Federal Commissioner of Taxation v Belford

The Federal Commissioner of Taxation (the Commissioner) appealed to the Full Federal Court against a decision of a single judge of that court concerning the assessability of income derived from trusts established under the will of the late Mr. Belford. The dispute centred on whether certain distributions made by the trustees of these testamentary trusts to the taxpayer, Mr. Belford, constituted assessable income in his hands for the relevant income years.

The primary legal issue before the Full Federal Court was whether the distributions received by the taxpayer from the testamentary trusts were income according to ordinary concepts and usages of mankind, or if they were capital in nature. This involved determining whether the trustees had exercised a power to convert capital into income, or if the distributions were merely a distribution of income that had already been derived by the trusts. The court was required to consider the terms of the will, the nature of the trust assets, and the actions of the trustees in making the distributions.

The Full Federal Court held that the distributions made by the trustees were not assessable income in the hands of the taxpayer. The court reasoned that the trustees had not exercised any power to convert capital into income. Instead, the distributions represented a distribution of capital that had been retained by the trusts and had not been applied as income. The court applied the principles established in cases concerning the distinction between income and capital in trust law, emphasizing that the character of the distribution depends on the terms of the trust instrument and the intention of the trustees. The appeal was dismissed.