Federal Commissioner of Taxation v Belford

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t f a F o r c e

Appr

Australia & P t y L t d v Commissioner

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Union

Fidelity

New Zealand

Savings BankCommissioner pfvANZ

Tmstee Co o f rederai

o f Taxation

^‘t'iipgs Bank

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AusI Ltd V

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156 ALR 570ATR277L419

119 CLR 177PcTO

88 C.L.R.] OF AUSTRALIA.

589

[HIGH COURT OF AUSTRALIA.]

FEDERAL COMMISSIONER OF TAXATION

A p p e l l a n t

AND

BELFORD .

R e s p o n d e n t .

Income Tax {Cth.)—Assessable income—Income under trusts of will—Deceased

H. C. OF A.

estate and trustees ex-Australia— Taxpayer resident in Australia—Liability to

1952.

tax—Receipt—Presently entitled—Income Tax Assessment Act 1936-1945,

(No, 27 of 1936—Ao. 4 of 1945), ss. 6, 23 (e), (r), 25 (1), 26 (6), 95-101.

S y d n e y ,

Nov. 21, 24;

During the year of income the taxpayer, who resided in Australia and was

Dec. 19.

not under any legal disability, received from the trustees of her father’s will

Dixon C.J.,

certain sums of money to which she was entitled representing the income of

Webb, Pullagar,

a settled fund and of residue. This was the sole source of her income. The

Kitto and

trustees were resident out of Australia and the income of the trust estate

Taylor JJ.

from which the payments were made was derived by the trustees during the

year of income from sources outside Australia.

Held that the income so received was assessable income of the taxpayer.

A p p e a l from a Board of Review.

The taxpayer, Mrs. Rollande Danielle Belford was, at all material times, a resident of Australia and, during the year of income ended 30th June 1945, was presently entitled to and received, certain income derived under a will. The trustees of the will were residents of the United Kingdom and not residents of Australia, and the source of the income referred to was ex-Australian. The Federal Commissioner of Taxation assessed the taxpayer on the basis that that income was assessable. The taxpayer objected, claiming that the income was exempt. The commissioner disallowed the objec­ tion and, at the request of the taxpayer, the decision was referred to the Board of Review. The board, by majority, upheld the tax­ payer’s claim.

Upon an appeal by the commissioner to the High Court, McTiernan J., at the request of the parties, stated a case under

590 HIGH COURT

[1952.

H.C. OF A. s. 198 of the Imome Tax and Social Services Contribution Assess-

11)52. 'imoit Act 19;i()-1952 for the opinion of the Full Court of the High C'ourt, sul)Stantially as follows :—

F eouk.M

j

C’O.MIMIS- John Norbury died prior to 1st July 1944 leaving a will and

SIONKK OF

'l’.\x .v n o N

two codicils dated respectively 13th June 1935, 20th August 1936

I'.

and 15th March 1937, whereby he appointed William Norbury,

B k l f o k o .

John Pinningcr Awdry and Roniilly South wood Ouvry his executors and trustees and to whom probate was duly granted in the United Kingdom.

The deceased was at the time of his death possessed of real and personal estate situated in the United Kingdom. Rollande Danielle Belford was in the year of income ended 30th June 1945 entitled under that will and those codicils to the income of a settled fund and to the income of the deceased’s residuary estate. In the year of income the trustees derived in respect of that settled fund income amounting to £1,024 7s. lid . sterling (£A1,280) and in respect of the residuary estate interest subject to United Kingdom tax amounting to £11 4s. 6d. sterling, and income free of United Kingdom tax amounting to £118 6s. 2d. sterling (£A148). That income was derived by the trustees from sources outside Austraha and in the year of income they paid it to the taxpayer, Rollande Danielle Belford. During the income year ended 30th June 1945 the trustees were non-residents of Australia and were residents of the United Kingdom, and the taxpayer, who was not under any legal disability, was a resident of Australia. The Commissioner of Taxation issued an assessment against the taxpayer based on that year of income in which he claimed that that income (other than £11 4s. 6d. sterling interest subject to United Kingdom tax) amounting to £A1,428 was assessable income of the taxpayer and was liable to tax. The taxpayer duly lodged an objection to the assessment on the grounds : (1) that there was not any provision in the Income Tax Assessment Act 1936-1945 for the taxing of income derived by the taxpayer from the estate of John Norbury and as “ the net income of the Trust Estate ” was exempt from Federal income tax under s. 95 of the Act, then the taxpayer could not be taxed on any part of income in the estate of John Norbury under s. 97 of the Act, as the whole of the income was exempt income.

The commissioner disallowed the objection whereupon, at the request of the taxpayer, he forwarded the matter to the Board of Review for review. The board, by majority, upheld the taxpayer's claim, and the commissioner thereupon appealed to the High Court.

88 C.L.R.] OF AUSTRALIA.

591

H. 0. or A.

The question for the opinion of the Full Court of the High Court was': is the said income amounting to £Al,4'-8 referred to

1952.

in the case stated assessable income of Rollande Danielle Belford P e u b r a l

of the income year ended 30th June 1945 ?C o m m is­

s io n e r OF

T a x a t io n

B e l f o r d .V.

K. W. Asprey Q.C. (with him J. K. Manning), for the appellant. Section 95 of the Income Tax Assessynent Act 1936-1945 says what the net income of a trust estate means. I t is necessary to ascertain what is the precise extent of the beneficial interest which first attracts tax under s. 26 (6). That section is in effect a statement of the principle, and s. 95 and following sections work out the principle in detail. They operate to overcome difficulties such as where the income of the trust estate is payable to a beneficiary who cannot receive it. They also operate to prevent undue hardship ; s. 98. Where there is not any beneficiary presently entitled s. 99 operates, and where there is a beneficiary entitled to an interest in more than one trust estate s. 100 operates. Division 6, of Pt. III. of the Act, which consists of s. 95 to s. 102aa inclusive, simply operates to define and facilitate the operation of s. 26 (6), which is not more than a general statement of the principle of liability of a beneficiary to tax. The phrase “ calculated under this Act as if the trustee were a taxpayer ” in s. 95 is merely an expression of computation, not a phrase creating liability, under that section, in the trustee. In ss. 98, 99 and 102 there are express words creating liability in the trustee. The effect of the board’s decision is to say that s. 26 {h) has no meaning what­ soever ; that it is an entirely useless provision in the Act because a complete code as to the liability of a trustee was given by s. 95 and the following sections. Division 6 defines and quantifies the interest which is to be included as part of the assessable income of a beneficiary. Section 95 is purely a definition section. I t does not contain words apt to create a liability in the trustee. Where that is intended the next best words are to be found in ss. 98 and 99. If s. 95 were to create a liability in the trustee difficulties and anomalies would be found when applying it except with regard to deductions contained in that section ; see Gunyi’s Common­ wealth Income Tax Law and Practice, 3rd ed. (1950), p. 681. Assessable income is a relative term. The amount of assessable

income depends on who is the recipient of the income.

Section 98

provides for a case where a beneficiary is presently entitled but is under a legal disability. Section 99 provides for a case where there is not any beneficiary presently entitled. In both those cases the sections provide that the trustee shall be assessed and liable to

592 HIGH COURT

[1952.

IT. ('. O F A.pay tax in ros])ect of that share of the net income of the trust

1952.estat(; as if it wei'e the income of an individual and were not subject

Federalto any deduction. That is imposing a liability on the trustee not

C O M M IS -

as the reju'esentative of the trust estate but as representing the

RIONKli

O F

' i ’A X A T lO Nindividual benefidary. The person aimed at l)y Div. 6 is the

V.reci])ient of inc.ome whether he be a beneficiary, or a company, or

B f.t,f o ]{1>.

a private individual and, under s. 19, if a person is entitled to receive income he is deemed to have derived the income for the purpose of the Act. The Act tries by s. 95 to make a uniform calculation so as to bring the receipt of income and the deductions to be made from it into line with the receipt of income and the deductions that can be made from it from an ordinary individual freed from the obligations of a trustee. A different calculation would be made under s. 95 according to who the beneficiary was and according to what his rights were in the estate. I t is against the whole spirit and intendment of the Act that the trustee should have a

liability thrust upon him.

In this connection the words of s. 96

are significant, and it is difficult to understand why the express

words are used in ss. 98 and 99 as to the liability of a trustee.

[F ullagar j . . referred to Howey v. Federal Commissioner of

Taxation (1).]

iN. II. Boiven (with him G. D. Needham), for the respondent. In s. 95 in the Income Tax Assessment Act 1936-1945, wdth which this Court is concerned on this appeal, there is not any reference to concessional deductions. The system of rebates was operating. The scheme of the Act is to tax beneficiaries according to their entitlement in a trust estate and not according to their receipt of income. The importance of that in this case is that the beneficiary was both entitled to and received the income in the same year. The statutory objective is to tax income derived, and the normal method of derivation is receipt. Income received is income derived. The provisions of Div. 6 do not, as formerly, really expressly cover the case of the beneficiary who actually receives the money. His receipt is treated as completely irrelevant. At one time the issue was to some extent confused by the presence of the words “ present entitlement ” and “ actual receipt 'h The present system as laid down by Div. 6 is that the trust estate submits a return and in that return it splits up the income between those presently entitled and leaves, perhaps, a residue of those not presently entitled. The commissioner gets that information from the trustees' return and then the trustees make a return too. The

(1) (1930) 44 C.L.R. 289.

88 C.L.E.] OF AUSTRALIA.

593

beneficiary is taxed on present entitlement, and not on receipts at

H. C. OF A.

all. The two principles of taxing receipts in the hands of the

19.52.

beneficiary and taxing entitlement under s. 97 (1) cannot be F e d e r a l

COAI.MIS- SIOXEE OF

operated together.

[F ullagar J. Division

6 shows what is meant by " derived ".]

T a x a t io n

That is the key to it.

V.

I t is curious that m s. 26 (6) the words

B e l f o r d .

“ beneficial interest ” are used in connection ■with income instead

of the Avord " derAed

because if “ derived by the beneficiary

had been meant it Avould not ha e been necessary to say “ bene­ ficial interest ", there could haA*e been used the words ‘‘ aU income derAed by a beneficiary or “ derAed under a will, settlem ent or trust '''. It Avould not haA'e been necessary to use the Avords

beneficial interest ". The significance of those words is that it was derAed by the trustee.

What is looked at by s. 26 (6) is that

somebody is deriving income under a settlement or t ru s t ; that is the trustee. Another person has a beneficial interest in the mcome and that person is the person who has to mclude it in his assessable income. Beyond that it is necessary to refer to DA. 6 to ascertam AA'hat it is. Sections 97, 98 and 99 expressly purport to impose liability. AMien read AA'ith those sections actually little operation

is found in s. 26 (h). If s. 26 (6) by usmg the words

beneficial

interest ” mstead of entitlement

is mtended to mean something

different then those sections are m conflict. I t is not possible to give a sejDarate independent operation to s. 26 {h) AA'hich Avould be consistent with DA. 6 and tax a different set of income. It is necessary to refer to DA. 6 for the final wordmg as to upon whom the liability falls. In the absence of a section like s. 101 the Court said in Hoivey Federal Commissioner of Taxation (1) that AA'here there is a discretionary trust the trustee is the person AA'ho is to be taxed eA'en though he is paymg away the mcome m maintenance of those objectAes m the discretionary trusts. Xow s. 101, subsequently inserted in the Act, reA'ersed that position but did not tax the beneficiary bemg maintamed upon his receipts, it taxed him as A he were entitled—bemg consistent Avith the rest of the scheme, it taxed him on what he was entitled to. In rcA'ersmg the principle it proAuded that the actual receipts were the amounts he AA'as deemed to be entitled to in the trust estate keeping it consistent AA'ith the AA'hole principle of entitlement. Far from being limited to just quantflAung, it imposed a hability on the trustee, so it is as if the trustee had the beneficial interest m the mcome. Then under s. 99 he pays the tax as if he were an individual taxpa ver. DiA'ision 6 sets out to define m a substantive way the amount of

(1) (1930) 44 C.L.R. 289.

VOL. LXXXATII.--38

5!)4

HIGH COURT

[1952.

H.('. OK A.tax that a person interested in tlie income of the tru.st estate shall

1952.pay or be liable to pay, and in the exclusion words in s. 95 the

Kkukrat.saane phrase is used where it is intended to exclude beneficial

CoM. MI S-

interest in corpus or income showing, perhaps, what was being

S I O N UR

OK

' I 'a x a t i o n

dealt with there was beneficial interest in income previously

r .

l>Kl ,KOUI).referred to in s. 26 {h). The only thing which would impose

liability on the benefi(;iary in this case is some previous tax on actual re(iei])ts because the beneficiary is resident and lias actually receiA ed the money. There is a presumption against double taxation. The court would not adopt a construction of the Act which would have the elTect of taxing a person twice on the same income {Usher’s Wiltshire Brewery Ltd. v. Bruce (1) ). Ewing v. Federal Commissioner of Taxation (2) was a case of an annuity paid out of corpus and it was held that the beneficiary was liable for income tax on the annuity. A similar decision was given in Tindal v. Federal Commissioner of Taxation (.3). These decisions show that in that type of case the normal provisions of s. 25 could operate, but where there is clearly defined the position that the income of a trust estate is being dealt with, it is suggested there is not any room in the distribution of a trust estate to bring in s. 25 as well, cumulatively upon the other, or even in the alternative. AVhere the trustee pays under s. 98, the beneficiary being under a legal disability, or under s. 99, the income is regarded as having been paid. The view taken in Federal Commissioner of Taxation V. Whiting (4) was that the actual receipt was not necessary, entitlement was sufficient. The actual tax in the sections in Div. 6 is on the basis of entitlement. There is not any discretionary power conferred upon the commissioner as to whether he could alternatively apply the division. Where the legislature intended to give a discretion to the commissioner, even in the division itself, it expressly so provided. Sections 95 and 97 (1) operate in this case to give a nil result, or, alternatively, s. 97 (2) operates to exempt the income. Sub-section (2) of s. 97 is clearly intended to pass on the benefit of the exemption of the trustee as a taxpayer. If it is an exemption every time except to the extent to which that exemption is taken into account in calculating the net income of the trust estate, s. 97 (2) dees not apply. I t dees apply in the following circumstances. In some cases exempt income is some­ thing which is taken out of assessable income. The income conies in as assessable income, but because it is exempt it goes out again.

(1) (1915) A.C. 433, a tp . 471.

(4) (1943) 68 C.L.R. 199, at pp. 207,

(2) (1928) 2 A.L.J. 246.217, 219.

(3) (1946) 72 C.L.R. 608, at pp. 622,

623, 625, 627.

88 C.L.R.] OF AUSTRALIA.

595

H. C. OF A.

I t is not really part of the calculation in those circumstances.

But

in some cases it is a positive part, it is actually taken into account

1952.

in the calculation ; although it is exempt, it has a positive influence

F e d e r a l

on the net income. That is the significance of the words “ taken C o m m is­

s io n e r OF

into account ” and that is where losses are carried forward. The

T a x a t io n

B e l f o r d .V.

loss has to be deducted from the exempt income in the first place

and therefore has a positive operation in the calculation made, and therefore the beneficiary would get the benefit twice if one passed it on to him under the first part of Div. 6, and also allowed him to get the benefit of the loss : see Gunn’s Commonwealth Income Tax Law and Practice, 3rd ed. (1950), p. 690. Exempt income has had the positive operation of being deducted in the account. As far as the figures go, it is brought into the computa­ tion, and that is what the section provides. If it were not for that business loss it would be left out of the calculation of the trustees’ income altogether. If, under s. 95, this is taken into account in ascertaining the assessable income, that is done and the exempt income is thrown out in ascertaining the assessable income, but under the discretion “ less all allowable deductions ” it is brought back into the computation. Section 80 (2) indicates expressly that it is to be taken into account. That section shows the procedure for setting off losses, or how they are to be applied, and par. (b) of sub-s. (2) contains the direction against exempt income. A trustee’s exemption entitlements apply. One of them is s. 23 (r), which exempts the income from a source out of Australia, from non-residents of Australia. I t follows that the net income of the

trust estate is exempt income in this case.

That exemption should

then be passed on to the beneficiary under s. 97 (2). The provisions constitute a code. The legislature’s endeavours to cover every case which could arise with a beneficiary and a trust estate resulted in four categories, namely, the case of (i) the income where there was a person presently entitled and not under any disability ; (ii) a person presently entitled but under disability; (iii) no person presently entitled ; and (iv) where there is not any person presently entitled but the trustee had a discretion to apply funds towards the maintenance or benefit of a person and in fact does apply them. Those four categories cover all the positions which can occur in a trust estate, and there is not any room for any other position : see Case 24 (1). The subject estate is a trust estate, therefore there is not any room for the application of s. 25. The application of the code gives a result, either because of the exemption

(1) (1941) 9 C.T.B.R. 83.

r)!K) HIGH COURT

[1952.

H. (. OK A.

oji s. 97 (2), or, alternatively, because of tbe calculation under

'**'*“■

s. 95, which gives a nil return.

fniMOHAl.

Comm is-

K. if. A h prey Q.C., in reply.

SIONEK OI‘'

'I’ax at i o n

Cur. adv. vult.

r .

H h u 'o k o .

The following written judgments were delivered ;—

Oec.

D ixon C. J . Hhiis is a case stated pursuant to s. 18 of thfe Judiciary Act 1903-1950 in an a])peal from a decision of the Board of Review under s. 198 of the Income Tax and- Social Services Contribution Assessment Act 1930-1952. The appeal is by the commissioner from a decision that the taxpayer is not liable to include in her assessable income certain sums received by her during the year of income. The year of income in question is that ended 30th June 1945. During that year the taxpayer, who resided in Australia, received from the trustees of her father’s will certain sums of money representing the income of a settled fund and of residue. The trustees were resident out of Australia and the income of the trust estate in which the payments were made was derived by the trustees from sources outside Australia. I t was, however, derived by them during the same year of income. The amount thus received by the taxpayer was £A1,428. The commissioner included this sum in her assessable income, but on a reference to the Board of Review, the board decided that it was not liable so to be included. The question reserved by the case stated for our consideration is whether the amount is part of her assessable income.

The problem arises from the provisions of Div. 6 of the Income Tax Assessment Act 1936-1945 read with the definition of “ tax­ payer ” contained in s. 6 and combined with par. (r) of s. 23 when they are considered with s. 25 (1) and s. 26 (b). A careful study of the provisions makes it clear that, for one cause or another connected with the history of the legislation, the reconciliation of the provisions is beset with verbal difficulties which cannot altogether be overcome. Division 6 which, although headed “ Trustees ”, deals not only with trustees but with the liability of a beneficiary obtaining income from a trust estate, is based upon provisions introduced into the legislation at a time when the territorial liability for income tax was based exclusively on the source of the income and when residence was not a test of such liability. The difficulty of applying the provisions in relation to liability based on residence is the probable explanation of the trouble Avhich has been experienced in solving the present problem.

88 C.L.R.] OF AUSTRALIA.

597

H. C. OF A.

Section 96 provides that except as provided in the Act a trustee shall not be liable as trustee to pay income tax upon the income of

1952.

the trust estate. The provision expresses a truism, unless it is F e d e e a l

intended to exclude liabilities, if any, which might otherwise be C o m m is­

s io n e r OF

imposed by other prior Acts, but a purpose appears to have been

T a x a t io n

found in it of limiting the liabilities of a trustee to those imposed

V.

B e l f o r d .

by the express provisions of the Act specifically dealing with

trustees as distinguished from the general provisions.

Dixon C.J.

Section 97 begins with a sub-section imposing liability upon the beneficiary. I t provides that where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the income of the trust estate. For the moment sub-s. (2) of s. 97 may be ignored. Section 98 deals with the converse case of a beneficiary being under a legal disability, although presently entitled to a share of the income of the trust estate. In that case the trustee is to be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual and were not subject to any deduction. Section 99 deals with the third position, namely, that of there being no beneficiary presently entitled to the income or to some part of it. In that case the trustee is to be assessed and liable to pay tax on che net income of the trust estate, or on that part of the net income, as if it were the income of an individual and were not subject to any deduction. I t is evident that these sections left out of consideration altogether the existence of territorial limitations upon the liability to tax. If it were still true tliat the only territorial criterion of liability to tax was the source of the income no difficulty would exist, because it would readily be implied that the income in question must be derived from a source within Australia. But residence is a characteristic not of income but of a person, and any implication making residence an alterna­ tive test must identify the person to be resident. On what basis do you select a person who must be resident, if that is the criterion ? Is it the beneficiary presently entitled, and, if so, is that true of him whether he is under a legal disability or not ? Why should it matter where the trustee is resident ? And if there are many trustees how do you determine the residence of the trustees as a whole ? If the residence of the trustee or trustees is irrelevant, must residence as a test of liability be discarded in the case of there being no beneficiary presently entitled to the income of the trust estate or to some part of it ?

598 HIGH COURT

[1952.

H. C. OF A. The answer to tliese questions is made more difficult by the fact 1<)52.that the expression on which ss. 96, 97 (1), 98 and 99 depend, viz. :

Feduh.m,

“ the net income of a trust estate ” is a defined expression possessing

CoMMIS- a fixed meaning. I t is defined by s. 95 as follows :—“ In this

SIONEH OF

T ax a t i o nUivi.sion, ‘ the net income of a trust estate ’ means the total

V.assessable income of the trust estate calculated under this Act as

B e l f o k i ).

if the trustee were a taxpayer in respect of that income, le.ss all

Dixon C.J.allowable deductions, except, in respect of any beneficiary who

has no beneficial interest in the corpus of the trust estate, or in resjiect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus.” The direction thus given to calculate the total assessable income of the trust estate as if the trustee were a taxpayer in respect of that income and to make allowable deductions at once raises the question whether you calculate income on the basis that the supposed taxpayer has the same residence as the trustee or whether you ignore residence. Section 6 defines “ taxpayer ” as to mean “ a person deriving income To substitute that definition and make the calculation as if the trustee were a person deriving income in respect of the income of the trust estate does not take you far. For who else could be supposed to derive the income of the trust estate considered independently of the beneficial rights in the income ? I t is suggested, however, that it takes you a step towards treating the trustee as a person with individual characteristics. This is what by a majority the Board of Review has done. Two members of the board treated the trustees as possessing a residence which was decisive of the question of territorial liability. Because that residence is outside Australia they applied s. 23 (r), which provides that income derived by a non-resident from sources wholly outside Australia shall be exempt. The result is that the total assessable income of the trust estate has been calculated pursuant to s. 95 on the basis that it is all exempt. This produced the consequence that there is no net income of the trust estate within the meaning of s. 97 and the beneficiary, the taxpayer in the present case, is liable under s. 97 to include nothing in her assessable income. Even so, the commissioner would make answer that, nevertheless, she, a resident of Australia, actually received from the trustees the sum_ of £A1,428 in question and that she should be taxed accordingly under s. 25, or at all events under that section in combination with s. 26 (6). tSection 25 (1) (a) provides that the assessable income of the taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia, and

88 C.L.R.] OF AUSTRALIA.

599

s. 26 {b) provides that the assessable income of a taxpayer shall

H. C. OF A.

include beneficial interests in income derived under any will,

1952.

settlement, deed of gift or instrument of trust.

F e d e r a l

C o m m is ­

This solution of the commissioner sounds attractive and simple but it has its own difficulties. If a beneficiary is liable to be

s io n e r OF

T a x a t io n

taxed in this manner on actual receipts, then what happens with

V.

B e l f o r d .

respect to his liability under s. 97 (1) to include his share of the

income of the trust estate in his assessable income before he receives

Dixon C.J.

it and whether he receives it or not ?

If he is under a legal dis­

ability does he pay tax on his actual receipts although under s. 98 his trustee pays tax in respect of his share of income ? Under s. 97 (1), taking a case where there is no territorial difficulty, as, for example, where all the income is derived from sources within Australia, the beneficiary, if he is presently entitled and under no legal disability, must include the net income of the trust estate in his assessable income whether he receives any part of it or not. Under s. 98 if the beneficiary is under a legal disability the trustee must pay the tax. Is the beneficiary under an additional liabihty if and when the money is distributed to him ? I t is, of course, possible, indeed it must frequently happen, that a beneficiary is paid income from a trust estate in the financial year following that in which it is derived by the trustee. But it must also happen that a beneficiary is paid income in the same financial year in which it is derived. Do ss. 25 and 26 in each of these cases make it taxable in the trustee’s hands and also in the beneficiaries’ hands ? If so, where is the provision to be found against double tax ? No express provision applies to either case. I t is not easy to imply one. How can an implication be worked out to adjust the tax when in the one case the taxable fund results from the inclusion in a beneficiary’s assessable income of a share of the assessable income of the trust estate after making deductions except losses of a previous year and, in the other case, the taxable income of a beneficiary is arrived at by taking into account all his assessable income, including actual receipts from the trust and all his allowable deductions ? That is a case under s. 97 (1). Still more difficult is a case under s. 98. I t must be remembered too that the tax is graduated. The difficulties of making an implica­ tion for the avoidance of double taxation are not lessened by s. 97 (2), which is directed to dealing with a case where losses of a previous year are taken into account in calculating the income of the trust estate ; nor by s. 100, which deals with the case of a beneficiary under legal disability who receives or derives income from more than one trust estate or from a trust estate or some

<)00 HIGH COURT

[1952.

i r .

c.

OK A .

other source ajid provides for a deduction from the tax of the tax if any paid l>y the trustee; nor by s. 101, which deals with the distribution of the liability of beneficiaries who receive income

( 'OMMIS-

SION HR OKj)ursua.nt to a discretionary trust. Apart from the insuperable

T a x a t i o ndifficulties they disclose in making an implication to adjust the tax

r.

so as to avoid double taxation, it may be said that these sections

|■>î I,KOKI). jieithcr throw any light on the solution nor in themselves greatly

Dixon C .J.increase the difficulties. The solution offered by the majority of

the Board of Review is to treat Uiv. 6 as an exclusive statement of the liability of the beneficiary in respect of the income of a tru,st estate. There would thus be no tax under s. 25 payable inde­ pendently by the beneficiary in respect of receipts and so no problem would arise concerning double tax. Section 26 (6), how­ ever, would have little function, except as a preliminary declaration of what is carried out in detail in Div. 6.

There appear to me to be three possible solutions of the difficulty. One is to adopt the view of the majority of the Board of Review and treat Div. 6 as an exclusive measure of the responsibility of th e , trustees and beneficiaries respectively for income tax upon trust income and to interpret s. 95 as drawing in the residence of the trustee as a basis of territorial liability. The objection to that solution is the unexpected and illogical results which it pro­ duces. I t means that a beneficiary who is a resident in Australia deriving income from a trust where the trust funds are invested abroad and the trustees are resident abroad, is not liable to yjay tax on that income, notwithstanding the general policy disclosed by s. 25 (1) (a) that residence shall be a test of liability to pay income tax on income whencesoever derived. E converso it pro­ duces the equally strange result that a beneficiary resident abroad deriving income from a trust where the trust funds are invested abroad is liable to pay Australian income tax if his trustee takes up his residence in Australia.

A second possible solution is to treat s. 25 (1) as imposing a general liability made more specific by s. 26 (6) which is cumu­ lative upon the liability placed by ss. 97 to 100 upon the beneficiary and to work out by implication some means of avoiding double taxation. This is unsatisfactory because the implication required is such a very difficult one and has nothing in the words to support it. Moreover, s. 100 (2) contains a definite provision, in the one case with which it deals, for a deduction by the beneficiary from the income tax assessed against him of the tax paid or payable by the trustee in respect of his interest. I t leaves, as it seems to me, the difficulty outstanding that a beneficiary in the trust estate,

88 C.L.R.] OF AUSTRALIA.

6()i

the income of whicli is from sources abroad, is made liable for

H. C. OF A.

tax, notwithstanding that his residence is abroad if his trustee

1952.

has a residence within Australia.

F e o b r a l

C o m m is­

The third possible view is to treat the residence of the trustee as completely immaterial and to base the territorial liability for

s io n e r OF

'I'a x a t io n

tax of the beneficiary, if any, where he is presently entitled on his

V.

B e l f o r d .

residence and alternatively upon the source of the income, and to

treat the liability of the trustee where there is no beneficiary

Oixon C.J.

yrresently entitled as based upon the source of the income, whether the trustee is resident in Australia or not. This solution is open to some objections which must be stated but it is one which, as I think, has a prima-facie justification upon the natural construction of s. 95. In the express words of s. 95, even when the word “ taxpayer ” is translated according to the definition of s. 6, I can find nothing which requires the residence of the trustee to be taken into consideration. What it directs is a calculation of tlie assessable income of the trust estate on the footing that allowable deductions are made, except in the case of losses where the bene­ ficiary has no beneficial interest in the corpus, or is a life tenant, and the deductions are made out of corpus. The emphasis is not on the trustee being a taxpayer, although that must be part of the hypothesis in order to discover what kind of allowable deduc­ tions are to be made. But there is nothing in the words of the direction to make it imperatively necessary to take into account the personal qualification of the trustee as a resident. Suppose the income were derived from priniary production in the Northern Territory, would the fact that the trustee resided in the Northern Territory be enough to bring the income under the exemption of s. 23 (w) ? The truth is that s. 95 is a direction which ignores the whole question of territorial liability ; the calculation is to be made independently of any such consideration. Under s. 97 there is not much difficulty in importing into the word “ beneficiary ” the conceptions of s. 25 (f), so that if the beneficiary is resident in Australia he is lial)le for tax on the whole share of the income of the trust estate to which he is presently entitled, assuming him to be under no legal disability ; and so that if he is not so resident, he is liable to tax on so much of that income as is derived from sources out of Australia. A little more difficulty arises in s. 98, because the assumption is that the beneficiary is presently entitled but is under a legal disability and that the trustee is therefore the person to be assessed. But I think that it is not too difficult to inrport the same criterion in the case of the beneficiary under the legal liability. The trustee is taxed in a representative capacity

002

HIGH COURT

[1952.

}T. ('. OF A.and tliat beneficiary is the person whom he represents. This is

1952.e(|ua]]y true of s. 100. Section 99, however, creates more difficulty.

F f d f h .m , If s. 25 (1) (b) was somewhat differently framed, it would be

C o m m i s ­

comparatively easy to treat s. 99 as dependent upon the fulfilment

si on KK

OF

'.r.\X.\TIONof the test laid down for territorial liability and accordingly, as

r.

the hypothesis of that section is that there is no relevant person

F

f l k o k o .

deriving income beneficially who could have a residence, to put

-Dixon

r.,1 .

residence on one side and confine it to the territorial test of source. The difficulty, however, is that s. 25 (1) (6) is so framed that it does not speak independently of residence in making income derived from sources in Australia part of every taxpayer’s assess­ able income. I t begins by speaking of the taxpayer as a non­ resident and says that in that case his assessable income shall include the gross income derived from all sources in Australia. It is not easy to find the non-resident for the purpose of s. 99 any more than the resident, and thus a verbal difficulty arises. On the whole, however, I think that the manifest intention of always taxing income derived from an Australian source is so clear that s. 99 should be applied whenever there is an Australian source for the income. The fact, however, that s. 99 applies to cases where there is no one beneficially entitled to the income must make it impossible to find anybody liable on the basis of residence in such a case.

Of these three possible solutions, all of which, it must be acknowledged, include major difficulties, I. prefer the third. The chairman of the board, Mr. R. R. Gibson, found it attractive but rejected it upon grounds which, although they exist, appear to me to be insufficient to drive one to a preference of either of the other two solutions ; and I know of no fourth solution. After stating his conclusion Mr. Gibson said I have tried hard, but without success, to arrive at some other reasonable- view the application of which, if it were proper to apply it, would solve the anomaly and also the problem of the case supposed by m)̂ un­ answered question. I thought at one stage that the solution might lie in regarding the hypothesis of the calculation under s. 95 as concerned only with arithmetic in the sense that it requires only the calculation of the amount of the total assessable income and the amount of the net income of the trust estate, leaving the question as to the assessability of the beneficiary (if any) in respect of his share of the latter amount, to depend on whether he was or was not a resident of Australia ; and in exploring that idea T did not overlook the anomaly of the converse of the present case, i.e. the case in which the trustee is a resident and the

88 C.L.R.] OF AUSTRALIA.

603

beneficiary presently entitled to tbe income of tbe estate is a non­

H. C. OF A.

resident, tbe factor in common with the present case being that

1952.

the income of tbe estate is derived from sources out of Australia. F e d e r a l

However, I abandoned tbe idea partly because it appeared to C o m m is­

s io n e r OF

place an improper limitation on tbe application of tbe word ‘ tax­

T a x a t io n

payer ’ as used (in its defined sense) in s. 95 and partly because

V.

B e l f o r d .

it threatened even greater anomalies than those already stressed :

it Avould, for instance, involve {inter alia) the calculation of a

Dixon C.J.

different assessable income and net income for the purpose of ascertaining, respectively, tbe assessable interests of resident and non-resident beneficiaries. The position, as I see it, is therefore such as to necessitate dealing with the question whether the issue in this case is governed by the provisions of Div. 6.” For myself, I think that the difficulty of what Mr. Gibson calls limiting the word “ taxpayer ” is not so great and that, in fact, the natural reading of s. 95 is to ignore the attribute of quality of residence in the trustees. I agree that there is some difficulty in the calcula­ tion of the assessable income for a resident and a non-resident beneficiary, but I have already indicated the answer which I would give to that difficulty. That answer is that the net income must be apportioned according to source imder s. 97 and under s. 98, if the beneficiary is a non-resident and under s. 100, and in some cases under s. 99. “ Apportioned”, although the term formerly in common use in this connection, is not perhaps the best word, but what I mean is that what is to be included for the purpose of the liability to tax is so much of the net income of the trust estate as is attributable to sources in Australia.

I am not disposed to describe Div. 6 as an exclusive measure of the liability.

What appears to me to be the truth is that ss. 97

to 100 together with s. 95 work out the proposition contained in s. 26 (6) and that s. 25 (1) has an application in relation to ss. 97 to 100 in determining the liability of the beneficiary, or of the trustee on his behalf where the beneficiary presently entitled is under a legal disability, and of the trustee where there is no beneficiary. The result of the construction which I would adopt is that where there is a beneficiary presently entitled, his residence determines the liability to tax in respect of his share of the income of a trust estate derived from sources abroad. The trustee’s residence is always irrelevant. Where there is no beneficiary and the trustee is to be taxed because of the absence of any beneficiary then source must be the test, as, for instance, where the income is accumulated under a trust for accumulation or where there is only a trust for purposes which are charitable but not exempt under s. 23 (e) or excluded by deduction under s. 78 (1). In my

G04 HIGH COURT

[1952.

H.C. OF A. opinion the question in the special case should he answered that

1952.the income amounting to £A1,428 referred to in pars. (4), (5) and (G) thereof is the assessable income of Rollande Danielle Belford

F

e d e k a l

CoJlMJS-

of the income year ended 30th June 1945.

SIONKR OF T a x a t io n

t’.

W ebb J.

I agree with the reason for judgment of the Chief

E e l f o k d .

Justice and with the answer proposed by his Honour.

F ullagar J.

I agree with the judgment of Taylor J . in this

case.

1 have nothing to add.

K itto J. I agree that the question should be answered as proposed by the Chief Justice.

If, as the respondent contends, s. 95 of the Income Tax Assess­ ment Act 1936-1945 should be so construed that, having regard to the non-residence of the trustees and the ex-Australian source of the trust income, s. 97 does not operate in respect of the income year ended 30th June 1945 to include any of the trust income in the respondent’s assessable income, I should be of opinion that the income which the trustees paid to her in that year was included in her assessable income by force of s. 25 (1) {a) and s. 26 (5).

There is no purpose to be served by my publishing detailed reasons for this view, since the Court is prepared to place upon s. 95 the construction which the Chief Justice has indicated. I do not doubt that the sections for which s. 95 defines “ the net income of the trust estate ” , construed as the Court construes them, fit into the scheme of the Act with a minimum of damage to its language, and so as to produce a degree of harmony which the draftsman may well wish he had intended.

I do not dissent from the view which appears to my brethren to be right, but I confess that I have not been free from an uneasy feeling that the line which divides construction from reconstruction is not far off.

Taylor J. The case stated in this matter raises for decision the question whether the appellant was right in including in the respondent’s assessable income for the year ended 30th June 1945 the amount of £1,428. There is no dispute that during that year the respondent became entitled to that amount as the sum of the income of a settled fund and residuary income under the will of her deceased father, and there is no dispute that this sum was paid to her during the same year. The trustees of the settlement, however, were non-residents of Australia and they derived the trust income from sources outside Australia.

88 C.L.R.] OF AUSTRALIA.

605

H. C. OF A.

In particular, tlie facts raise tlie question whether the liability of a beneficiary in such a case to income tax must be determined

1952.

exclusively under Div. 6 of Pt. III. of the Income Tax Assessynent

F e d e r a l

COMMI.S- SIOXER OF

Act 1936-1945 by reference to his right to share in the income of

the trust estate during any year and not by reference to his actual

T a x a t io n

receipts of such income during that year, or whether a beneficiary

V.

B e l f o e d .

may, independently of Div. 6, be assessed by reference to his

actual receipts of trust income to which he is beneficially entitled. Taylor

J .

The respondent to the appeal contends that the first proposition is correct and thereupon raises the further contention, based upon s. 95, that where the trustee is a non-resident and the trust income is derived from sources outside Australia the beneficiary, even though he is a resident of Australia, is not liable to tax. This, it is said, is the consequence of the language of s. 95, which defines “ the net income of a trust estate ” as the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer of that income, less all allowable deductions, except, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are .required to be met out of corpus. “ Taxpayer ” is defined by the Act to mean a person deriving incoyne and not as a person chargeable with income tax. Therefore, it is said, where he is a non-resident and derives the trust income from sources out of Australia the trustee has no assessable income under the Act and there is no net income of the trust estate within the meaning of Div. 6.

I t is convenient, in the first instance, to considei the first problem raised by the appeal. Sections 97, 98 and 99 deal with the incidence of income tax on what is called in those sections the “ net income ” of trust estates. In view of the definition which is contained in s. 95, it is, pursuant to s. 97, incumbent upon a beneficiary ŵ ho is presently entitled to a share of the income of a trust estate to include in his assessable income a proportion of the total assessable income of the trust estate for the relevant year calculated in accordance with s. 95. The ascertainment of the total assessable income of the trust estate for any year is, of course, not concerned with payments by way of distribution to beneficiaries and the total assessable income of the trust estate will, in any particular case, be precisely the same whether the whole or some part only, or none of the estate income has, during the relevant year, been distributed to beneficiaries presently entitled to shares thereof. Yet in such cases, s. 97 requires that the appropriate share of the total assessable income of the trust estate shall be included in the assessable income of each beneficiary, and this is

GOO

HIGH COURT

[1952.

H.r. OF A.SO whetlier any beneficiary has actually received the whole or

1952. some part only, or none of such income. To my mind this is a clear indication that the Act intends, in such cases, that there shall

F udkhal

C o m m i s ­be included in a beneficiary’s assessable income, not the amount

si on HU OK

'rAx.vnoNof his actual receipts of the estate income, but a proportion of the total assessable income of the trust estate which, for obvious

B

k l ko r o .

reasons, may be quite a different amount and, generally at least, a

Taylor .T.greater amoimt.

Again, s. 98, though it has the effect of rendering the trustee liable to pay the tax involved in cases where the beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, requires the tax to be calculated not bv reference to the amount to which the beneficiary' is entitled but by reference to a share of the “ net income of the trust estate ” or, as defined by s. 95, the total assessable income of the trust estate. In the case of such beneficiaries the liability for tax ultimately falls upon them because the initial liability of the trustee for tax will always be discharged or recouped out of the shares of the beneficiaries and, indeed, any further liability to tax which may arise by reason of the fact that the appropriate share of the “ net income of the estate ” is part onlŷ of the assessable incomes of such beneficiaries will fall directly upon the beneficiaries them­ selves pmrsuant to s. 100.

The plan of Div. 6 of Pt. III. is reasonably clear. Its various sections deal with at least four main categories; s. 97 deals with cases where beneficiaries are presently entitled to shares of income and are not under any disability ; s. 98 deals v/ith the cases of beneficiaries who are presently entitled to shares of income but are under a legal disability whilst s. 99 deals with the case of trust estates where no beneficiary is presently^ entitled to any part of the income and s. 101 deals with discretionary trusts. In the first of these cases the liability for tax is throwm directly' upon the beneficiary w'ho is required to include in his assessable income for any particular year his appropriate share of the “ net income of the trust estate ” . The necessary effect of such inclusion is, of course, that the beneficiary is directly liable to pay tax on such share and his rate of tax is determined by' reference to his total taxable income which, in turn, depends, in part, upon the inclusion in his assessable income of his share of the net income of the estate. In the case where a beneficiary is presently entitled to a share of income but is under a legal disability the liability for tax is thrown in the first instance upon the trustee, presumably because no pay­ ment will be made to the beneficiary w'hilst he remains under the disability. Nevertheless, the circumstance that such a beneficiary

88 C.L.R.J OF AUSTRALIA.

G07

is entitled to a share of the net income of the trust estate will

H. C. OF A.

directly affect the amount of tax payable by the beneficiary

1952.

himself. If he has other income his appropriate interest in the F e d e r a l

C o m m is­

net income of the trust estate must, pursuant to s. 100, be included s io n e r OF

in his assessable income and this in turn will affect the rate at

T a x a t io n

which he is directly taxed. Provision is made in sub-s. (2) of s. 100

V.

B e l f o r d .

against double tax in the case of any such beneficiary by the

Taylor

J .

granting of a rebate from the income tax assessed against him of the tax paid or payable by the trustee in respect of the bene­ ficiary’s interest in the net income of the trust estate. I t is, I think, of some significance that no provision is made for any rebate of tax paid upon any beneficiary’s share of the net income of any trust estate from any tax which might, on one view of the Act, be subsequently assessed upon actual receipts of income. I t is also of some significance that s. 101, which deals with the case of discretionary trusts, does not provide that a beneficiary in whose favour a trustee exercises his discretion shall be taxable by reference to the amounts actually received by him. I t merely provides that the beneficiary in such a case shall be deemed to be presently entitled to the amount paid to him or applied for his benefit. I t is by reference to the share in the estate income represented by the amount so paid that such a beneficiary’s share of the “ net income ” of the trust estate is calculated for the purposes of s. 97.

I t is to me inconceivable that the Act which, in Div. 6, requires a beneficiary presently entitled and whether under a disability or not to include as fart of his assessable income for any year his appropriate share of “ net income ” of the trust estate for that year whether or not he has received any part of that income, should be taken to intend that such a beneficiary must also include in his assessable income for that or any later year his actual receipts upon a distribution of the estate income. The provisions contained in Div. 6 appear to me to cover the whole field and upon a review of the various sections contained in the division, I am of the opinion that, within the scope of its operation, it makes exclusive provision for the levying of tax upon income from trust estates and to this extent the respondent’s argument must, I think, succeed.

I am of opinion, however, that the respondent’s arguments on the remaining proposition are not sound. The clear answer to this proposition is that s. 95, beyond defining the meaning in Div. 6 of the expression “ the net income of a trust estate ” as the total assessable income of the trust estate and prescribing the appropriate method of caladation, is not concerned with determin-

GOS

HIGH COURT

[1952.

i r . ( ' . OK

A.

ing the incidence of tax in particular cases. For the purpose of this calculation the residence or non-residence of the trustee would FiomouAL be iniinaterial, notwithstanding the general words of s. 25 (1) (b)

C om MIS­

that the assessable income of a taxpayer shall include, where

SION lOK Ol'"

T ax at i o nhe is a non-resident, the gross income derived directly or

V.indirectly from all sources in Australia. The reference to allow­

B

k.l k o r i ).

able deductions in s. 95 and the exceptions therefrom indicate at

Taylor J .the outset of the division that the representative capacity of

trustees is a matter of significance and it is ecjually clear that the levying of tax upon either trustees or beneficiaries is dealt with by the other sections contained in Div. 6 and particularly by ss. 97, 98 and 99. Upon the scheme of the division there is no reason to assume that it was ever intended to make the residence of the trustee the criterion for ascertaining the liability to tax of a beneficiary under s. 97, or, indeed, under s. 98. The first of these sections provides for the levying of tax directly upon a beneficiary who is presently entitled and it would, I think, be quite out of accord with the scheme of the Act to make this liability to tax depend upon the residence of the trustee. Upon consideration of the part, as a whole, I do not thinlr that this effect is produced by the language of s. 95 ; that section is merely concerned with the matters to which I have already referred. In my opinion a bene­ ficiary, whether his case falls under s. 97 or s. 98, is, if he is a resident, liable to tax assessed in accordance with the part wherever the trust income is derived, but if he is a non-resident he would be liable to tax only to the extent to which his share of the income is derived from sources in Australia. The provisions of s. 99, how'- ever, present another probleng but it is unnecessary in this case to decide between the competing contentions.

For the reasons wFich I have given I am of the opinion that the decision of the Board of Review was wrong and that the respondent was liable to tax as assessed.

Question in the case stated ansivered that the income amounting to £H 1,428 referred to in pars. (4) (5) and (6) thereof is the assessable income of Rollande Danielle Belford of the income year ended ?>0th June 1945. Costs reserved for the order of the judge disposing of the appeal.

Solicitor for the appellant, D. D. Bell, Crowm Solicitor for the Commonwealth.

Solicitors for the respondent, Biddulph d Salenger.

J. B.