Raftland Pty Ltd as Trustee for the Raftland Trust v Commissioner of Taxation

[2007] HCATrans 327

[2007] HCATrans 327

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B11 of 2007

B e t w e e n -

RAFTLAND PTY LTD AS TRUSTEE FOR THE RAFTLAND TRUST

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

GUMMOW J
KIRBY J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON THURSDAY, 21 JUNE 2007, AT 11.40 AM

Copyright in the High Court of Australia

MR D.G. RUSSELL, QC:   May it please the Court, I appear with my learned friend, MR H.L. ALEXANDER, for the applicant.  (instructed by Tobin King Lateef)

MR J.A. LOGAN, SC:   May it please the Court, I appear with my learned friend, MR P.A. LOONEY, for the respondent.  (instructed by Australian Government Solicitor)

GUMMOW J:   Yes, Mr Russell.

MR RUSSELL:   If the Court pleases, you should have from us an application book and a bundle of authorities.

GUMMOW J:   We do.

MR RUSSELL:   I am hesitant to mention it, given the authorship of the work in question, but item 17 in our bundle of authorities, Jacobs’ Law of Trusts in Australia and the photocopy ‑ ‑ ‑

GUMMOW J:   Yes, it is not Jacob as in Jacob and Esau.  It is Jacob as in Jacob.

MR RUSSELL:   Yes.  The bundle of authorities has unfortunately – the photocopier has caught up with the last inch, half inch, of the pages.  We do have substitute pages if that assists.

GUMMOW J:   Thank you.

MR RUSSELL:   It may not be necessary.

KIRBY J:   You have seen that the Commissioner wants to bring up sham if you succeed in this application.

MR RUSSELL:   Yes, your Honour.

KIRBY J:   But you say that there is a paradox on the face of the Full Court’s decision, that they have denied sham but they have left the penalties which were imposed for sham standing.

MR RUSSELL:   Yes, that is essentially the penalty point, your Honour.

KIRBY J:   Which is a very curious outcome.

MR RUSSELL:   Yes. 

KIRBY J:   You might come unstuck if the thing comes up here and we think the primary judge was right.

MR RUSSELL:   Well, that is a risk obviously we have to take, but we rely very much on the findings of the Full Court in relation to sham.  We think they are plainly correct.  But, yes, that is a risk that we would take if the matter comes up.  As I said in argument to the Full Court, it would be a rather odd case – it would be the first case that we have been able to detect in the reports of senior counsel actually settling a sham because this was a case in which everything, as the evidence showed, as indeed the Full Court judgment records, that ‑ ‑ ‑

GUMMOW J:   Yes there is a recent case of Halloran (2006) 80 ALJR 519 at 530 paragraph [56]. We said where is the effect? The mere fact that there are a number of complicated steps which lawyers have embarked upon does not mean that what they were doing was a sham.

MR RUSSELL:   Yes, and, indeed, the Court said something very similar in Equuscorp v Glengallan Investments.

GUMMOW J:   Yes.

KIRBY J:   The only trouble is your clients gave somewhat embarrassing answers to a few questions which the Commissioners latched onto.

MR RUSSELL:   That is so, your Honour, but they also said in evidence that they accepted when they signed documents they were bound by them and in the case of the trust deed, which is the relevant document in terms of sham, the settlor was an employee of my instructing solicitors’ firm and there was evidence given as to precisely what the intention was in relation to the terms of the trust deed.  So, in our respectful submission ‑ ‑ ‑

KIRBY J:   Is sham a search into the mind of the taxpayer or a search into the consequences of what the taxpayer is trying to do?

MR RUSSELL:   It is a search in relation to an instrument – it is not a tax doctrine here as it is in the United States.

KIRBY J:   Maybe it will become so.

MR RUSSELL:   Sorry?

KIRBY J:   Maybe it would be timely for it to become so.

MR RUSSELL:   Well, indeed, that proposition has been put by ‑ ‑ ‑

KIRBY J:   It seems unpromising in the light of the case that Justice Gummow has referred to.

MR RUSSELL:   Yes.  Well, we would submit it is not part of the law here, so one simply goes to the standard understanding of what a “sham” is.  One has to find parties who have executed an instrument who have no intention of being bound by its terms. 

GUMMOW J:   Anyhow, you have to put your case positively, I suppose.

MR RUSSELL:   Yes.

GUMMOW J:   You criticise the application of Upton v Brown?

MR RUSSELL:   Yes, your Honour.

GUMMOW J:   Now, where does the Full Court deal with that?

MR RUSSELL:   It is at page 101 of the application book, your Honour.  It is the first discussion of it and then in paragraphs 108 and 109.

GUMMOW J:   Does it not then just become a question of whether this particular trust deed was so drawn as to displace what otherwise might have been that rule, if that is the way to call it, in Upton v Brown?

MR RUSSELL:   Well, we would cavil with the use of the word “rule”.  It was his Honour Justice Edmonds’ expression but we would say that until recently in two Federal Court cases it has not been so described.  It is more a question of ascertaining the intention of the set law, the maker of an instrument.  Your Honour no doubt will refer me to paragraph 1945 of the 7th edition of Jacobs’ and this connection.

GUMMOW J:   No I was looking at Underhill & Hayton, the 17th edition.

MR RUSSELL:   I am sorry, your Honour.

GUMMOW J:   Paragraph 51.24.  The point is made there, and it is made also in the 17th edition of Lewin, more shortly I think, paragraph 25.25.  In every case the adjustment of the relative rights of tenant for life remain and if necessary depends upon the construction of instrument.

MR RUSSELL:   Yes, and that, of course, is one of our points.

GUMMOW J:   But does that not then mean that this case is about construing this instrument and why is that a special leave matter?

MR RUSSELL:   Well, we would say in the first place that, as the extract from Lewin that your Honour has read out makes clear, this is a rule that normally applies in dealing with adjustments of interests of estates in succession.  This is a unit trust, so to suggest that this is a general rule that applies to all trusts as opposed to a rule which relates to the exercise of the trustee’s duty of impartiality, as it is put in Jacobs’, in our respectful submission, correctly in context, is wrong and has a capacity to have very considerable general consequences.  If this is a rule that applies not as simply something which trustees have to do in exercise of their duty of impartiality but as a rule of general application to all trusts, in our respectful submission, that goes further than the existing authorities in something which has a capacity to be of very considerable general implication, particularly given that trusts are increasingly a form of collective investment vehicle, in context like real estate investment trusts.

GUMMOW J:   You quarrel with paragraph 109, I think, on page 102 of the application book?

MR RUSSELL:   Yes.

GUMMOW J:  

The origin of the rule may well have been conditioned by situations involving beneficiaries having interest in income but not in capital and vice versa, but the rule itself is not so qualified.

MR RUSSELL:   That is so, your Honour.  In our respectful submission, there is no authority before this case which says that it is a general principle as opposed to a principle to be applied in the exercise of the trustee’s duty of fairness.  That becomes important as a matter of general principle because the normal rule in relation to investment vehicles is the company rule, which is that any profits in each year are determined annually and there is no requirement to take into account prior losses in determining whether or not there is distributable income.  We have given your Honours the references to the company law cases.  So we say that if the court below is wrong, then it is a matter of general importance.

We would also say in relation to the terms of the trust deed, and we have given examples from the reported cases of other trust deeds in broadly similar terms, that this is a very common form of trust deed.  So that if the interpretative construction of the trust deed is as the Full Court has said it is, then it simply will not be a question relating to this trust deed.  It will be something of fairly general application, in our respectful submission.

GUMMOW J:   Now, do you say that this misconstruction of the general law of trusts necessarily found its way into a misconstruction of the taxing section, section 100A?

MR RUSSELL:   That is not in dispute, with respect.  His Honour has said first that the application of Upton v Brown means there is no net income, or no income, for the purposes of section 100A(3A).  He has then said that there are two other reasons why, even if he is wrong about that ‑ ‑ ‑

GUMMOW J:   Yes, that is what I am worried about.They seem to be alternative, not necessarily cumulative.

MR RUSSELL:   Yes, indeed, your Honour, they are.  If I can take them from paragraph 113, his Honour says:

Second, until there was a payment, application or setting aside of such income, the provisions of cl 22(d) of the E & M Unit Trust deed did not operate to give the unitholders a vested and indefeasible interest in such income.

Those terms are on pages 203 and 204 of the application book.  In our respectful submission, if his Honour is right about that, it is actually revolutionary because if we are right in our construction, in our submission, that this trust deed has to be construed without reference to Upton v Brown and the net income for the year was distributable, then the trustee was required by clause 22(a) of the trust deed to distribute it, was only entitled to accumulate it under clause 22(b) with a unanimous resolution of all of the unitholders. 

In our respectful submission, 22(d) talks about what happens once the trustee performs the duties performed under clause 22(a).  But the notion that until the trustee does so has no obligation to account to the unitholders, effectively says that all that a trustee needs to do to avoid it trust obligations is to not comply with them.  If it was a requirement of clause 22(a) that the trustee take the steps that clause 22(a) outlines, then failure to perform it could not, in our respectful submission, defeat the entitlement of the unitholders as against the trustee.

Your Honour, some of the language, when one comes to the terms of the Act, I should say that there are two concepts involved.  One is present entitlement and another is deemed present entitlement.  It may be necessary at various points of the argument to distinguish whether we are talking about actual present entitlement in the sense referred to by this Court in Whiting’s Case or that we are talking about a deemed present entitlement arising under section 95A(2) but, in our respectful submission, it does not really matter whether one is talking about actual present entitlement or

deemed present entitlement.  In our respectful submission, a failure by the trustee to take the step required of it by clause 22(a), if indeed properly construed it was a requirement, cannot have the result that clause 22(d) does not apply and the unitholders cannot seek payment to them of the funds.

Of course, it was that conclusion, if the Full Court is wrong about that, that leads to the error in section 100A(3A).  There is no particular tax element of that dispute.  There was a third ground on which his Honour relied.   That appears at about point 7 on page 103, “until that occurred” is referring to the making of the payment application or setting aside –

the interest of the unitholders in both the income and capital of the trust fund was defeasible at the absolute discretion of the trustee –

because the trustee had the power to redeem the units.  It is true that the trustee had the power to redeem the units, and his Honour has given the clause numbers.  They appear on pages 195 and 196 of the application book.  Once again, in our respectful submission, that proposition is revolutionary.  The notion that once – if an income beneficiary is truly entitled – on the assumption that we are right on our first point – the beneficiary is truly entitled to the income for the year.  The fact that at a later point of time after the year of income the trustees might redeem the unit cannot take away the entitlement of the income for prior periods.

GUMMOW J:   Where do you deal in your written submissions with this third point?  Your argument starts at 120, thereabouts. 

HEYDON J:   Page 125.

GUMMOW J:   Yes.

MR RUSSELL:   Yes.

HEYDON J:   At 3.11.

GUMMOW J:   Yes at 3.11, as Justice Heydon says.

MR RUSSELL:   So, in our respectful submission, if we are right in our first proposition that Upton v Brown must be so restricted ‑ ‑ ‑

GUMMOW J:   Yes, we will call on the Commissioner now.

MR RUSSELL:   Thank you, your Honour.

GUMMOW J:   Yes, Mr Logan.

MR LOGAN:   If the Court pleases.  The case and its foundation, in our submission, involves a construction of a particular trust deed.

GUMMOW J:   That is always going to be so, unfortunately, this area of discourse.  That will always be so in a 101 case, I suppose.

MR LOGAN:   That is certainly right.  When one looks at this trust deed there is a particular obligation flowing from clause 21 in relation to gross income.  Putting aside for the moment Upton v Brown and looking at the clause itself on page 203, before one gets to net income one has a deduction and a requirement in respect of the expenses of the trust.  His Honour’s view in relation to Upton v Brown is really in conformity with what, in our submission, is just a matter of construing a trust deed, that is, that before one gets to net income one must from the gross take out expenses.  If that is so, then there is no net income in respect of which there can be any present entitlement, any distributable income.  So that it is not necessary to embark upon a consideration of all of the other nuances that his Honour has found in relation to this particular trust deed.  If one accepts that particular proposition, that perfectly explains the outcome.

The steps that Justice Edmonds and the other members of the Full Court went through were three steps in terms of subsection (3A).  It was the last of those that was the critical one in terms of present entitlement under the E&M Unit Trust.  So that if your Honours, in our submission, are of the view that there is no particular error in the construction of the trust deed, even if that does or does not particularly gel with everything that has been made of Upton v Brown, then there is no special leave point, we respectfully submit, in that.  The sham aspects of the case are those only which the Commissioner would be disposed to agitate in the event that there were a grant of special leave, but do not revise otherwise.

GUMMOW J:   The Commissioner has been entranced by the notion of sham for years now.

MR LOGAN:   Your Honour, with respect, that is certainly right.

GUMMOW J:   It goes back at least to Sharrment, I think.

MR LOGAN:   One might find inspiration for that though if one goes back in time to Mr Justice Windeyer’s judgment in Scott’s Case.

GUMMOW J:   Yes.

MR LOGAN:   There are nuances there.  Shams are real but they are camouflaged.  Justice Windeyer may well have had a unique insight into that from his experiences in the Western Desert.  But the sham aspect here, it is real in the sense of there are these documents that are signed up, they are real but each sign says “No, we weren’t ever intending that they have the effect that they say they have”.  It is just one of those cases which ‑ ‑ ‑

KIRBY J:   You have indicated that you will be filing a notice of contention and want to argue this matter in this Court if the case is granted special leave, but the portents, the entrails are not very hopeful in recent dicta in the Court.

MR LOGAN:   It is an interesting point and, with respect, as his Honour the presiding Judge has observed, history has obviously been entranced by that for quite a time, and this is a case where factually it is entrancing.

KIRBY J:   It is hard to justify, is it not, the intention of the penalty when that was based on the finding of sham which was overturned in the Full Court. That does not seem to square to me.  I may be missing something.

MR LOGAN:   Their Honours seem to have taken the view that – consistently with their view about the application of trustor and this particular trust deed – but it is consequences in terms of there being no distributable income have just been ignored by those advising and by the taxpayer company and it was not incapable of being regarded as reckless.  It is not as sharp a situation as the finding of sham.

KIRBY J:   I thought there was some power in the applicant’s submission, paragraph 3.14, which was making this point.  I suppose you say fundamentally her Honour got it right in that respect?

MR LOGAN:   The reasons that the Full Court gives are very abbreviated, but they are not incapable of being regarded as reckless if one accepts their premise that here there has just been a failure to come to grips with the consequence of there being no distributable income.  “Having regard to these reasons” is the language that their Honours use in that one sentence.  Have they come to grips with that?

KIRBY J:   The reasons include the overturning of the finding of sham and the complaint is that no other grounds exist for the penalty.

MR LOGAN:   I have to accept that the reasons are abbreviated to say the least, but they are not incapable of being – when one looks to those reasons of ‑ ‑ ‑

GUMMOW J:   How much money involved there were the penalties?

MR LOGAN:   There is a lot.

HEYDON J:   It is between 2 and 3 million, is it not?

MR LOGAN:   We can give you the precise figure.  About 4 point something million or so with penalties.  There is a lot of money at stake, no denying that.  So, your Honours, truly, in our respectful submission, if one is of the view that there is nothing in the point of construction of this deed as to what a trustee had to do and putting aside even Upton v Brown for which we contend it is an exemplar of a principle, then there is no special leave point, we respectfully submit, and repetition will not make that any better or worse, with respect.  If the Court pleases.

GUMMOW J:   Yes thank you, Mr Logan.

KIRBY J:   Your point on sham, is that a cross-appeal point or a notice of contention point?

MR LOGAN:   It would have to be in the nature of – we would need special leave to cross-appeal but that only comes up in the event that this Court is disposed to grant special leave.

HEYDON J:   That is not strictly right.  You have a right to file a notice of contention.

MR LOGAN:   Yes.

HEYDON J:   To contend that the conclusion below is correct for some other reason.  If you want to quarrel about the 50,000, then you would need a notice of cross-appeal.

MR LOGAN:   That is right, yes.

HAYNE J:   Then you would need leave for that.

MR LOGAN:   Yes, we accept that, yes.  If the Court pleases.

GUMMOW J:   Thank you.  We do not need to call on you further, Mr Russell.  There will be a grant of special leave in this matter, which will be a one day case.  The Court will adjourn to 10.15 am on Tuesday, 31 July at Canberra.

AT 12.04 PM THE MATTER WAS CONCLUDED