No, your Honour, because prescribed trust estate is no more than a place marker for the expression which is or has been a public trading trust.
NETTLE J: I appreciate that but as you said before we are not concerned whether this is a public trading trust. It is not an issue in this appeal apparently, or are we?
MR SLATER: No, that is the ultimate question. I am sorry, I withdraw that.
NETTLE J: In a way, we have to be, do we not?
MR SLATER: Your Honour puts to me what the issue in this appeal is, yes. The issue in the division ultimately is whether it is a public trading trust because that is what is taxed under section 102S.
NETTLE J: Of course.
MR SLATER: The issue in this appeal is a narrower issue. It is simply whether it is a unit trust but the answer to that is informed by looking at the whole of the provisions.
NETTLE J: But the extended definition of “unit” only applies in relation to a prescribed trust estate, not in relation to others.
MR SLATER: Yes, and our answer to that, your Honour, as I have said, and apologies if I have not made myself clear ‑ ‑ ‑
NETTLE J: No, it is my fault, I think.
MR SLATER: “Prescribed trust estate” simply means is now or was public trading trust. We say that public trading trust is “a unit trust” which meets the four conditions which are specified in section 102R(1).
The unit trust is a public unit trust. The unit trust is a trading trust. The unit trust is a resident trust. The unit trust is not a corporate unit trust. Each of those conditions for being a public trading trust, and therefore for being a prescribed trading trust, is predicated on there being a unit trust.
NETTLE J: Very well. Thank you.
MR SLATER: That is why all of these provisions are relevant to the notion of what is in a trust which is the issue to which this appeal has been confined. In resolving the issue to which this appeal has been confined, in our submission, one has to look to the context of the whole division.
GAGELER J: Looking to the context of the whole division, the definition of “prescribed trust estate” feeds into the operative provision in section 102T.
MR SLATER: Yes, your Honour.
GAGELER J: I do not think you have taken us to that. Do we need to understand the operation of 102T to understand the entire context?
MR SLATER: I do not think so, your Honour, but I should just draw your Honours’ attention to it. It will take me a moment longer than it would normally do because I just have to read the provisions as I go.
GAGELER J: It would take me longer to read it for myself, Mr Slater, so I would be assisted.
MR SLATER: What 102T does, in subsection (1), is to amend the operation of the Act in relation to distributions by a unit trust, which qualifies as a public trading trust, and assimilate them to the provisions of the Act which deal with companies. The simplest example is subsection (11). It is in a curious sequence, the way this is laid out. Subsection (11):
A reference in subsection 44(1) –
of the 1936 Act - just to remind your Honours, section 44 is the provision which includes dividends in assessable income; so a reference in that section to:
a company or to a company that is a resident shall be read as including a reference to a prescribed trust estate –
For the purpose of taxing a dividend, it is treated as if it were a company.
GAGELER J: Yes.
MR SLATER: Without taking the time – it would take me about 10 minutes to go through and do this. I am sorry, I apologise ‑ ‑ ‑
GAGELER J: But there are variations on that theme.
MR SLATER: I had not actually prepared a quick summary of this ‑ ‑ ‑
GAGELER J: Yes, I understand.
MR SLATER: ‑ ‑ ‑ but it is variations of that throughout.
GAGELER J: Yes.
MR SLATER: Does that sufficiently assist your Honour?
GAGELER J: Yes, thank you.
MR SLATER: Your Honours, let us get back to where I was a moment ago. We say that the concept of a unit is not constrained to a divided share. It is not limited to the subject of the discussions in the texts and other materials which are set out in our friends’ submissions. We note that even those texts accept the idea of a “$1” unit, in the passage which is quoted in paragraph 31 of our friends’ submissions.
The concept of “unit trust” in the division is equally fluid. It is used as referring to a trust state in which there are units and that means units as defined at section 102M. They are interests which can be cancelled, extinguished or redeemed and “unitholder” has a correspondingly fluid meaning.
There is no definition of “unit trust” either in the division or elsewhere in the Act. There are definitions of “unit” and “unitholder” to which we have taken your Honours and, in our submission, what one concludes is that a unit trust in Division 6C is something in which a unit, as defined in section 102M, can be held by a unitholder as defined also in section 102M.
In our submission, her Honour the presiding Judge was correct when she said at paragraph 49 of her reasons at page 148 of the appeal book that the definition of “unit” informed the meaning of “unitholder” in the division. Her Honour’s reasons for that are at page 145 at paragraphs 43 to 53. I was not going to read those to your Honours but simply draw your Honours’ attention to them.
In our submission, Justice Jessup, at page 165 of the appeal book, in paragraphs 2 to 4, mistook the role of the definition of “prescribed unit trust” and did not have regard to its content as merely being something which is or was a public trading trust and to that extent his Honour’s decision, in our submission, miscarried.
In our submission, the joint judgment correctly said at paragraph 61 that the argument which was advanced by the Commissioner in the Full Court and is again advanced in this Court should be rejected, although, in our submission, your Honours were wrong to go on to rely, in effect exclusively to rely on a functional description or on a functional basis or functional character of a unit as the basis for determining what is a unit trust.
KIEFEL J: What about the metaphorical conceptions? You have not criticised those?
MR SLATER: Not yet, your Honour, give me time. I do want to have something to say about the Full Court’s judgment but, if it is convenient to your Honours, I will defer that until later. We would say, your Honours, that the width of the definition of “unit” in section 102M puts few limits on what can be a unit trust. The context in which the expression falls to be construed includes not only Division 6C but also the rest of the Act and we acknowledge that. We have addressed that wider context in paragraphs 24 to 30 of our written submissions. In summary terms, the Act uses the words “trust”, as I said undefined, and “trust estate” and the content of those is both to be found in the general law because they are terms which have a meaning in general law.
The Act also uses the expression “discretionary trust”, sometimes with a definition and sometimes without. Where it uses it without a definition, the term does not have a settled meaning in general law. It is merely a description for a range of trust estates with some common characteristics, but there is no general law boundary to that range.
It also uses the expression “fixed trust”. That is a term which is defined in Schedule 2F to the 1936 Act in Division 272 as one where beneficiaries have vested and indefeasible interests. Both “vested” and “indefeasible” do have meanings in general law.
In our submission, the idea of a unit trust in the legislation as a whole fits somewhere between discretionary trusts on the one hand and fixed trusts on the other, but the Act does not contain or imply any clear demarcation of or between those concepts. So what is a unit trust may also have discretionary elements or may also be a fixed trust without losing its status as a unit trust.
If I can give your Honours an example of that without taking your Honours to it at the moment, in Schedule 2F to the 1936 Act – I will give your Honours a page reference to that if I can find it because it is a little difficult to locate. It is on page 163 of volume 3 of the CCH print or the 2015 version of the Act. I am not going to take your Honours to it because it does not directly bear on the present case, but the point of subsection (2) was to deal with the circumstance that in a typical paradigm unit trust, units can be issued and redeemed. That is not always the case. Not all unit trusts have redeemable units. The original form did not.
But where the units can be redeemed the consequence is that the redemption of a unit before the distribution date or the vesting date in relation to corpus and before the end of the year of income in relation to income causes the unitholder to lose an estate in the trust as at the vesting date or the accrual of income, so that it would not be a vested and indefeasible interest for the purpose of being a fixed trust, and the legislature came to the conclusion that they wanted the typical unit trust to be within the idea of a fixed trust, so subsection (2) provides an exception to that.
Your Honours, it is not necessary for the purpose of resolving this appeal to determine the limits of the notion of unit trust, neither in the Act nor in Division 6C. What we have put in our written submissions is merely our submission as to the way in which the Act as a whole may be viewed rather than just confining attention solely to Division 6C.
NETTLE J: If you are right, Division 6C would apply to a very large part of what has traditionally been taxed under Division 6.
MR SLATER: Not really, your Honour, because statistically something over 99 per cent of the trusts which are taxed under Division 6C would fail the public requirement. So the requirements are not simply that it be a unit trust but it would be a unit trust, a resident trust, a public trust and a trading trust. So the actual category to which this applies is quite narrow. I said 99 per cent, that is background knowledge from the Bar table. There is no evidence to that effect but it is, in fact, the case.
As we said, the only issue here is whether it is a unit trust within Division 6C. We have given your Honour this background material so that we hope your Honours can feel comfortable that the conclusion which we invite your Honours to draw does not create an inconsistency with the rest of the Act.
Your Honours, in our submission, to be a Division 6C trust it is sufficient that there is a trust estate, there is a trustee, property and identifiable beneficiaries, that there are beneficiaries who qualify as unitholders as defined in section 102M, that is to say, they hold units as defined in that section. We say that not all beneficiaries need be unitholders. It is enough that there are units as defined, held or able to be held by some beneficiaries. For the purpose of it being a unit trust, it would be enough that the trust provided for the issue of units even though none were issued. That is not this case.
The entitlements qualifying as units must, in our submission, comprise a beneficial interest, in a sense we have already dealt with, be in some income or property of the trust estate, be capable of redemption and be measurable in some manner so that the number of units held can be ascertained and the amount payable on redemption can be determined.
Now, while the commonly encountered style of unit trust that is known as such meets this specification it is, in our submission, not the only one which does. As we have said, we accept that we do not fall within that paradigm case. What we do say is that we fall between the paradigm case and the boundary of the division.
It was the legislative intention that the scope of the division should not be so limited. One can see that in the use of the words in the definition of “unit” as – use in that definition of the words “howsoever described” and in the extension of the concept two units which confer an interest in either income or property and in the absence of limiting language such as “divided into units” or “divided into shares”.
Your Honour Justice Keane asked me before about parallels between companies and trusts. In our written submissions we have drawn attention to the economic parallel. There are, as your Honour will know, many proprietary companies which have shares which carry a range of quite abstruse rights.
Some of those are rights which were established in order to escape the liability to death or estate or gift duties. Typical examples of that are Robertson v Commissioner of Taxation, in I think (1952) 86 CLR. A particularly notorious example would be Gorton v Commissioner of Taxation in 1964, I think it was 19 CLR, but they were the estate planning devices of the 60s and 70s.
So, share rights can be just as convoluted as rights of beneficiaries and in that sense there is a parallel but there is a very distinct difference in the sense that a trust is a quite different animal, if I can use the expression, from a company.
GAGELER J: Mr Slater, does the context of Division 6B assist us in construing the provisions of Division 6C? I think you suggested at the beginning that it did but you have not taken us to it.
MR SLATER: No, I have not taken you to it. They are very closely parallel. The difference between the two is that to be a corporate unit trust in Division 6B – I am paraphrasing this from memory, so I might not be completely accurate – but Division 6B fixes upon trust estates which have acquired property from a company and distribute income to persons associated with the shareholders of the company.
The historical background to that was that the major property companies ‑ to use one particular example which is still around, Westfield Limited – were facing competitive difficulties because the income from their property portfolio was taxed at corporate rates and then distributed to untaxed beneficiaries –superannuation funds, exempt government bodies and non‑residents. So, the shareholders were getting less money than would have been the case had they had an interest as beneficiaries.
So Westfield took the rather bold step in about 1975 of splitting itself into two parts – Westfield Limited and Westfield Property Trust – transferring its property assets into the property trust and listing both of them. I do not think – I cannot remember now – that they were stapled. They might have been. Division 6B was introduced to prevent the loss to the Commonwealth of the revenue by way of company tax on that property income.
Division 6C was introduced to deal with the case where what was transferred to trustees was not property but operating businesses, so that the income arising from the businesses also flowed through to the beneficiaries without suffering company debts, but the scheme of the two divisions is very close.
So one finds that the words I have taken your Honours to in sections 102M through to 102S are very closely parallel to those which are in Division 6B. Is your Honour assisted by my going back to Division 6B or is that sufficient?
GAGELER J: No, I think that is sufficient.
MR SLATER: It is our submission that the trust deed of which the appellant is trustee, although it is not in a common form of unit trust, is a unit trust within Division 6C. Can I take your Honours then to the terms of the trust deed and again start with some matters of context which are relevant to the construction of the instrument?
The first point of context is this. The question for determination in this appeal is not what beneficial interest any named worker has in the fund; the question is whether the deed is one which provides for beneficial interests in the trust property or income which meet the definition of “unit” in Division 6C such that the trust estate can be called a unit trust for the purposes of that division.
The second context point we make is this. Payments are made into this fund by employers as required by industrial awards or agreements. The sums which are paid in are the sums which are payable to employees on the termination of their employment, either redundancy or simple loss of job.
The risk which workers face and the risk which this fund is established to mitigate is that the employers will become insolvent before the employees become entitled to receive termination or redundancy payments. So to mitigate that risk, moneys are paid into this fund and other similar funds under the industrial awards so that they are set aside to meet the entitlements of the workers at the termination of their employment.
The object is to provide both security and transportability of entitlements. So if a worker changes jobs from one employer to another, his interest in the fund remains and can be increased by contributions by second or third employer.
What was particularly concerning about these arrangements was the prevalence of phoenix companies and the loss to employees as well as subcontractors arising from companies which became insolvent and then were replaced by the same individuals operating through different companies.
The trustee is directed to hold, subject to the terms of the deed, exclusively for the purpose of protecting those entitlements. That is the second context point. The powers and discretions which are conferred on the holder of the office of the trustee are conferred on it as trustee, not on the appellant personally, not to be exercised according to the whim of the directors of the appellant.
The appellant must exercise its powers in its capacity as trustee and it must observe its fiduciary obligations in doing so. The powers must be exercised in furtherance of the purpose for which they were granted and the fund was established. They cannot be exercised arbitrarily and capriciously. I emphasise that point because a great deal of play is made in our friend’s submissions about what are called discretions. Yes, there are powers which are sometimes called discretions, but they are powers which have about them also the character of duties.
The third context point we make is that this fund was prescribed as an approved worker entitlement fund for fringe benefits tax purposes. I took your Honours to the portion of the ruling which indicated that. Just for reference, it is at line 10 on page 73 of the appeal book. The purpose of that was to avoid the imposition of fringe benefits tax on the employers on paying into the fund, because the payment into the fund accrues for the benefit of workers and it would otherwise be a fringe benefit.
So, provided that the fund continues to meet the limitations imposed by the Fringe Benefits Tax Assessment Act, and in particular by section 58PB of that Act, then no fringe benefits tax liability accrues. This fund is subject to the statutory constraints imposed upon a fund prescribed under that section.
If I could then take your Honours to the deed? The deed begins at page 5 of the appeal book. Can I say at the outset that the deed has its imperfections. It is a pastiche of provisions imposed by various circumstances and parties, so by compliance with the Fringe Benefits Tax Assessment Act; by carrying forward a previous scheme; by the requirements of the sponsors, the Electrical Trades Union and the National Electrical Contractors Association; and by awards, and so forth. Those requirements do not always gel as well as they could. There are also some infelicities in expression, and some cross‑referencing errors, but the language is clear enough that the obligations imposed on the trustee are not really open to contest.
I do not propose to take your Honours to the machinery provisions about certificates and records, and so forth. Can I start with Recital A in the middle of page 5:
The Sponsors –
that is, the National Electrical Contractors Association and the union with a very long name known as the ETU:
have agreed to establish a scheme to be known as the Electrical Industry Severance Scheme (the Scheme) to provide benefits to Workers who leave or change their employment in circumstances set out in this Deed.
There is a declaration of trust on page 20 in clause 9:
The Trustee declares that it will hold the Trust Fund on the trusts, and with and subject to, the powers and provisions contained in this Deed.
The trust is specified in clause 11:
Subject to the provisions of this Deed, the Trust Fund shall be maintained exclusively for making Severance Payments to Workers under Clause 6.
Now, my friends take the point that that clause starts with the words “Subject to the provisions of this Deed”, and that is one reason why I took your Honours to the context in which the deed was executed.
Then, there is a reference in 11.1 to clause 6. That should be a reference to clause 8; that is a transcription error. I will come to clause 8 in a moment, but note that the purpose is exclusively for making severance payments. Purpose is qualified only so far as the deed provides, and in the context of the awards, what the deed provides is to be read according to that context.
Your Honours, contributions to the fund are dealt with in clause 3, and that appears on page 13 of the appeal book. Clause 3.1 deals with an employer becoming a member. Clause 3.2 binds the member by the terms and conditions of the deed. Clause 4.1 provides for contributions to the scheme; that is on page 14:
Each Member shall make Contributions to the Scheme –
in accordance with the agreement. The agreement is, to some extent, superseded by awards and industrial agreements. Having said that, I should tell your Honours that the term “agreement” is defined in clause 1 at the top of page 6. Contributions are defined on page 6, at about line 50. They are made in respect of “a Worker”. Contributions in the event are made under industrial awards. That supervenes the agreement which is referred to at the top of page 6 of the appeal book, made for workers covered by the award, each worker in respect of whom a payment is made, is required to be identified.
Your Honours will find that in clause 5 on page 14, in particular at clause 5.2. The remaining provisions of clause 5 deal with circumstances where there is difficulty in identifying the relevant worker and that is necessary because, as I told your Honours at the outset, there are a thousand employers and 31,000 members and record keeping can sometimes be difficult.
If a worker cannot be identified and the payment is put into suspense, your Honours will find that on page 16 in clause 5.9 at the top. Then the trustee is required to maintain worker’s accounts. Your Honours will find that on page 21 at clause 11.2:
The Trustee shall establish a Worker’s Account in its books of account in respect of each Worker. The Trustee shall credit and debit amounts to each Worker’s Account in accordance with Clauses 6, 7 and 8.
The contribution to be credited to a worker following identification in accordance with clause 5.2 is specified at clause 6.1 on pages 16 and 17 of the appeal book and 6.2 is:
required to be made to Worker’s Accounts under Clause 6.1 as at the date the relevant contribution or amount . . . is received by the Trustee.
So, what is recorded is contributions in respect of a worker, amounts transferred from a corresponding, what is called a reciprocating scheme, and amounts transferred from a previous scheme.
Then amounts may be debited to the worker’s account under clause 7. Your Honours will find that starting at line 20 on page 17. Now, 7.1 is a lengthy provision. Things to note about it are that the debit to accounts is subject, in the case of paragraphs (a), (b) and (e) to:
the consent of the Sponsors –
and in the case of paragraphs (c), (d) and (e) – I am sorry, I have misread that, I have misled, your Honours – paragraphs (a), (b) and (e) are subject to the constraints imposed by the Fringe Benefits Tax Assessment Act, restrictions that apply to approved worker entitlement funds and paragraphs (c), (d) and (e) are subject to the consent of the sponsor. So, (a) and (b) are payments out to workers as severance payments or transfers:
from the Worker’s Account in accordance with Clause 13.4 –
I will take your Honours to 13.4 but it deals with transfers to a reciprocating scheme and it is set out on pages 22 through to 25, and 13.4 is on page 24. Then, paragraph (c) and paragraph (d) are the share of each worker’s account of taxes, levies, stamp duties, settlement duties and any other impost et cetera and any related or similar amounts:
which in the opinion of the Trustee have or may be assessed against the Worker , or the Scheme in respect of the Worker.
So, taxes are debited to the account under paragraph (c). Paragraph (d) an amount may be debited to cover costs incurred in administering the scheme. Then, in paragraph (e):
such other amounts . . . [as are] appropriate or equitable to debit –
Now, a debit can only be made under paragraph (e) if the trustee determines that it is appropriate to do so. That would only be so if it were appropriate or equitable. A case might be, for example, a loss on an investment; had the trustee been imprudent enough to invest in Bell Group it would have suffered a significant loss on investment. In our submission, that is not a power which can be exercised arbitrarily and if it is exercised, what it does is to reduce the amount to the credit of the worker’s account. It does not authorise the trustee to pay an amount to anybody else.
Your Honours, the application of worker’s accounts is dealt with in clause 8 starting at page 18. Clause 8.1 ‑ and much is made of this both by the Full Court and our friends – put this clause:
only applies to a Worker who is an Active Worker.
That term is defined in clause 1 on page 5 at line 48 of the appeal book as having:
the meaning determined by the Trustee for the purposes of this Deed.
Now, the materials before the Court, because this is a ruling case, do not disclose the making of any such determination. So that all the Court has to go on is what determination may be made under the terms of the deed. What the scheme does do is to disclose these circumstances. First, that payments are made to the trustee under awards or industrial agreements for the purpose of securing entitlements to termination pay.
Second, that each payment is credited to the account of a nominated worker to secure that the benefit is duly paid to that worker or dealt with appropriately in respect of that worker. Under clause 8.3 payments can only be made out to an active worker. The power to make a determination is one which is given to the trustee as such. It is a duty as well as a power. The purpose of the determination is to identify the category of workers made up of active, inactive and nominated workers. Your Honours will see that in the definition on page 11 at line 45. So, it is to identify the section of the workers as there defined who may receive benefits.
Now, in our submission, the trustee could not properly fail to make a determination as to a meaning of “active worker” because to do so would be to frustrate the operation of the instrument altogether. Nor could it make a determination of the meaning of “active worker” that had the result that benefits were not payable under clause 8.3, again for the same reason, that would frustrate the purpose for which the fund was established. Nor can it make a determination arbitrarily or by reference to some other purpose such as benefiting the sponsors of the scheme.
The trustee has to make a determination in accordance with its duties and for the furtherance of the purposes of the scheme. What is relevant in this appeal is that it is a determination by a trustee and the workers who fall within its terms will be entitled under clause 8.3. The terms of the deed provide for it and the character of the trust estate is to be assessed accordingly.
GORDON J: How then do you distinguish between “inactive worker” and “active worker”?
MR SLATER: The only way one can distinguish it is that each is the subject of a determination made by the trustee. That is all the materials before the Court allow.
GORDON J: There is three categories of worker. It seems to be active, inactive and then somebody who a sponsor agrees could be treated as a worker.
MR SLATER: And from the text of the deed and from what material there is about the awards, one cannot tell ‑ ‑ ‑
GORDON J: There is nothing to tell us what is active or inactive.
MR SLATER: No, all that one can do is to say that the trustee has the power to make a determination and, in our submission, it has a duty to do so and a duty to do so having regard to the purpose for which the fund was established, the purpose for which contributions were made to it and the consequences of the determination made, which flow on to clause 8. That is as far as I can take it, your Honour. But we say that is sufficient. The trustee could not make a determination which arbitrarily excluded anyone and it could not make a determination which had the effect that the fund was frustrated.
GORDON J: Well, it must be able to make a determination to exclude the operation of clause 8 because they have got to be an active worker, and you make a determination that they are inactive – so there is a distinction to be drawn; what it is I do not know.
MR SLATER: I agree that your Honour is ‑ and the Court and the appellant face a difficulty with that, but the issue in this appeal is not whether any particular worker has an entitlement ‑ ‑ ‑
GORDON J: No, but it goes to working out whether or not the trustee who falls within – whether or not what we are dealing with is the unit trust for the purposes of Division 6C and ‑ ‑ ‑
MR SLATER: Well, one answers that, your Honour ‑ ‑ ‑
GORDON J: ‑ ‑ ‑ taking into account all of the matters that you referred to earlier where you have got a trustee who can make a determination that someone is either an active worker or an inactive worker, but we do not know how or why.
Now, as to our friend’s written submissions, our friend’s reliance on Gartside, we would say, picks up the common misconception of the decision in that case. All that case decided was that a mere object – and that was a case where there was a trust to accumulate the income but with a bare power to appoint to beneficiaries if the trustee so desired it ‑ the mere status of being an object of that bare power did not create a measurable interest to which anyone could succeed under section 2(1)(b) of the Finance Act 1984. That is all the case decides really.
We say in this case there was a beneficial interest and I have taken your Honours to this many times before so I will do no more than to say that sums were put into the fund to meet the entitlements of workers, that workers had an entitlement in respect of those funds from the time they were put in. And within that context, we would submit that the observations which were made in Finch v Telstra Super, which are set out in our written submissions, 242 CLR 254, page 270, paragraph 30, we would say are entirely apposite.
And, finally, we would say that two decisions of Full Courts of the Federal Court, which were cited both by Justice Davies at page 142 to 145, especially at paragraph 37 of the appeal book and by the Full Court at page 187, paragraph 92, but were not addressed by our friends, either in writing or orally, are directly in point.
Both cases deal with superannuation funds and not with termination benefit funds but the material point is the same. It is a payment into a fund under employment terms for the benefit of employee come beneficiaries. The entitlements are contingent on termination of employment and are defeasible but in both cases it was held that the employee beneficiaries had beneficial interest in the funds, or more accurately in both cases it was said that the beneficiaries had an equitable proprietary interest and, in our submission, that is what the somewhat loose expression “beneficial interest” really means.
The two other cases quoted by our friends in the footnotes to their submissions do not help. If one looks at Commonwealth Bank OfficersSuperannuation v Beck [2016] NSWCA 218 and looks at the clause which was in issue there, clause 11.3, set out by the Chief Justice at paragraph 13 of his reasons, one sees that it has nothing to do with this.
Similarly, the decision of this Court in Commissioner of State Taxation vCyril Henschke (2010) 242 CLR 508 is a case about the rights of partners. And the observations which our friends referred to at paragraph 25 are directed to the rights of partners and the difference between the rights of partners inter se and the rights of partners in partnership property, and the comments were made in saying that – talking about beneficial interest in the partnership property ‑ did not assist in understanding the rights existing as between partners. Your Honours, unless there is anything else I can assist the Court with, those are our submissions.
KIEFEL J: Thank you. The Court will reserve its decision in this matter and adjourn until 9.45 am tomorrow for pronouncement of orders and otherwise until 10.15 am.
AT 4.15 PM THE MATTER WAS ADJOURNED
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