Harmer & Ors v The Commissioner of Taxation

[1991] HCATrans 289

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth Nos P39 and P40 of 1990

B e t w e e n -

RONALD WINSTON HARMER, JOHN

DAVID FINLAY and ROBERT GRAEME

HEBBARD as trustees for the

RONALD WINSTON HARMER, JOHN
DAVID FINLAY and ROBERT GRAEME

HEBBARD COURT TRUST

Appellants

and

THE COMMISSIONER OF TAXATION

Respondent

MASON CJ
DEANE J

DAWSON J

TOOHEY J

Harmer(2) 1 21/10/91

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON MONDAY, 21 OCTOBER 1991. AT 2.16 PM

Copyright in the High Court of Australia

MR D.R. WILLIAMS, QC:  May it please the Court, I appear

with my learned friend, MR M.J. HAWKINS, for the

appellant. (instructed by Mccusker & Harmer)

MR C.J.L. PULLIN, QC:  May it please the Court, I appear

with my learned friend, MR W.S. MARTIN, for the

respondent. (instructed by the Australian

Government Solicitor)

MASON CJ: Yes, Mr Williams.

MR WILLIAMS:	Your Honours, I hand up copies of the appellant's out.line of submissions. There has been
prepared and provided to the Court, Your Honours,
in addition a book containing the documents
referred to in the judgments below and a book of
some authorities, excluding the Commonwealth Law
Reports.

Your Honours, the primary question in the

appeal is the meaning of the term "presently

entitled" in Part III Division 6 of the Income Tax

Assessment Act and, in particular, in

section 97(1). This provides that:

Where a beneficiary of a trust estate who is

not under any legal disability is presently

entitled to a share of the income of the trust

estate -

(a) the assessable income of the beneficiary

shall include -

(i) so much of that share of the net income of

the trust estate as is attributable to a

period when the beneficiary was a resident;

I think I can terminate the reading there.

Section 98(1) provides that:

Where a beneficiary of a trust estate who is

under a legal disability is presently entitled

to a share of the income of the trust estate,

the trustee of the trust estate shall be

assessed and liable to pay tax in respect of -

(a) so much of that share of the net income of

the trust estate as is attributable to a

period when the beneficiary was a resident

and -

(b) -

which is not relevant -

as if it were the income of an individual and

were not subject to -

Harmer(2) 21/10/91

certain deductions. Now, plainly the concept of

entitlement, having regard to those two provisions,

has nothing to do with legal disability or

capacity. Section 95A(2) is relevant in the

appeal. That provides that:

For the purposes of this Act, where a

beneficiary has a vested and indefeasible

interest in any of the income of the trust

estate but is not presently entitled to that

income, the beneficiary shall be deemed to be

presently entitled to that income of the trust

estate.

Plainly it is to be deduced from that that the

concept involves - the concept of present

entitlement involves rights beyond mere vesting.

The submission of the appellants is that the focus should be on an entitlement in the sense of title.

There are three cases of this Court of

significance in the proper construction of the

term. The first is a judgment of the Court in

(1943) 68 CLR 199, Federal Commissioner of Taxation

v Whiting. The facts, although - - -

MASON CJ: What proposition are you going to get out of this

case?

MR WILLIAMS:  The proposition is one that is derived from,

really, the two cases of Whiting and Taylor, and

that is that the right to demand and receive

payment by a beneficiary - a demand of the trustee
by the beneficiary is one which is to be determined

by assessing the right, in the sense of title, at the time in question and it is determined, on the

authority of the two cases, we say, by asking the

question, "What would a court, faced with the

demand by the beneficiary and a refusal by the

trustee, do?"

MASON CJ: Essentially it is the proposition in

paragraph 9(b), is it? That is how you have just

stated it.

MR WILLIAMS:  It is that and paragraph 10.

MASON CJ: And paragraph 10? You say Whiting and Taylor

support the propositions in 9(b) and 10?

MR WILLIAMS:  Yes. Not only by the decisions themselves but

by the views expressed in those two cases.

Whiting's case was one in which there was a

deceased estate which, during the relevant year of

income, was in the course of being administered.

The debts of the estate had not all been paid, nor

had all the legacies and there was an annuity to be

Harmer(2) 21/10/91

dealt with. So the residuary estate had not,

during the relevant year of income, been

ascertained but the executives, believing for sound

reason that there would be a residue, appropriated
part of the income in the books of the estate to
the beneficiaries entitled to the income of the

residue in proportion to the entitlement under the

will.

Now, the question was whether that process of

crediting - it was not paid - gave a present

entitlement. Mr Justice Rich who heard the matter

initially said it did, but the Full Court said it

did not. The question was relevant whether the

executors were assessable under section 99 on the

basis there was no present entitlement in the

beneficiaries or whether the beneficiaries were

assessable under section 97. At page 207

Mr Justice Rich, at about point 2 said:

Reading the section as a piece of

English, I think it reasonably plain that in

the case of a beneficiary who is sui juris all

that is necessary in order to attract

liability to him and to divert it from his

executor or trustee is that he should be

presently entitled to income of the estate.

By this, I think, is meant entitled for an

interest in possession as contrasted with an

interest in expectancy. It is not necessary

that he should have received his share of

income.

His Honour was conscious of the fact that the

estate was unadrninistered but at about point 7 he

said:

But if the estate has in fact earned net

income which is not required to be accumulated

for the benefit of persons interested in

beneficiaries are presently entitled to that expectancy, and is not insolvent, the	income notwithstanding that for the purposes
of other language than that of the relevant
sections it might be proper to describe it as
income of the executors, and notwithstanding
that in the proper administration of the
estate the executors may be entitled to
withhold payment and apply it to some other
purpose, and that actual payment may be
exigible only in the course of some later
adjustment.

Over the page, 208 at about point 8, His Honour, in

the middle of the large paragraph, said:

Harmer(2) 21/10/91

And it must always be remembered that what

attracts liability to a beneficiary is the

fact that, being entitled in possession to an

immediate interest, he is presently entitled

to a share of income. The facts that he has

not yet actually received the share to which
he is presently entitled, and that there may

be considerable delay in his getting it, do

not affect his liability to be assessed and to

pay in respect of it, nor divert the liability

from himself to his trustee.

MASON CJ: Are you saying that the Full Court of the Federal

Court was wrong in its enunciation of the

principles with respect to this question?

MR WILLIAMS:  They did not recognize the question in the

form in which - they purported to rely upon Whiting

and Taylor but did not recognize what those

decisions stood for. They also treated the
interpleader proceedings with the setting aside of
the trust fund as enabling a court to create rights

in the moneys set aside and failed to ask the

question that Whiting and Taylor requires to be

asked, namely what would a court do, faced with a

demand by the beneficiaries in question. They

recognized only that there were competing demands

and then dealt with what were really interlocutory

proceedings as if they affected substantive rights.

They did not go behind what the parties were doing

in the interlocutory steps in court and ask what

were the substantive rights of the parties at that

time.

MASON CJ:  But did not their decision really turn on the

view that there was no identified or identifiable

class of beneficiaries at the time the fund was

vested in the trustees?

MR WILLIAMS:  In a sense it turned on that, not only that,

we would say, but the reason the Full Court came to

that conclusion was they saw the identification

process as being one that was done by the setting

up of the trust fund and not one that took account

of pre-existing rights. They failed to have regard

to the whole situation. They had regard to the

narrow effect of the procedural orders.

DAWSON J:  Does it amount to this, that when the court finds

that certain persons are entitled, they were always

entitled.

MR WILLIAMS:  Yes. That is our submission, at least in this

case. There may, of course, be cases where that is

not true. In this case, it was always the case

that there were persons who had an entitlement of a

Harmer(2) 5 21/10/91

definable nature and persons who had no interest.

But they were competing claimants.

I go back to the judgment of the Full Court.

At page 214, at the bottom of the page, reference

is made to the view of His Honour Mr Justice Rich

and it is then said:

On the other hand it is contended that a

beneficiary is presently entitled within the

meaning of the sections only when he is

entitled to immediate payment of a share of

the income of a trust estate. This latter
view is, we think, strongly supported by the

provisions contained in s.98. Section 98

deals with the case of a beneficiary who is

presently entitled, but who is under a legal

disability. In such a case the beneficiary

under a legal disability may have a vested

interest, but the trustee is nevertheless

required to pay the tax. The circumstance

which distinguishes this case from the case of

a beneficiary presently entitled to whom s.97

applies is the existence of a legal

disability. That legal disability does not

prevent the beneficiary from having a vested

interest. The effect of it is to prevent him

receiving payment, because he is incapable of giving an effective discharge to the trustee.

This provision, therefore, supports the view

that when the Act speaks of a beneficiary

being presently entitled to a share in income,
it refers to the right of a beneficiary to
obtain immediate payment, rather than to the

fact that a beneficiary has a vested interest.

At the bottom of page 215, Chief Justice Latham and

Mr Justice Williams said:

The words "presently entitled to a share of the income" refer to a right to income

"presently" existing - i.e., a right of such a

kind that a beneficiary may demand payment of

the income from the trustee, or that, within

the meaning of s.19 of the Act, the trustee

may properly reinvest, accumulate, capitalize,

carry to any reserve, sinking fund or

insurance fund however designated or otherwise

deal with it as he directs or on his behalf.

A beneficiary who has a vested right to

income (as in this case) but who may never

receive any payment by reason of such right,

is entitled to income, but cannot be said to

be "presently entitled" as distinct from

merely "entitled."

Harmer(2) 6 21/10/91

The crux of the decision is on page 216, in the

middle of the paragraph which concludes at the

bottom of the page:

With great respect, it appears to us that

these provisions -

that is Part III Division 6 of the Act -

must be construed in the light of the general
principles of law applicable to the

administration of estates by executors and

trustees at law and in equity.

The Court is saying that one goes back to the basic

rights of the parties.

TOOHEY J: That is the whole point, is it not? Is that not

a different question to the one we are faced with

here? I mean, questions of administration of

estates raise all sorts of problems about

administration and when the fund is available for

distribution and the like, but I took the question

to be here rather whether an inability to identify
the beneficiaries at any particular point in time
really was germane to the question whether there

was anyone presently entitled for the purposes of

the section.

MR WILLIAMS:  In our submission, it is a novel proposition

to suggest that there is no legal entitlement

because the court has not declared that entitlement

at the relevant time. The reason I submit that the

point in the Whiting judgment is that the Court is
directing reference back to the basis upon which
the parties have an entitlement is because what it
tells the analyst is that at the time in question,

the relevant year of income, the beneficiaries in

this estate if they had gone to court would have

got an order against the trustee, at best, for due

administration of the estate. They would not have	got an order for payment. And that is a
substantive distinction between the rights of a person presently entitled and a person not
presently entitled.

TOOHEY J: It is a bit more complicated, is it not, when you

have an actual competition between persons as to

who is entitled, and what does a trustee do who is

faced with an assessment in respect of the income

of a fund that says, well, there is somebody

presently entitled. I cannot say with certainly

who it is because I am faced with competing claims

by X on the one hand and Yon the other.

MR WILLIAMS:  It is a very common situation in the taxation

field that the rights of the parties to a dispute

Harmer(2) 21/10/91

will affect whether or not they have derived income

or have incurred deductions.

McHUGH J: This case was not determined on the major

premise, was it; it was determined on the minor
premise? It turned on the nature of these

interpleader proceedings. The Full Court said it

was left to the supreme court of this State to

determine how the trust fund and its income might

be applied to accommodate any orders that the court

might make. I would have thought that the solution

to the case is to be found in an analysis of the interpleader proceedings and not by reference to authorities which the court did not dispute their

application.

MR WILLIAMS:  In our submission, we partly agree with that

on the basis that it is dependent upon an analysis

of the interpleader proceedings, but in order to

analyse the interpleader proceedings one has to

understand, in our submission, what the authorities

say "presently entitled" means in that context.

MASON CJ:  I think on that point you might be pushing at a

door that is open, Mr Williams, but having as it

were pushed at that door and gained entrance, you

have to come to grips with the issue that has just

been identified.

MR WILLIAMS:  Yes. The interpleader proceedings were in

substance in two stages. At the first stage,

Riverhall came and said, "I have competing claims

to these funds. I am willing to pay to whomever

the court declares that I should pay to but I do

not wish to participate in the proceedings." The

money was paid into court and pursuant to the

orders, Riverhall was discharged. Now, the effect

of those two early orders, that is the orders of

Mr Justice Kennedy and Mr Justice Brinsden which are in the book of documents, was to do two things,

we say: one was to discharge Riverhall from any liability in respect of the debt to whomever it was	owed, but secondly, it converted the claims of the
two claimants into a claim to the moneys paid into
court. That is consistent with orthodox interpleader theory as it is garnered in many
authorities including the judgment of
Chief Justice Barwick in Olsson v Dyson.

The orders were based on Order 17 rules 1 and

5. Order 17 rule 1 provides that:

Relief by way of interpleader may be granted

by the Court -

(a) where the person seeking relief (called

the applicant) is under liability -

Harmer(2) 21/10/91

.....

(iii) for any debt or money; or

.....

in respect of which he is or expects to be

sued by two or more parties (called the

claimants) making adverse claims -

Then in rule 5:

If the claimants appears in pursuance of the

summons the Court or a Judge may order either

that any claimant be made a defendant in any

action already commenced in respect of the

subject-matter in dispute in lieu of or in

addition to the applicant, or that an issue

between the claimants be stated and tried, and

in the latter case may give directions as to

which of the claimants is to be plaintiff and

which defendant, and as to the method of trial

and such other directions as may be necessary

in the circumstances.

The directions in this case, which are contained in

the order of Mr Justice Brinsden of. 21 July, which

appears at page 5 of the book of documents, were

effectively for the trial of two issues: one

relating to the claim by MPP and Amberwood to

$100,000 out of the $125,000 and the profits

relating to it, and the other to the $25,000, a

claim by Sweeney, and in each instance In Residence

Pty Ltd in liquidation was the defendant. In each

case, the pleaded claims of the effectively

successful claimants, MPP and Amberwood on the one

hand, and Sweeney on the other hand, were based on

contractual rights which had been derived well

prior to the interpleader.

Now, the next step, the second stage in the

interpleader proceedings, was when a consent order

was made by Mr Justice Wickham in 1982 setting up

the trust fund. The order is in relatively simple

terms. It is page 9 in the book of documents. It

is expressly:

by consent IT IS ORDERED THAT:

1. The monies paid into court by the Plaintiff

herein be paid out of court to the solicitors

for the First Defendant for investment with

Town & Country Permanent Building Society in a

redeemable investing share certificate

account, such deposit to be made in the names

of -

the solicitors -

Harmer(2) 9 21/10/91

and that such monies be held on trust by them

pending the determination of these

proceedings.

Now, the claims of the competitors having been

converted at the time of payment into a claim to
the money paid into court, they were reconverted at
this stage, not to a claim in the nature of a debt

as money paid into court is as regards those

claimants, but to a specific fund which is set

aside in the names of other persons to be disposed
of by the court by order after the parties'
entitlements were declared. Now, the making of

that order was authorized under Order 52 of the

Supreme Court Rules - that is in the list of

authorities. It appears at page 32, Order 52

rule 2(3):

Where the right of any party to a fund is in

dispute in a cause or matter, the Court may
order that the fund be paid into court or

otherwise secured.

What occurred in this case was that the fund was

secured. It meant that Riverhall was two stages

removed at that stage, but the entitlement to the

fund was still notionally the entitlement of the

claimants against the original debtor but it was to

a specific fund appropriated for that purpose, and

for that purpose only. It was a trust fund in that

sense.

The point at which the Full Court of the Federal Court, in our submission, fell into error

was in its characterization of those proceedings.

The proper characterization, we would say, is that

the court has made an interlocutory order in the

nature of an order preserving a fund that could
have been made in ordinary proceedings in an

injunction on the basis that there is, as between

the competing claimants, a serious issue to be

tried. It has not made any finding as to the

entitlement, other than that there is a serious

issue as between the parties to be determined by

the court. So the entitlement remains exactly as it was prior to the interpleader and prior to the

payment into court.

It is a distinction that was recognised by

Sir William Blackstone in the fourth edition of his

commentaries in volume II, page 389. Sir William,

subject to his later editors, wrote - and I am

reading at about point 7 on the page:

A judgment of a court of justice, is

frequently the means of vesting the right and

property of chattel interests in the

Harmer(2) 10 21/10/91

prevailing party. And here we must be careful

to distinguish between property, the right of

which is before vested in the party, and of
which only possession is recovered by action;

and property, to which a man before had no

determinate title or certain claim, but he
gains as well the right as the possession by

the process and judgment of the law. Of the

former sort are all debts and choses in

action; as, if a man gives a bond for
20 pounds, or agrees to buy a horse at a
stated sum, or takes up goods of a tradesman

upon an implied contract to pay as much as

they are reasonably worth: in all these cases
the right accrues to the creditor, and is
completely vested in him, at the time of the

bond being sealed, or the contract or

agreement made; and the law only gives him a

remedy to recover the possession of that

right, which already in justice belongs to

him.

MCHUGH J: What page is this?

MR WILLIAMS:  Page 389, going on to page 390. There are two

extracts from Blackstone. One is volume III,

relating to ..... , the other is volume II relating

to - - -

McHUGH J:  Yes. I have been given pages 398 and 399. I am

right. It has been added. Somebody has seen the

mistake apparently.

MR WILLIAMS: At the bottom of the page, 389:

and the law only gives him a remedy to recover

the possession of that right, which already in

justice belongs to him. But there is also a

species of property to which a man has not any claim or title whatsoever, till after suit	commenced and judgment obtained: where the	right and the remedy do not follow each other,
as in common cases, but accrue at one and the
same time; and where, before judgment had, no man can say that he has any absolute property,
either in possession or in action. Of this
nature are -

and then the commentaries refer to penalties, then

secondly damages, given the example of damages for

assault, and in relation to that it is said:

It is true that this is not an acquisition so

perfectly original as in the former instance:

for here the injured party has unquestionably

a vague and indeterminate right to some

damages or other, the instant he receives the

Harmer(2) 11 21/10/91

injury; and the verdict of the jurors, and

judgment of the court thereupon, do not in

this case so properly vest a new title in him,

as fix and ascertain the old one; they do not

give, but define, the right. But, however,

though strictly speaking the primary right to

a satisfaction for injuries is given by the

law of nature, and the suit is only the means

of ascertaining and recovering that

satisfaction; yet, as the legal proceedings

are the only visible means of this acquisition

of property, we may fairly enough rank such

damages, or satisfaction assessed, under the

head of property acquired by suit and judgment	at law.
And the third category is costs and expenses

of suit which are "looked upon as an acquisition

made by the judgment of law."

What the Full Court did was to characterize

events differently. In the judgment of

Justices Wilcox and Lee in the appeal book at
page 51, in the third line, referring to the order

of Mr Justice Wickham setting up the trust fund,

they said:

In making the order by consent, the Court was

acknowledging an undertaking by the solicitors

that they would hold the monies for the

benefit of interests which may be created by

orders made in respect of that sum as part of
the determination of the litigation.

That suggests that rights are created rather than declared by the proceedings. They call in aid two

points to support that and said that:

The Court retained a discretion to make

various orders in respect of the monies held

by the solicitors.

the Court may have ordered that part of the
fund, or the income thereof, be applied to the
costs of a party including the costs of

Riverhall as plaintiff to the originating

summons.

Then in the same paragraph:

What those fail to recognize, in our submission, is that there are parties who, as at that time, have

pre-existing valid claims and there are parties who

have claims which are not valid. Nothing that is

done by the court order can affect that; any of

the court orders. All that the court is doing is

in effect injuncting the proceeds until it has had

Harmer(2) 12 21/10/91

the opportunity to determine the rights of the

parties. There is in every sense of the word a

title, a present right to demand and receive

payment vested in - in this case to the

beneficiary.

At the bottom of page 52, the second-last sentence, there is a similar comment by the court:

The object of the Court order was to deliver

the funds to the solicitors to hold the same

for the eventual use of others.

In our submission, that fails to recognize the

injunctive nature of the orders. At page 60

Their Honours say in the third line:

the terms of the trust thereby established

were that the trustees would hold the sum for

the Court and for such interests of the

parties to the litigation as may be eventually

created by the Court.

Contrasted with that is the sentence at the end of

that paragraph:

The purpose of the trust was to maintain the

value of the trust fund pending the

determination of the litigation and the

declaration of the legal entitlements of the

litigants inter se.

With respect, we would say that those two

propositions are inconsistent and that the second

one is the correct one. At the bottom of page 61

reference is made to the in personam claim by

Sweeney against In Residence. It is not altogether

clear what the court meant by that, because all of

the claims of the parties in the proceedings were

in the nature of in personam claims. Their Honours

then say: None of the parties had a right to any part of the income of the trust fund. The further

Court orders established those rights.

In our submission that is incorrect. Over the page

at the top:

The creation of the trust established the

litigants as a class of persons from which the

eventual beneficiaries would emerge upon determination of the pending litigation.

In our submission that is an incorrect

characterization. In the middle of that paragraph:

Harmer(2) 13 21/10/91

This was not a case of the postponement of enjoyment of the benefit of a right to income but rather the postponement of the vesting of

a right to the income of that trust fund.

In our submission that is incorrect. There was no

vesting of the trust fund at all. There was in

effect a restraint removed on the receipt by the

party entitled to it. It further on said:

the vesting of rights to the corpus and income
of the trust fund would occur upon the making

of that order of the Court.

Again, in our submission that is incorrect. In

Taylor's case Mr Justice Kitto at page 452 stated what he regarded as the correct conclusion in the case before him, bearing in mind this is a case

involving infants.	He said in the third-last
paragraph:

In my opinion the correct conclusion in the present case is that the son was "presently

entitled" to the relevant income because (1)

it was legally available for distribution, (2)

as to the whole of it he had an absolutely

vested beneficial interest in possession, and

(3) but for his legal disability from giving a discharge he would have succeeded in an action

to recover it from the trustees.

All of those conditions are satisfied if the court

in the present case declared the rights of the

parties and then proceeded as they did after the

end of the year of income to determine who was

validly entitled. There His Honour is stating the

test: could he have succeeded in an action to

recover it from the trustees?

TOOHEY J:  Mr Williams, the way in which you put your

part other than, as it were, a part of the history	argument, do the interpleader proceedings play any
of bringing the trust into existence? Perhaps,
hopefully to make clear what I have in mind, on
your argument, if the three solicitors had at some
stage before there was any litigation come into possession of the fund or agreed that the three of
them would hold it as trustee for whosoever should be held to be entitled following the resolution of
litigation, would the position be any different to
what it is in the present case?

MR WILLIAMS:  In our submission, substantially no, nor would

it have been any different if the fund had been

held by Riverhall or competing claims and the

parties obtained an injunction restraining

Riverhall from disposing of the funds pending

Harmer(2) 14 21/10/91

resolution of court proceedings. All that has

happened is that there is litigation between the

parties making competing claims to a particular

asset in the hand of another and the court is

restraining the disposition of that fund until the

rights are determined.

TOOHEY J:	Then could I come back to my earlier question. What on your argument is the significance of the
interpleader proceedings other than perhaps
bringing the trust into existence?
MR WILLIAMS:	I think there is another significance, and

that is that the fact that there are these

interlocutory proceedings on foot has resulted in

there being a temporary interlocutory prevention of

possession. the valid claimants from enjoying actual

TOOHEY J:	Is that anything to do with presently entitled?
MR WILLIAMS:	In our submission it has got nothing to do

with it.

TOOHEY J:	Thank you.
MR WILLIAMS:	In relation to the question of vested and

indefeasible interest within the meaning of

section 95A(2), there really seems to be little

difference between the views as to the meaning of

that term expressed by His Honour Mr Justice French

and Their Honours in the Full Court. On that basis

"vested" means, in our submission, vested in

interest. There is no apparent contest, and the

only reason that the Full Court differed from

Mr Justice French in holding it inapplicable was because of their characterization of the nature of

the rights held by what we would say are the valid

claimants at the relevant time.

The relevant passages in the judgment of

Mr Justice French appear at page 28.	In the first
paragraph towards the end he says:

In my opinion, the vesting contemplated by

sub-s.95A(2) is a vesting in interest and such

a vesting had occurred in this case. The

beneficiaries may not have been known but they

were certain, albeit a process of judicial

inquiry was necessary to determine who they

were.

He then refers to the Commissioner's submission

that the interest of the beneficiaries was

contingent. He said:

Harmer(2) 15 21/10/91

In my opinion, while it may be arguable, contrary to my view on the question of

"present entitlement" generally, that there

was no right of immediate payment the fund was

vested in interest. Its enjoyment was merely

postponed until and not contingent upon the

judgment of the Court. The directions to be

given by the court would merely give effect to

the rights recognised by the judgment.

In the judgment of Justices Wilcox and Lee at

page 63, Their Honours state:

Whatever the scope for operation of this sub-

section -

that is 95A(2) -

may be, for the reasons outlined above in

respect of the question of "present

entitlement" the facts of the present case do

not permit a conclusion that there were any

beneficiaries who had a vested and

indefeasible interest in the income of a trust

estate according to the ordinary meaning of

those words as understood in law. The Act

provides no indication that the words are to
be understood in other than their ordinary

meaning.

Then they conclude at the bottom of the page that

the interests were not vested either in possession
or in interest, having regard to the

characterization of the rights of the parties.

McHUGH J:  Mr Williams, did the court have a discretion to

order payment of costs out of this fund?

MR WILLIAMS:	Yes.
McHUGH J:

prior to the court's judgment, what entitlement any If that is so, how do you know whether or not, person had to part of the fund?

MR WILLIAMS:  I think one could go back to Blackstone in

that respect and say that what the court was doing

was declaring the rights of the parties as to the

income of the trust fund. At the end of the

proceedings the court would exercise a judgment as

to whether or not a party should pay the costs of

another party. That is not a pre-existing right;

that is something that is determined by the court

at the conclusion of the proceedings. It is

something in the nature of a contingency that may

never happen. If the court did make an order for
payment of the costs out of the fund, it is merely

addressing the rights of the parties to the costs

Harmer(2) 16 21/10/91

and, having regard to the convenience of the fund

being there, making an order.

DAWSON J:  You say it is tantamount to making the

beneficiary pay the costs; making those who are

otherwise entitled to the fund to pay the costs?

MR WILLIAMS:  Yes, that is all it is. Blackstone regarded

it as not a pre-existing entitlement. So that in

this case, at the time of the relevant years of income, both of them, no order for costs of the

eventual proceedings had been made.	In any event,
you cannot tell what the court might do.	It might

decide no costs should be ordered. Having a

discretion of that nature does not, in our

submission, affect the basic entitlement of the

property to the trust fund in question. There was

in fact an order made in Riverhall's favour at the

time of the original payment into court, but its

costs to be paid having regard to the competition.

From memory I do not remember what happened,

but it would be open to the court to say in favour of the valid claimants who succeed in having their

entitlements declared favourably, "You have an

order for costs against the unsuccessful
claimants." That is the sort of order one would

normally expect. So that the normal expectation

would be that there would be in any event no order

for costs made in respect of the fund, but it could

not be denied that there was a possibility.	They
are our submissions.

MASON CJ: Thank you, Mr Williams. Yes, Mr Pullin?

MR PULLIN:  May it please the Court. Could I hand up my

outline of submissions. Your Honours, could I just

correct one typographical error at the top of

page S. The reference to Order 17 rule 8 should be

a reference to Order 17 rule 15. Your Honours, so

far as the law is concerned, it seems that

Mr Justice French, the Full Court, the appellant

and the respondent were in complete agreement about

the law. We agree with the statement as it appears

in 9(b) of my learned friend's outline of
submissions that "present entitlement" means the

right to demand and receive payment of the income. So far as "vested and indefeasible" is

concerned, there is no disagreement with us on that

point. The "vest" means to vest an interest, but

of course such an interest may be contingent

interest. So the legislation says that for the

purposes of that section, it must be vested and

indefeasible; in other words, not liable to be

defeated. So relevantly the interest must not be a

contingent interest. As I say, the parties are

Harmer(2) 17 21/10/91

really in complete agreement on the law and so

therefore it is a fact case and it is to the facts

that I turn.

Riverhall, when it came to court with its

money, came with its own money. It did not come

with money that somebody claimed to have an

interest in such as the case - just to give an

example, what I might call an ascertainment case.

That is where money is left in a will, for example,

to the eldest surviving son. There may well be a

dispute before the court as to who that person is,

and in that case the court is merely ascertaining

the person who has the entitlement, but in this

case Riverhall came with its own money to discharge	a3 debt and it wished to pay it to somebody, was
confronted with claimants, and that money was then paid into court.

If I can just trace through the history, does

the Court have my learned friend's book of

documents?

MASON CJ: Yes.

MR PULLIN:  The money went into court - it appears on

page 1. My page is unnumbered, but it appears to
be the first document after the index. The money

that was paid in was $198,195 and this appears to

have been on 30 June 1981. That comprised of

$125,000 of money which Riverhall said that it

wished to repay by way of loan repayment, plus an
amount which equalled the share in the development

which had taken place. So that money was paid into

court.

Can I say that when money is paid into court, there are a number of things that need to be

appreciated, and Mr Justice McHugh has already

appreciated one of those facts, and the most

important fact, we say. That is that the court has

power to deal with those moneys at its discretion.

Order 17 rule 15 is the rule which in very broad

terms gives the court the power to make a
determination in relation to costs. It is just

couched in very wide terms. In addition, the

Supreme Court Act section 37 says that costs are:

in the discretion of the Court or Judge, and

the Court or Judge shall have full power to

determine by whom or out of what estate, fund,

or property, and to what extent such costs are

to be paid.

Could I just hand up to the Court section 37 and

Order 66 rule 2. Order 37, as I have read to the

Court, gives a very wide discretion. Order 66

Harmer(2) 18 21/10/91

rule 4 which appears at the bottom of the page of

the two pages which are stapled together says:

Where property is the subject of any action or matter, or where any question arising therein

will affect any right or claim to property,

the Court may make an order that the costs of

any party may be recovered out of the property

with or without recourse against any other

party: provided that no such order shall be

made unless the Court is satisfied that the

party seeking the order had a genuine interest

to protect, or that it was reasonable in the

circumstances that he should appear.

Just how wide these powers are is indicated, for

example, in Aiden v Interbulk, which is on our list

of authorities, which is a case where someone who

was not a party, I think that being an interpleader

case, was ordered to pay costs. One can see the

same sort of action of the court wherein, for

example, Singh v Observer Newspaper, which I have

referred to on the list of authorities, somebody

who was unlawfully maintaining an action was

ordered to pay - or was seen to be _someone who

could be ordered to pay costs of one of the

parties. So there are very broad powers in the

court and therefore in proceedings as there were

here, where there were two sets of proceedings
where the various sets of contenders were involved,

there could be orders made from one piece of

litigation against a party in the other piece of

litigation.

TOOHEY J:	Mr Pullin, are you saying that the existence of such provisions is destructive of the notion that
there can be a present entitlement in terms of the tax provision?
MR PULLIN:	Yes, and we say that it is destructive also of

the need to establish that there is a vested and

indefeasible interest, because take the position at

the end of a tax year - and that is the time that

it must be judged. Could any of the beneficiaries

have said, "I am presently entitled to the income

of the fund which had been established by the order

of the court", to which I have referred? The

answer is no,. that they could not, because at all

times the court had the power to order that in fact

some of the income not go to one of the parties.

So in that sense it was defeasible, it was a

defeasible amount of income because the court could

make an order which would defeat the interest of

the party who was claiming it.

Indeed, that is what happened in this case.

What I will now demonstrate, just to see what can

Harrner(2) 19 21/10/91

be done with the fund, is then illustrated by what

we see in the booklet. Could I then go on to the

next order which was made, which appears at page 4

of the booklet, remembering that the first order

was that the moneys be paid in within 21 days, and

it appears that it was paid in because 14 days

later, as appears from page 4:

Out of the moneys ordered to be paid into

court by the Plaintiff pursuant to the order

of the Honourable Mr Justice Kennedy ..... the full satisfaction of its costs of and

incidental to these proceedings to date.

So here we see t:• court making an order in fact in favour of the interpleader and some of the fund is being used for that purpose. The odd thing is that

later on we will see that that $1010 in fact was

not deducted, and I can only speculate that the

parties reached some agreement that rather than go

through the administrative nightmare of trying to

break it up into two and being paid out, that it

was somehow paid directly. But I have no

information, there is no information in the

documents which indicates that.

So at the moment we are looking at this figure

of $198,195. We now have the position where it has

been reduced by $1010, and then we come to page 10

where we find the order which creates the trust,

the income of which the Commissioner is interested

in in this case. So the Court will see that:

The monies paid into court by the Plaintiff

herein be paid out of court to the solicitors

for the First Defendant for investment with

Town & Country Permanent Building Society in a

redeemable investing share certificate

account, such deposit to be made in the names

of ••••• Harmer, •..•• Finlay and •.••• Hebbard,	and
that such monies be held on trust by them

pending the determination of these

proceedings.

That is in fact almost a year later, because remembering it was 81 that the order of June 81 and

then July of 81 that the $1010 was ordered to be

paid out. The next document that I wish to refer

to is at page 11 which you will see is the letter

from one of the trustees, Mr Harmer, to the

building society advising of a forthcoming

investment of $198,195. The investment is to be

made in the name of the three persons. So in it

goes into court in 1982, interest is then earned

and that is the income of the trust estate that we

are concerned with in terms of division 6.

Harmer(2) 20 21/10/91

Then we have the judgment of the court some

years later. Just before going to the judgment, I

might go to the reasons for decision of

Mr Justice Olney at page 40, where it is recorded that the money which Riverhall was paying was as a

result of a loan.	So In Residence had agreed to
lend Riverhall $125,000.	Then so far as the orders

that were made, they are found at - one of the

orders made is at page 75. One can see the heading

of the proceedings back on 74 and 75, that the two

sets of claimants are involved in two sets of

proceedings and they have been heard together.

Here are the orders made, and one of them on

page 76 at paragraph 7 - so that is the last

paragraph:

The Defendant (in the second issue) pay the

Plaintiff's costs (in the second issue) fixed at the sum of $3,500.00 and such sum be paid by the Defendant (in the second issue) from the Defendant's entitlement from the moneys invested with Town and Country W.A. Building Society.

I know there might be an argument that my learned

friend would advance in opposition to that to say,
"Oh yes, but he gets the money and then it comes
back out of that sum", but it is only illustrative
of the fact that the court has general powers and

could easily have said "be paid out of the fund."

As soon as the existence of these powers are

recognized as demonstrated in this case, how can it

be that the beneficiaries in this case could say at

the end of any tax year, "I have an interest which

cannot be defeated by court order in the income on

this fund"? We would submit that they cannot say

that and therefore cannot succeed in these

proceedings.

McHUGH J:  But are you not compelled to say that the court

is creating rights and not declaring them?

MR PULLIN:  Indeed we are, Your Honour. We do have to say

that.

McHUGH J:  Does that mean that federal courts cannot be

invested with interpleader procedure because it

would be an exercise of non-judicial power?

MR PULLIN:  Your Honour, the position is that in this case

at least, the parties had obviously reached

agreement. So I can probably avoid that for this

reason. Could I take the court to the interpleader

rules. They are reproduced in my learned friend's

list of authorities. Could I take the Court to

Order 17 which is on page 27. The only part of the

order which says anything about costs in relation

Harmer(2) 21 21/10/91

to interpleader proceedings is on page 30, rule 15,

which says:

Subject to the foregoing Rules of this Order, the Court may in and for the purposes of any

interpleader proceedings make such order as to

costs or any other matter as it thinks just.

In relation to the payment in, we then go to

the regulations and I should say, page 31 - in

fact, this is the one I intended to refer to:

The manner of payment into and out of

court and the manner in which money in court

shall be dealt with shall be subject to the

regulations contained in the Third Schedule.

Then we go to the third schedule which is found at

page 33 and regulation 3 says:

Money paid into court shall be paid by

the Accountant to the Treasurer, except when

the money is to be invested by the Public

Trustee, in which case it shall be transferred

to the Public Trustee.

Now, without referring to all the legislation

on this point, what the public trustee then does is

to invest it in the common fund if such an order

has been made; that is, that the money be paid to

the public trustee. If nothing is said, as was the case here, the money is paid to the treasurer and I am not quite sure what the treasurer does with it,

but it is quite apparent that over the year that he
held it, the money went into court, earned no
interest because exactly the same sum of money came

back out again in April of 1982.

There was a case in Western Australia where it

was suggested that the court had power to order

more productive funds than in the common fund, and	investment by the public trustee in some other and
it was held that the court had no power to do that. was paid out as a result of a direction by the
court but with the agreement of the parties that
that could be done.

TOOHEY J: 

Mr Pullin, I am just having some trouble with the

notion that the power of the court to make orders
as to costs is somehow destructive of the existence

of a present entitlement. I appreciate that there are complications here because of the interpleader

proceedings, but presumably the principle is the

same, whether it is interpleader or litigation

between two parties. But if X brings an action

against Y as a result of which there is a

Harmer(2) 22 21/10/91

declaration of the court that Y holds money or

property in trust for X, and that includes the

income of that fund for some particular period of

time, and an order is made liberty to apply as to

costs, do you say that until that liberty to apply

has been exercised that it is not possible to say

of the person whom the court has held to be

beneficially entitled to the property that that

person is presently entitled?

MR PULLIN: In those circumstances, Your Honour, I need to

ask whether or not the trust fund was in existence

before the proceedings had been commenced. In

other words, that is the point that the Full Court

made here. The Full Court here decided that if the

money had been trust moneys before the proceedings

commenced, then it would have been a different

result.

TOOHEY J:  I can see that being relevant to the notion of

whether the court merely recognizes rights or

establishes them, but I was trying to fasten on to

the narrow question of costs which you are putting

forward, as it were, almost as an independent argument that is destructive of the notion of

present entitlement because the question of costs

has not been resolved.

MR PULLIN:  Yes, we say it is very important, Your Honour,

because at the end of the tax year, because the

court can deal with the proceeds, not only the

corpus but also the income, then the simple fact is

that no beneficiary can say, "I demand my payment

of the sum of money which I identify." It is

impossible to identify the sum because that sum -

or the entitlement to that sum may be defeated by

the court order. It is just the fact of it

becoming - once the court becomes involved and can

deal with the moneys, either corpus or income, then

the beneficiary has a defeasible interest.

McHUGH J: But it is not, is it? The interest is not

defeated. The court is just ordering you to be the

paymaster.

MR PULLIN:  That is what it boils down to. I appreciate

that my argument can be finessed perhaps by my

learned friend by saying, really, the

characterization of what is happening is that the

costs are really coming out of the money which is

going to one of the parties, we have not just

declared their rights, and therefore all that is

happening is the court is declaring the rights

which existed all through. But, in fact, we say

that is not what is happening in view of these very

broad powers of the court. The court can order

moneys out of the fund before it starts to release

Harmer(2) 23 21/10/91

those funds to any party and, indeed, it did so
here. It actually made an order before the funds -

as I say, the parties apparently worked out

something to avoid that money actually coming out

of the fund but in fact the court made an order

that moneys come out of the fund.

McHUGH J: Except that that order was made before the trust

was created, was it not?

MR PULLIN:  Yes, but it really illustrates the powers. I

mean, it is not the fact that orders were made; it

is the existence of the power in the court to

defeat an interest that the beneficiary says that

they had. They claim they have a vested and

indefeasible interest; we say it can be defeated,

therefore it is not indefeasible and there is no

present entitlement because they cannot at any time

say that we are entitled to demand and receive

payment, had it not been for these interpleader

proceedings which are on foot.

DEANE J: But if that be right as a general proposition,

there would be no one entitled to the interest of

any trust or estate which was involved in

litigation because the court can always order that

costs be paid out of the trust or estate.

MR PULLIN: That may be so, Your Honour, if the proper

analysis of the position is that there is a fund in
dispute - there would have to be a fund in dispute
for Order 66 to operate - but if there is a fund in

dispute, that is the case. In policy terms it is

not a terrible result because it is a matter of

whether it is the trustee or the beneficiary - - -

DEANE J: That may be so now when the tax rates have

flattened out a little bit; it certainly used not

to be.

MR PULLIN: There used to be a penalty rate, I agree,

Your Honour. In the case where you could not prove

that you were presently entitled, then in those

circumstances - if you did not fall within

section 97 or 98, which is the case we say here,

then the position was that the trustee paid what we
call penalty rates. The Commissioner is very keen
for me to say that they were not penalty rates,

they were just the top marginal rate; that in fact

there have been times where the top marginal rate

has been the same as, for example, the tax rate, as

would be the case here.	For one year that
occurred.

Can I just mention what does happen under

Division 6. Could I just briefly mention that. Of

course section 96 says:

Harmer(2) 24 21/10/91

Except as provided in this Act, a trustee

shall not be liable as trustee to pay income

tax -

Section 97 deals with the standard case of the

beneficiary who is presently entitled and not under

any legal disability and the income is then added

to his other income and taxed accordingly.

Section 98 deals with the common case of the

beneficiary who is under a legal disability in

which case Parliament appreciated that the child

would not be paying, so made the trustee liable to pay as if it were the income of an individual, and

section 99A picks up everyone else who does not

fall within those categories.

Now, the situation here is that if we are

right, then the trustee is taxed under section 99A.

If my learned friend's argument is accepted, then the position is - if my learned friend establishes that the beneficiaries are presently entitled then

section 97 will apply to all of them, that is

Mr Sweeney, who is an individual, plus the

corporate beneficiaries. If there is a deemed

present entitlement, then in the case of

Mr Sweeney, the individual, the trustee is liable

under section 98 but that does not apply to

corporate beneficiaries because of the tax

avoidance scheme that was very quickly set up when

this division was established in 1980. The

corporate beneficiaries continue to be taxed under

section 97.

So there is no policy reason that would say it

is a wrong result that the Commissioner's argument

should succeed. One year it might be, another year

it might not be, and as I say, there was one year

in this period, I believe, where in fact the tax

rate and the top marginal rate were the same, 49

per cent. So I am very keen to make sure that

there is no understanding that for policy reasons

the result that has been contended for by us is

somehow unacceptable in policy terms.

DEANE J:  Mr Pullin, if you are to succeed here, must it not

eventually be on the basis that in this case the
question was not entitlement to this fund, the

question was entitlement to the benefit of the loan

and the moneys were held by the court, not on trust

to be declared but as a fund to be applied to

reflect the entitlement to the loan moneys?

MR PULLIN:  Your Honour, the question really is - - -

DEANE J: In other words, do you follow the point I am

making? Here the court is interposed between the

funds and those claiming it. Their entitlement

Harmer(2) 25 21/10/91

arises from the court of the court reflecting

background entitlement.

MR PULLIN: 

I agree with that, Your Honour, but the question

of present entitlement, it must be remembered,
with respect, as being present entitlement to the

income of the fund which was established and not

present entitlement to the fund itself.

DEANE J: Unless you succeed on your argument that the

possibility of an order for costs or something like

that defeats present entitlement, you cannot
distinguish between entitlement to the fund and

entitlement to the income.

MR PULLIN: Probably that is so, Your Honour, that you would

expect - the parties would go down with - if I can

talk about expectations - that if they were

successful in establishing a right to $25,000,

which one of them was, that the interest would

follow that $25,000. But the whole point is that

it is - and the Full Court distinguished between

what I have called the ascertainment cases, where

the court is merely declaring an entitlement, and I

gave the reference to the AVCO case which is on the

list of authorities, where the mortgagee had

completed a sale and there was some surplus moneys

left over and there were some claimants to it,

namely possibly the registered proprietor or

somebody who had an equitable charge on the moneys.

Now, that was a case where the court was

merely declaring the equitable entitlement of a party to that, what we call, trust moneys. But

this was not that case. We had Riverhall with its

own money, coming to the court and giving it to the

court. It is the creation of that trust, and then

the income from that trust that we are concerned

with. It was an important issue before the other

courts about whether or not there was any trust

so we must accept for the purposes of argument that	involved or not, but that has not been pursued here
there was a new trust fund established as a result
of the order of the court and that there was then
income earned on that trust fund. And it is the
question of present entitlement to that income,
from that trust fund, which is the issue in this
case.

If I could just then go to the decision of the

trial judge and of the Full Court to indicate where

we say the difference occurs. Dealing first with

the question of present entitlement, page 25

contains the sentence which is where we say

His Honour Mr Justice French was wrong in his

analysis. Page 25 line 5 he said:

Harmer(2) 26 21/10/91

The trust fund, to use the language of

Lord Halsbury "was constituted". It was to

determine the entitlements to that fund that

the action was begun.

We say that is not correct. There was no fund

constituted. The fund was only constituted after

the action had been commenced, and that is what the

Full Court said. Starting at page 59, this is how

the Full Court reasoned. This is at line 29:

Riverhall did not hold the monies on trust at the time it paid the monies into Court.

That is the first important statement that they

made and it is what they observed about the facts,

and we say that is a correct observation about the

facts. I might add, just at the bottom of page 59

there is a reference to the Avco case where the

Full Court compares that situation with the Avco

where the order provided that any excess would be

paid out to the party making the payment in.

MR WILLIAMS:  I do not see that that could not be done under

the Western Australian rules as well, but I also,

Harmer(2) 35 21/10/91

with respect, do not see that any distinction

thereby arises, because there is a definition of

that particular entitlement.

DEANE J:  I am being obscure, Mr Williams. In the latter

case it is very easy to see the sum being simply in
the nature of a payment into court in the ordinary

sense on the basis: I am not disputing a claim but

to that amount. There are the funds to satisfy the

claim to the extent that it is made good.

TOOHEY J: But the interpleader proceedings in Western

Australia require the person interpleading to swear

that that person has no interest in the

subject-matter, do they not, other than for charges

and costs? It is Order 17 rule 2(3)(a).

DEANE J:  I was aware of that. I was simply trying to

isolate the problem involved in payment into court,

not necessarily involving the creation of a trust.

MR WILLIAMS:  In this case the payment into court itself, in

our submission, did not create a trust. It is not

really necessary for our argument to characterize

it, but in our submission all that happened at that

stage was that there was an interest in a

subject-matter which was a chose in action. It was

a debt; it was not an identifiable asset. There

was a proprietary interest in the valid claimants

from the time of payment in from the time of the
discharge of Riverhall, but there was not - it was

a right to a different asset. It was not a

specific fund as it later became. That does not

give rise to a trust. It just in a sense effects

an assignment of the liability from Riverhall to

whoever holds the moneys paid into court.

My learned friend in this connection said that

it was material that there was no trust created

prior to the action. In our submission, that is	really inunaterial because if our analysis of the	rights is correct, there is a proprietary interest
in the chose in action, the debt, which is at the
time of the order for payment out to be invested.
The investment gives rise to a new version of the
alternative rights and the rights against Riverhall.

I think it was Your Honour Justice Dawson who

suggested that it might be a trust in effect to

abide the order of the court. In our submission,

it is not, except in a procedural sense. The

orders of the court will be necessary in the same

way that it would be necessary for an injunction to

be discharged if the parties had come to court in a

different way, but it would not in any sense effect

Harmer(2) 36 21/10/91

an entitlement. It would just be giving effect to

the resolution of the dispute.

DAWSON J:  What I was suggesting was that the entitlement

was against Riverhall. Once you had established

that, the court would make an order but there was

no entitlement to the fund or its income at that

stage.

MR WILLIAMS: Again, if my characterization is right, the

entitlement against Riverhall ceases on the payment

into court. Riverhall is discharged. That is the

effect of the order.

DEANE J: Mr Williams, under my questioning, I think you

might have abandoned a submission which possibly

should not be abandoned, and that is: may it not

be arguable that when Riverhall comes to pay the

money into court in these circumstances, it has

itself in effect created a trust at the moment of

payment in on the basis that it says, "I owe this

money. There are competing claimants. I set aside

this money to satisfy those claimants and I pay it

into court in accordance with the interpleader

procedure." As I say, I am not saying it is right.

It just seems to me you may have abandoned one way of looking at it, which there is no need for you to

abandon.

MR WILLIAMS:	I think we have not picked that up in the sense that we do not, in our submission, need to,
because we say there is undoubtedly a trust at a
later point. There is some mild reluctance on the part of the courts to hold themselves as trustees in any sense or their agents as trustees for
parties, and that is reflected in the authorities.
Properly characterized, it is not impossible that
might be the correct result. Unless there is any
other matter the Court wishes us to address, they
are our submissions in reply.

MASON CJ:  Thank you, Mr Williams. The Court will consider

its decision in this matter.

AT 4.07 PM THE MATTER WAS ADJOURNED SINE DIE

Harmer(2) 37 21/10/91