Murdoch and Commissioner of Taxation
[2007] AATA 1791
•21 September 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1791
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT 2006/47
TAXATION APPEALS DIVISION ) Re ELISABETH MURDOCH Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Justice Downes, President Date21 September 2007
PlaceSydney
Decision 1. The Commissioner’s assessment is affirmed in so far as it relates to income tax on the lump sum payment of $85,087,176.
2. The Commissioner's objection decision of 20 December 2005 is varied to exclude the amount of $6,900,026 previously assessed as a capital gain from the assessable income of the applicant.
....................[sgd]......................
Garry Downes
President
CATCHWORDS
TAXATION – Income tax – lump sum – compensation for breach of trust – life tenant and remainderman – investment policy increased capital more significantly than income – life tenant only had an interest in income – payment on income account.
Taxation Administration Act 1953 (Cth) ss 14ZZE, 14ZZJ
Allied Mills Industries Pty Ltd vFederal Commissioner of Taxation (1989) 20 FCR 288
Boardman v Phipps [1967] 2 AC 46
Booth v Federal Commissioner of Taxation (1987) 164 CLR 159
Re Earl of Chesterfield’s Trusts (1883) 24 Ch D 643
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124
Howe v Lord Dartmouth (1802) 7 Ves 137; 32 ER 56
Kelsall Parsons and Co v Commissioner for Inland Revenue (1938) 21 TC 608
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608REASONS FOR DECISION
21 September 2007 Justice Downes, President Summary
1. The taxpayer, Dame Elisabeth Murdoch, who has a life interest in the income of four trusts, was paid a substantial lump sum as compensation for breaches of trust by the trustees. Although the lump sum was paid out of capital, I have decided that it was received as income. The only entitlement of the taxpayer was an entitlement to income and the payment remained income, or compensation for lost income, though paid out of capital.
Form of reasons for decision
2. These reasons for decision were originally “framed so as not to be likely to enable the identification of” the taxpayer in accordance with s 14ZZJ(2D) of the Taxation Administration Act 1953 (Cth), pursuant to a request made under s 14ZZE of the Act. Because the condition precedent to reasons being prepared in this form, namely, that “a notice of appeal has not been lodged with the Federal Court” (s 14ZZJ(2D)(b)), is no longer applicable, the reasons are now published in full.
Facts
3. The taxpayer has a life interest in four trusts that were established in the 1930’s. In two of them she is entitled to the whole of the income. The taxpayer’s son, Rupert Murdoch, is the sole remainderman. In the other two trusts the taxpayer was originally entitled to a defined share of income in conjunction with Mr Murdoch and other children. The children were the remaindermen. These two trusts were reorganised in the early 1990’s. The taxpayer and Mr Murdoch obtained the only life interests and Mr Murdoch became the sole remainderman.
4. Each of the trusts was settled by the taxpayer’s husband. A representative clause setting out the taxpayer’s interest is as follows:
THE trustees shall hold the trust fund IN TRUST to pay the income arising therefrom to the wife for life for her own use and benefit absolutely and upon the death of the wife IN TRUST as to both the capital and income of the Trust Fund for the son conditionally upon his attaining the age of twenty-five years.
Each trust contained an investment clause to the following effect:
Any funds in the hands of the Trustees for investment shall during the life of the Settlor be invested in such securities bonds stocks shares debentures or other investments as the Settlor shall in his absolute discretion direct and the Trustees shall if and whenever so directed by the Settlor sell and dispose of or otherwise realise any particular securities bonds stocks shares debentures or other investments in which the Trust Fund or any part thereof is for the time being invested and shall for the purposes of any such realisation if so directed by the Settlor take or join in taking any steps to wind up any company of or in which the Trustees hold stocks shares or debentures as part of the Trust Fund and from and after the death of the Settlor the Trustees shall either continue to hold any of the then existing investments or at their discretion shall call in and convert the same into money and with the like discretion invest the money arising thereby or otherwise in their hands for investment in the names of the Trustees upon some one or more of the securities authorised by any Statute for the time being in force in any State of the Commonwealth of Australia authorising the investment by Trustees of Trust Funds or upon the shares or debentures of any public industrial company which has been carrying on business in Australia for at least three years and which has paid up capital of not less than One hundred thousand pounds. During the life of the Settlor the Trustees shall not be entitled to call for a transfer into their own names of any of the property comprised in the said Trust Fund (whether as a result of investment or otherwise) which shall be in the name of the Settlor and such property shall unless the Settlor otherwise elects be left in his name.
5. The trustees of the trusts changed over the years. For a time the Trustees Executors and Agency Company Limited was the trustee. In 1983, the taxpayer, Mr Murdoch and Jack Kennedy became the trustees. In 1992, the taxpayer and Mr Kennedy were replaced by Actraint No. 119 Pty Limited. This company was associated with Mr Murdoch and Mr Kennedy.
6. During the life of the settlor the bulk of the assets of the trusts were shares in News Limited, held through Cruden Investments Pty Limited. After the death of the settlor the investments remained unchanged. During part of this period the taxpayer was a trustee. At all relevant times Mr Murdoch was the Chairman and Chief Executive Officer of News Limited.
7. In 1994, a deed of release was entered into between the taxpayer, Mr Murdoch, Mr Kennedy and Actraint. Pursuant to the deed, the taxpayer was paid $85,087,176 in addition to her entitlement to the income of the trust. The Commissioner assessed the lump sum as a receipt of income. The taxpayer claims that it was a receipt of capital.
8. The taxpayer’s case is that the lump sum represented compensation for the failure of the trustees to properly balance the trust investments so that they did not prefer capital gain (and the interests of the remainderman) over income (and the interests of the life tenant). The case appears to be put in a number of ways, but broadly it is said that the lump sum payment was made in accordance with the principles of Boardman v Phipps [1967] 2 AC 46. This operated to create a charge or constructive trust over the capital of the trusts from which the taxpayer received a capital sum.
9. I have concluded that the taxpayer’s claim must fail and that the receipt of the lump sum was correctly assessed as income. The taxpayer’s only entitlement under the trusts was to income. Any charge or constructive trust arising out of any failure of the trustees to properly administer the trust could only be compensation for lost income. This must be so, even if the amount of the lump sum was calculated by reference to the swelling of the capital value of the trusts’ investments and not by reference to income not paid. Accordingly, the lump sum was received as income and not as capital. My detailed reasons follow.
Deed of release
10. The Deed of Release and Agreement that led to the payment of the lump sum was executed by one person acting as attorney for each party. The signatures were witnessed by a different person. The deed contained the following recitals:
I.The trustees of the Trusts from time to time since the death of the Settlor have followed an investment policy of investing the funds the subject of the Trusts almost exclusively in shares in companies, Cruden Investments Pty Limited (‘Cruden Investments’) and Cruden Holdings Pty Limited, which are not authorised trustee investments under Australian legislation relating to trustees (such investment policy being referred to below as the ‘Investment Policy’).
J.Dame Elisabeth has claimed that:
(i)the pursuit of the Investment Policy by the trustees of the Trusts:
· has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the Trusts; and
· involved significant risk for the beneficiaries of the Trusts, which risk was not properly rewarded in the case of Dame Elisabeth to the extent that she only had an income interest under the Trusts;
(ii)in pursuing the Investment Policy, the trustees of the Trusts from time to time have since the death of the Settlor breached their trust duties to Dame Elisabeth as a life tenant;
(iii)Mr Murdoch, a man generally regarded as being of outstanding ability and force of personality with an extraordinary record of business success, as a trustee of the Trusts and holder of the whole of the remainder interest in the Subject Trusts, had substantial responsibility for such breaches of trust since May 1983 because he was pursuing goals not properly goals of the Trusts, but which goals required the Investment Policy to be pursued and inter alia had the effect of improving Mr Murdoch’s financial position as beneficiary in remainder under the Subject Trusts; and
(iv)that in the premises, a constructive trust has arisen in respect of eighty per cent or more of the beneficial interest in the assets of the Subject Trusts, constituting the advantage to Mr Murdoch of the Investment Policy having been pursued in lieu of a more appropriate investment policy, and/or Dame Elisabeth has the benefit of a charge over the assets of the Subject Trusts which Dame Elisabeth is not entitled to be paid as income of the Subject Trusts accompanied by a right to have sufficient of the corpus of the Subject Trusts sold to compensate Dame Elisabeth for the breach of trust and/or to ensure that the benefit of such advantage is made over to her and does not flow to Mr Murdoch.
K.The Current Trustees (including Mr Murdoch) and Mr Kennedy do not, and Mr Murdoch as beneficiary in remainder under the Subject Trusts does not, admit any such breach of trust or the existence of any such constructive trust, or charge, or right of sale. With a view to avoiding unnecessary disputation and any need for litigation, however, the Current Trustees (including Mr Murdoch) and Mr Murdoch as such beneficiary in remainder are desirous of compromising the claims made by Dame Elisabeth.
L.It has therefore been agreed that Dame Elisabeth, as the life tenant under the Subject Trusts, having shared in the risk of investing in the investments of the Subject Trusts and in consideration of her releasing:
(i)The Current Trustees and any former trustees under the Trusts from any claims by her against them for breach of trust or otherwise in relation to following the Investment Policy in relation to the investments of the funds of the Subject Trusts and of the other of the Trusts; and
(ii)The assets of the Subject Trusts and the other of the Trusts (being assets which Dame Elisabeth is not entitled to be paid as income of the Trusts) from any claims Dame Elisabeth has or may have upon or in respect of them other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she may have in the capital and income of the other of the Trusts,
should be entitled to the following:
(iii)that the ordinary shares in Cruden Investments (the ‘Cruden Investments Shares’) comprising the assets of the Subject Trusts should be in whole or in part realised (by way of sale of some of such shares or partial return of capital on all of such shares to raise $85,087,176 in Australian currency; and
(iv)that such $85,087,176 be paid to Dame Elisabeth or as she may direct as the absolute property of Dame Elisabeth to deal with as she in her full and complete discretion may determine.
11. The operative parts of the deed contained covenants by the taxpayer and the other parties:
2.LIFE TENANT RELEASES, AUTHORITIES AND REQUESTS
2.1Subject to the other provisions of this deed, Dame Elisabeth, in her capacity as the Life Tenant, hereby releases and discharges each other party hereto from any claims, proceedings, obligations to account and other liabilities for or in relation to (including without limitation any loss arising to or profit of or other benefit to any other party hereto in respect of) any or all of the following which, had this deed not been entered into, such party would have had against such other party or such other party may have had against such party as the case may be:
(a)the pursuit of the Investment Policy in relation to the investment of the funds of the Trusts and the failure of the Trustees at any time and from time to time to consider pursuing to pursue another policy or otherwise to realise, convert and reinvest the funds of the subject of the Trusts or to consider doing so;
(b)any breach by the Trustees of the duties owed by the Trustees to the beneficiaries under the Trusts.
(c)any right of action whether at law or in equity, Dame Elisabeth has or may have against Mr Murdoch as a beneficiary of any of the Trusts in relation to any of above; and
(d)any right of action Dame Elisabeth has or may have upon or in respect of the Trust assets other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she has or may have in the corpus or income of the other of the Trusts according to the express terms of the documents creating or recording the terms of the Trust.
2.2Dame Elisabeth hereby authorises and requests the Trustees to continue to carry on the Investment Policy and undertakes not to bring any claims or proceedings against any of the Trustees in respect thereof.
3.TRUSTEE UNDERTAKINGS
The Current Trustees hereby undertake:
(a)promptly to raise the Settlement Amount by selling some of the Cruden Investments shares or participating in a reduction and return of capital by Cruden Investments on and in respect of the Cruden Investments Shares; and
(b)to pay to Dame Elisabeth the Settlement Sum on the Settlement Date.
4.REMAINDERMAN REQUEST AND AUTHORITY
Mr Murdoch, as beneficiary in remainder under the Subject Trusts, requests and authorises the Current Trustees to observe and perform their undertakings in clause 3 hereof.
12. The preparation and execution of the deed was preceded by two opinions by a Queen’s Counsel as to whether the taxpayer had any claim arising out of the way the trusts had been administered. It is not clear to whom the Queen’s Counsel was giving his opinion. The solicitor who instructed him did so orally. He had acted for Mr Murdoch from the late 1970’s to the late 1990’s.
13. The evidence includes an affidavit by the same solicitor, filed on behalf of the taxpayer. An annexure to the affidavit is a memorandum he received from overseas lawyers, as follows:
If Dame Elisabeth has a valid claim under Australian Law with respect to the “Power to Contain Conversion”, because she was not receiving a fair current return, Rupert would be obligated to act together with the other trustee and correct the situation by making a distribution to Dame Elisabeth. A distribution of this type made by the trustees to bring the trust into compliance with Australian law would not be construed to be a gift made by Rupert under United States law.
14. The Queen’s Counsel was instructed that the dividend yield of the public company shares had “been very low relatively to the earnings of blue chip shares in industrial companies quoted on the Stock Exchange, though there has been a considerable rise in the value of those shares”. He was further instructed that “the result has been that Dame Elisabeth Murdoch has received much less income in virtue of her life interest than she would have done had the Trust Fund been differently invested”. The Queen’s Counsel considered possible claims under the Rules in Howe v Lord Dartmouth (1802) 7 Ves 137; 32 ER 56 and Re Earl of Chesterfield’s Trusts (1883) 24 Ch D 643 but decided neither was applicable. He then considered a possible breach of trust by failing to exercise the trustee’s powers of investment in such a way as to hold the balance properly between capital and income. He reached the following conclusion (at 13):
Whether the various trustees are liable for breach of trust to Dame Elisabeth Murdoch is thus a difficult question. If they were, the quantum of compensation for that breach may be hard to calculate but in principle it would be the difference between what the income of the assets could have been had they been invested in a mix of blue chip shares and other authorised investments producing a reasonable income, and what Dame Elisabeth Murdoch actually received.
He further said that if the problem was to be treated as a breach of trust, a number of principles were applicable. One of these was that a court “might recognise a charge over the remainder interests to benefit the tenant for life to the extent to which she was disadvantaged”. He went on (at 23):
Alternatively, on the reasoning in paragraph 254 [of Scott on Trusts (4th edition)], a court might hold that there was a constructive trust which could be vindicated by a sale of the property subject to the constructive trust (or, on the earlier analysis, subject to the charge): the proceeds of the sale could then be applied partly to compensate the tenant for life for past losses and thereafter reinvested on more appropriate securities.
If the facts, on investigation, turned out to be of the type indicated above there would be good prospects that the breach of duty by the trustees, and by Mr Murdoch as beneficiary-trustee in particular, could lead to the remedy indicated -- a Court-ordered sale of the shares with a view first to compensating Dame Elisabeth Murdoch for past breaches, and then to reinvestment of the fund in appropriate assets so as to achieve for the future a proper balance between the interests of those interested in the income and those interested in capital.
15. It subsequently emerged that the opinion proceeded on a wrong view of the facts. The income received by the taxpayer was “well in excess of the gross income [which] could have been received had a ‘typical’ investment policy been applied”. This was partly because the increase in the value of the shares over the years led to substantial income, even though the dividend yield was low when measured year by year.
16. The Queen’s Counsel was asked to give a further opinion. That opinion included the following (at 2-3):
It is perfectly true that the investment policy which has been adopted has been extremely advantageous for the tenant for life in that it has produced for her a much higher actual income than the alternative. But it is a real possibility that the adoption of the policy was at various points a breach of trust induced by the remainderman. It may also be true that that remainderman had no intention of breaching the trust, or of causing loss, or of advantaging himself at the expense of anyone else in either an absolute or a relative sense. But where a trustee/beneficiary has made a gain in breach of trust, that gain is to be accounted for by him and held by him in trust for the other beneficiaries, even though the gain could not have been made by lawful means, and even though the conduct in question has caused the other beneficiaries to be better off than they would otherwise have been: Phipps v Boardman [1976] 2 AC 46.
The breach of trust by the trustees in general and the trustee/remainderman in particular may lie in the adoption of the investment policy, or the maintenance of it without undertaking occasional review of it, in such a manner as not to hold the balance properly between capital and income, pursuant to the principles discussed on pages 11-13 of the opinion of 7 June 1994.
17. It is not readily apparent why a barrister’s opinion is pertinent to the resolution of the issues before me. However, there was no objection to the tendering of the two opinions and the parties made reference to them. Nevertheless, it is for me to determine whether the lump sum paid under the deed was received as capital or income. The opinions do provide some evidence of the circumstances surrounding the execution of the deed. However, they cannot assist in construing the deed in the absence of supporting evidence and submissions. What is clear is that both parties contend that the lump sum was paid and received in accordance with the terms of the deed. There was one point at which counsel for the taxpayer did contemplate that the payment might have been outside the purported intent of the deed, but the purpose of that submission was to show the taxation treatment that would follow. It was not made to support a case that the payment was not, in fact, made under the deed (Transcript 92-93).
Governing principles
18. Whether a receipt of money is income or capital is determined by the character of the receipt in the hands of the taxpayer (Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J; GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136-137).
19. Where a taxpayer provides consideration, “the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not” (Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 472 per Brennan J). Where the consideration is discharging a cause of action, the character of the cause of action determines the character of the receipt (Federal Coke at 472; Allied Mills Industries Pty Ltd vFederal Commissioner of Taxation (1989) 20 FCR 288 at 309). Compensation or damages generally acquire the character of that for which it compensates (Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540).
20. In determining the nature of a payment under an agreement, both the agreement itself and the circumstances surrounding its execution, its operation and the receipt of the money in question must be examined (Federal Coke at 460 per Bowen CJ; Allied Mills at 309-310).
21. If a payment is received on revenue account, the position will not be altered merely because the source of the payment is capital, including the capital of a trust (Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608, especially at 627 per Dixon J).
Application of governing principles
22. The sole entitlement of the taxpayer under the trusts was to income. In principle, any compensation for a breach of trust would address a resultant loss of income. That is what the Queen’s Counsel said in his first opinion.
23. The settlement deed did not discharge or vary in any way the taxpayer’s entitlement to income from the trusts. Indeed, the taxpayer authorised and directed the trustees to continue the investment policy described in the recitals so that her income would continue to reflect that policy. It cannot, therefore, be said that the taxpayer was giving up an interest in capital as she might have been if she had surrendered her life interest in return for a lump sum payment. This case cannot be equated with the surrender of an annuity for a lump sum (cf Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 218; Booth v Federal Commissioner of Taxation (1987) 164 CLR 159 at 174-176, 178 and Kelsall Parsons and Co v Commissioner for Inland Revenue (1938) 21 TC 608 at 624).
24. The consideration supplied by the taxpayer for the lump sum payment is described in the recitals and specified in the operative part of the deed (cl 2). The terms of the release state that it is given by the taxpayer “in her capacity as the Life Tenant”. The release relates to “claims, proceedings, obligations to account and other liabilities”. The only claims the taxpayer might have had as life tenant were obligations to her in relation to her entitlement to income under the trusts.
25. The types of claim or obligations specified in the release related to:
1. The investment policy and the trustees’ failure to pursue another policy;
2. Breach of the trustees’ duties to beneficiaries;
3. Rights of action as a beneficiary;
4.Rights of action in respect of assets other than the right to current and future income and any interest the taxpayer may have in corpus or income.
Categories 1 to 3 could only relate to the income paid to the taxpayer. Although category 4 contemplates rights in assets or corpus, the trust deed did not confer any such rights other than to secure her right to income.
26. The recitals to the deed assert that the trust investments were not authorised investments under Australian law. However, they were authorised by the trust instrument. The question was whether the trustees performed their duty to properly balance investments between the interests of the life tenant and remainderman. On that issue it is asserted that the investment policy “has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the trusts” and that the beneficiaries were not rewarded for suffering a “significant risk”, in the case of the taxpayer, “to the extent that she only had an income interest under the trusts”. It is further asserted that in pursuing the investment policy the trustees “breached their trust duties to Dame Elisabeth as life tenant”. The remaining parts of the recital assert culpalibility on the part of Mr Murdoch and further assert that “a constructive trust has arisen… constituting the advantage to Mr Murdoch”. In addition, or alternatively, the taxpayer was to have “a charge over the assets… which Dame Elisabeth is not entitled to be paid as income… accompanied by a right to have sufficient of the corpus sold to compensate her for the breach of trust and/or to ensure that the benefit of such advantage is made over to her and does not flow to Mr Murdoch”.
27. A number of matters seem clear. First, the payment was made under the deed in vindication of rights at law or in equity. Secondly, these rights were the rights of the taxpayer as life tenant. Thirdly, the rights arose out of the trustees’ policy relating to the investment of the trust funds. Fourthly, the rights were associated with the absence of an exceptional increase in income and the assumption of a significant risk relating to the investments. Fifthly, the lump sum payment was made in compromise of the taxpayer’s claims for compensation for breach of trust and to deprive Mr Murdoch of such advantage as he might have otherwise gained.
28. The circumstances surrounding the receipt of the sum are relevant (Federal Coke at 460, 477; Allied Mills at 309-310). A letter from the firm of the solicitor referred to above to the Australian Tax Office disclosed that, on the day the payment was received, approximately one third was transferred to a trust associated with the taxpayer, which used the money for gifts to family members and charity, and the balance was converted to foreign currency “for the purpose of making a gift to Mr K R Murdoch”. Because these events relate to a time after the receipt of the money, I have not taken them into account in arriving at my decision.
29. It must be a rare case in which a life interest beneficiary is entitled to compensation for breach of trust which does other than compensate for lost income rights. If the lump sum payment in question was paid to compensate for lost income, the payment would be received on income account. To the extent to which the taxpayer claims that the payment was received on capital account merely because it was paid out of capital, that claim must fail.
30. The taxpayer places substantial emphasis on the principles established by Boardman v Phipps [1967] 2 AC 46 (following Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378). Emphasis is placed upon the reference to Boardman in the Queen’s Counsel’s second opinion.
31. Boardman, Regal and subsequent cases relate to very different factual circumstances to the present matter. Broadly speaking they relate to circumstances where trustees personally acquire assets which should have been assets of the trust. In Regal, directors acquired shares in a company which were to have been Regal’s. They did so for bona fide reasons. Yet they were held to be fiduciaries and were required to account for their profit on the shares. In Boardman, a solicitor to a trust and a beneficiary of the trust acquired shares in a company, which the trust had first considered acquiring, and used some information gained through their involvement with the trust in connection with negotiations. There was at least some disclosure to beneficiaries who did not oppose the transaction. The solicitor and beneficiary were held to have placed themselves in a fiduciary position and were required to account for their profit. In both cases, the court imposed a constructive trust.
32. It is, accordingly, easy to posit a case in which a person acquires shares which are impressed with a charge or constructive trust because of the person’s fiduciary relationship. But that is a very long way from the present matter. The conduct proscribed in Boardman and similar cases is the taking of an asset by a fiduciary which is in reality a trust asset. What is said here is that the trust funds should have been invested in different assets. The remedy in a Boardman case is imposing a charge or constructive trust upon assets of the fiduciary in favour of the trust. Here, the remedy was the imposition of a charge or constructive trust on the trust assets in favour of a beneficiary. In Boardman no question of the entitlement of the beneficiary to the benefit of a charge or constructive trust arose. The “beneficiary” of the charge or trust was the original trust and not a beneficiary; certainly not a beneficiary with only a life interest in income. The statement that Boardman leads to a charge or trust over assets needs to be seen in this context. Obviously, that will be the case when an asset held by a fiduciary belongs to a trust. The fiduciary will be a bare trustee for the trust. The trust imposed will be a separate trust arising by operation of law and will not be some manifestation of the existing trust. When the assets subject to that separate trust are transferred to the original trust, they will become part of the original trust’s assets, subject to that trust’s terms.
33. It follows that Boardman does not assist the taxpayer. First, the conduct giving rise to the charge or trust is quite different. Secondly, no question of a charge or trust directly in favour of a beneficiary arises.
34. It was suggested during the hearing that, in cases of breach of trust like that posited here, the remedy is concerned not merely with compensation for loss but with depriving the fiduciary of any benefit obtained by the breach. On this basis, the charge would remove any profit element from the capital of the trust and confer that benefit on the other person with an interest. Where, as here, the only other person with an interest was a life tenant, that beneficiary would obtain a windfall outside any anticipated benefits. To the extent to which the argument was put, I think it must be rejected. First, it is contrary to principle. Secondly, there are no cases (including Boardman) which support it.
Conclusion
35. The passages in the Queen’s Counsel’s first opinion suggest that any remedy for breach of trust flowing from improper exercise of the power of investment would reflect lost income. In that I think he was right. As compensation for breach of trust, the lump sum payment can only reflect lost income. Accordingly, the payment was received by the taxpayer on income or revenue account.
36. Because I have concluded that the lump sum payment is assessable income, I do not need to consider the alternative basis of the Commissioner’s assessment that the receipt is subject to capital gains tax. The Commissioner’s assessment was properly made and must be affirmed.
37. As agreed by the parties, I vary the assessment to exclude the amount of $6,900,026 previously assessed as a capital gain.
I certify that the thirty-seven preceding paragraphs are a true copy of the reasons for the decision herein of Justice Downes, President.
Signed: ..............[sgd].............................................
Julia Powles, AssociateDates of Hearing 27-28 August 2007
Date of Decision 21 September 2007
Counsel for the Applicant J W de Wijn QC with M Richmond
Solicitor for the Applicant Minter EllisonCounsel for the Respondent A H Slater QC with J Hmelnitsky
Solicitor for the Respondent Australian Government Solicitor
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