Nicholas v Federal Commissioner of Taxation

The appellant, Grace Marie Nicholas, as trustee of a settlement created by her husband, appealed against an assessment made by the Federal Commissioner of Taxation. The dispute concerned the application of section 102(1)(b) of the Income Tax Assessment Act 1936-1943 to income derived from the trust fund during the income year ended 30 June 1943. The trust deed settled shares, with income to be divided between the trustee and the settlor's children. At the relevant time, the settlor had three sons, one adult and two minors who were unmarried. The Commissioner assessed the trustee under section 102(1)(b) on the portion of the income attributable to the two infant sons, calculating the tax payable by the settlor as if he had received this income.

The court was required to determine several legal issues. Firstly, whether a trustee could be assessed under section 102 when no specific rate of tax was declared for trustees in the Income Tax Act. Secondly, whether section 102(1)(b) applied to a trust where beneficiaries included both adults and children of the settlor under twenty-one and unmarried. Thirdly, if the section did apply, whether there was a valid mechanism for calculating the taxable income in the absence of explicit apportionment provisions. Finally, the court considered whether, in the event of apportionment, the trustee should be assessed separately for the income of each infant child.

Williams J. held that the assessment was correct. The court reasoned that section 102 of the Income Tax Assessment Act, being incorporated into the Income Tax Act, effectively imposed a tax on the trustee. The rates of tax for calculating the amount payable under section 102 were found in the second and third schedules to the Income Tax Act, thus addressing the submission regarding the absence of declared rates. The court found that section 102(1)(b) was intended to apply to trusts where income was payable to or accumulated for the benefit of unmarried infant children of the settlor, even if other beneficiaries, including adults, also had interests. The amendment of section 102(2) in 1941 was crucial, as it removed limitations that would have restricted its application to situations where the settlor had a power of revocation, thereby extending its reach to irrevocable trusts with infant beneficiaries. The court concluded that section 102 treated the relevant income as a single taxable fund in the hands of the trustee, and the calculation method employed by the Commissioner was consistent with the statutory provisions.

Consequently, the appeal was dismissed with costs.