Read v Commonwealth

[1988] HCA 26

HIGH COURT OF AUSTRALIA

Mason C.J., Brennan, Deane, Toohey and Gaudron JJ.

READ v. THE COMMONWEALTH OF AUSTRALIA

(1988) 167 CLR 57

2 June 1988

Pensions

Pensions—Rate—Calculation—Factors—Income of pensioner—Unit trust—Revaluation of fund—Issue of additional units—Whether valuable consideration or profits, earned, derived or received—Social Security Act 1947 (Cth), ss. 18, "income", 28(1).

Decisions

MASON C.J., DEANE AND GAUDRON JJ: Since 1966 Mrs Clara Caroline Read ("the appellant") has been in receipt of an age pension paid pursuant to the Social Security Act 1947 (Cth) ("the Act"). In 1981 the appellant became the registered holder of 20,000 units in Australian Fixed Trusts Real Property Growth Trust ("the Trust"). On 31 May 1984, following a revaluation of the assets of the Trust, the appellant was issued with 8,755 additional units. An officer of the Department of Social Security valued the additional units at $4,027.00 and treated that sum as income for the purpose of ascertaining the appellant's pension entitlement under s.28 of the Act. The question which arises on this appeal is whether the issue of additional units was income as it was then defined in s.18 of the Act. The Federal Court of Australia (Spender and Pincus JJ., Fisher J. dissenting) upheld an appeal from a decision of the Administrative Appeals Tribunal and found that the additional units constituted "income" for the purposes of the Act. From that decision this appeal is brought.

2. The Trust is what is popularly known as a "capital growth trust". The Trust was established by Deed of Trust ("the Deed") made 23 April 1981. By this Deed, A.F.T. Property Company Limited ("the Managers") became the Managers of the Trust and Permanent Trustee Nominees (Canberra) Limited ("the Trustee") became the Trustee of the fund constituted initially by a sum of $460.00 contributed by the Managers. By cl.13(1) of the Deed, the beneficial interest in the fund thus constituted was divided into 1,000 units. Clause 2(1) of the Deed enables additions to the fund to be made by the Managers lodging "further cash or authorised investments or both to be held upon the trusts" as set out in the Deed. Clause 13(3) provides that "(a)s and when any addition is made to the Fund ... additional Units shall be created." The units thus created may be sold by the Managers (cl.13(2)). Alternatively, the Managers may nominate persons as the holders of units thus created (cl.14). Clause 13(4) of the Deed provides that at all times "the Units into which the beneficial interest in the Fund is divided shall be of equal capital value." The Deed provides that an up to date register is to be kept of unit holders (cl.22).

3. A Supplementary Deed made 6 May 1981 provided that the life of the Trust should be for 30 years from its commencement date, unless sooner determined in accordance with the Deed. Clause 3(1) of the Deed provides that the Trustee shall hold the fund "as trustee for the Registered Holders entitled thereto upon the terms of (the) Deed." Those terms include:

"3(2) No Registered Holder shall be entitled to require the transfer to him of any of the investments comprised in the Fund ..."

and

"35. There will be no distribution of income to Registered Holders in this Trust."

Additionally, cl.29 provides that upon determination of the Trust, and after sale and conversion of the investments and property constituting the trust fund, the proceeds shall be divided "among the Registered Holders in proportion to the number of Units of which they are ... respectively registered as the holders ...".

4. A unit holder thus has a beneficial interest in the assets of the Trust, a right to have the trusts executed in accordance with the Deed, and a right to proportionate distribution of the proceeds representing the assets of the trust fund upon termination of the Trust. The extent of a unit holder's beneficial interest at any given time is that proportion which his or her units bear to the total number of units issued.

5. In addition to the issue of units resulting from further contributions by the Managers in accordance with cl.2(1), the Deed requires units to be issued periodically to reflect any increase or decrease in the value of the assets of the Trust. Clause 36 requires the Trustee to revalue the assets of the fund at the end of each capital distribution period providing, effectively, that the fund is to be revalued at least once every three years. After making allowance for income transferred to capital reserve, the resulting increase or decrease in value (which the Deed refers to as, respectively, "capital gain" or "capital loss") is required to be distributed among the registered holders according to formulae which take account of the number of units held by each unit holder and the period for which each of the units has been held. The increase or decrease in value referable to each unit holder is then distributed by the issue to each registered holder of additional units. When a decrease is distributed in this manner it is accompanied by a reduction in the "capital value per unit". "Capital value per unit" is defined in cl.12(5) as "(t)he quotient arrived at by dividing the daily capital value of the Fund by the number of created Units on any day".

6. The revaluation of assets in 1984 disclosed an increase in the value of the assets of the Trust which, when distributed among the unit holders, resulted in the issue to the appellant of 8,755 additional units, bearing the same capital value per unit (46 cents) as those originally issued to her in 1981. Additional units, like original units, may be sold by a unit holder. Although it seems that, as at 1984, no market existed for the units, cl.17 of the Deed entitles a unit holder to sell to the Managers "all or any of his units" by giving twenty-eight days notice, at a price calculated by reference to the "repurchase price per Unit". The "repurchase price per Unit" is defined in cl.17(1) as "the daily capital value of a Unit ... rounded to the nearest one hundredth cent above or below such price". Thus the appellant was entitled to sell her additional units for 46 cents per unit, i.e. for the assessed value of $4,027.00, whilst retaining her original 20,000 units bearing the same capital value per unit as when originally issued.

7. In May 1984, "income" was defined by s.18 of the Act in these terms:

" 'income', in relation to a person, means any personal earnings, moneys, valuable consideration or profits earned, derived or received by that person for his own use or benefit by any means from any source whatsoever, within or outside Australia, and includes any periodical payment or benefit by way of gift or allowance from a person other than the father, mother, son, daughter, brother or sister of the first-mentioned person, but does not include ...".

The Act then listed a number of specific exclusions, none of which is relevant to the present matter.

8. It was not argued that the additional units were "personal earnings" or "moneys" as those words were used in the definition of "income" in the Act. It was argued on behalf of the respondent that the additional units were either "valuable consideration" or "profits", and that the meaning of "profits" encompassed unrealized profits. The appellant, on the other hand, contested the proposition that anything had been "earned, derived or received" by the issue of the additional units and submitted that they were simply the representation in paper form of her rights in relation to the Trust prior to the distribution of the increased value of the assets. Alternatively, it was argued on behalf of the appellant that the definition of "income", when properly read, excluded capital receipts.

9. It is convenient to turn first to the appellant's submission that the additional units merely represent in paper form her pre-existing rights in relation to the Trust. The beneficial interest acquired by the appellant upon the issue of her original 20,000 units was of a variable nature. It would vary as a proportion of the total beneficial interests in the Trust in accordance with the formulae contained in the Deed for distributing the increase or decrease in the value of the assets over the capital distribution period. In practical terms, the variation effected by the distribution of additional units to reflect increased value has two consequences for a unit holder. It alters the price at which the unit holder may sell his or her beneficial interest (or part thereof) to the Managers by altering the total number of units representing that beneficial interest. It also alters the proportionate share to be paid to the unit holder from the proceeds of realization in the event of the determination of the Trust.

10. It is obvious that distribution of an increase in value results in a net increase in the price at which a unit holder's beneficial interest may be sold. However, it is not at all obvious that it also results in an increase in the unit holder's proportionate entitlement to share in the proceeds of realization in the event of the determination of the Trust.

11. If the Trust had been determined prior to the distribution of increased value, the appellant's entitlement to the proceeds representing the assets of the Trust would have been that proportion which her 20,000 units bore to the total number of units then issued. After the distribution, her proportionate entitlement was that proportion which her aggregate unit holding - her original units plus the additional units - bore to the new sum total of issued units. It is not possible on the materials adduced to say whether that later proportionate interest was greater or less than her earlier proportionate interest as no material was presented as to the total number of issued units before and after the distribution of the increased value of the assets. However, as units were issued at different times and entitlement to additional units depends upon the time for which units have been held, it may be assumed that her later proportionate interest was different from her earlier proportionate interest.

12. As the issue of the additional units varied the appellant's entitlements in relation to the Trust in significant respects, it is inaccurate to say that the additional units merely reflect her prior entitlement. However, it does not follow that the additional units are properly to be characterized as either valuable consideration or profit "earned, derived or received" within the definition of "income" in the Act as it stood in 1984.

13. The argument that the additional units amounted to a valuable consideration was founded on the right of the appellant to require the purchase of the units by the Managers.

14. The words "valuable consideration" would seem intended to embrace receipts not in money form, but capable of being valued in money terms. Implicit in them is the notion of a quid pro quo or a material "reward, remuneration; a compensation" (The Shorter Oxford English Dictionary (3rd ed.) 1977). As identified in the judgment of Fisher J. in the Federal Court, "valuable consideration" includes "board and lodgings, goods, meals, rent free accommodation or provision of gratuitous services." The additional units (like the goods and services identified by Fisher J.), are capable of being valued in money terms. That value may be ascertained by reference to the repurchase price per unit assigned in the Deed. It does not seem to us, however, that it is possible to regard the appellant as having "earned, derived or received" any "valuable consideration" unless the additional units are capable of being treated as separate from the beneficial interest acquired by the appellant upon the issue to her of her original units. Unless they can be so regarded, their issue to the appellant would seem to us to be properly seen as an adjusting mechanism for formally recognizing or reflecting the alteration in and current value of the appellant's proportionate beneficial interest in the trust vis-a-vis other unit holders. Units issued to the appellant by way of such an adjusting mechanism would not, in our view, properly be seen as "valuable consideration ... earned, derived or received": they would neither constitute a "consideration" nor be susceptible of being valued independently of the underlying beneficial interest which had existed at the time of their issue.

15. Although the beneficial interest acquired by the appellant on the issue of her original units was an interest which might vary from time to time in proportion to the total beneficial interests in the Trust, and, it seems, did in fact vary in that manner upon the issue of the additional units, the variation could only be said to amount to a separate interest or item of property if, upon separation (as by way of transfer or sale of the additional units), the beneficial interest originally acquired retained its original form and character.

16. In the event that the appellant sold the additional units, her proportionate interest in the Trust would be that proportion which 20,000 units bore to the total number of units then issued. The number of units in existence after the revaluation of the trust assets was greater than the number of issued units prior to the revaluation. The proportionate beneficial interest in the assets of the trust retained by the appellant after a sale of the additional units would thus necessarily be less than the beneficial interest held by her prior to the distribution of increased value. That is, a sale of the additional units would involve a surrender of part of the interest the appellant previously held. In these circumstances, the additional units cannot be said to represent a separate item of property or a separate interest in the Trust. Their issue to the appellant is properly to be seen as an adjusting mechanism in the sense which we have explained. For the reasons which we have indicated, it follows that the additional units do not constitute valuable consideration earned, derived or received by the appellant.

17. It remains to be considered whether the additional units constitute a profit within the statutory definition of "income" in the Act.

18. The word "profit" connotes a gain or increase measured by comparison of financial position at different points in time. As Gibbs C.J. observed in Federal Commissioner of Taxation v. Slater Holdings Ltd. (1984) 156 CLR 447, at p 460, the starting point for determining the meaning of "profit" can be found in the well-known definition provided by Fletcher Moulton L.J. in In re The Spanish Prospecting Company, Limited (1911) 1 Ch 92, at p 98, viz:

" 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates."

19. As profit is the measure of improved financial position, the question whether or not a profit was made by the appellant cannot be determined merely on the basis of an increase in the number of units held by her, notwithstanding that the increase was in this case referable to an overall increase in the value of the assets of the Trust. The question whether the additional units constituted a "profit" must be assessed in terms of whether they resulted in any consequential financial gain to the appellant.

20. It has already been observed that it is not possible on the materials adduced to conclude that the issue of the additional units effected an increase in the appellant's proportionate beneficial interest in the Trust. The only gain or increase which the appellant may thus be said to have received (other than in the actual number of units held by her) was in the value of her beneficial interest, reflected in the price at which it, or part thereof, could be sold to the Managers.

21. We are prepared to assume for present purposes that the words "profits earned, derived or received ... by any means from any source whatsoever" as used in s.18 of the Act, as it stood in 1984, are wide enough to include capital profits: see Slater Holdings which was concerned with the meaning of "profits" in a similar context, viz. "profits derived ... from any source" in s.44(1)(a) of the Income Tax Assessment Act 1936 (Cth).

22. The term "capital gain" is sometimes used (as it is in this Deed) to refer to the measure of increase in the value of an asset over time. "Capital profit" and "capital gain" appear to have been used synonymously in a number of decisions of this Court concerning the operation of the Income Tax Assessment Act: see, for example, Blockey v. Federal Commissioner of Taxation (1923) 31 CLR 503, per Isaacs J., at p 508; Burnside v. Federal Commissioner of Taxation (1977) 138 CLR 23, per Aickin J., at p 50; Federal Commissioner of Taxation v. Bidencope (1978) 140 CLR 533, per Barwick C.J., at p 540; Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. (1982) 150 CLR 355, per Gibbs C.J., at pp 360-361, and Mason J., at p 372, and, most recently, Commissioner of Taxation v. Myer Emporium Ltd. (1987) 61 ALJR 270, at p 275: 71 ALR 28, at pp 36-37. The expression "capital gain", however, has generally been used to connote a gain made in the course of a transaction concerning a capital asset (Myer Emporium at p 270; p 29 of ALR). Commonly, such a transaction involves the sale or realization of a capital asset: see Whitford's Beach. However, as is clear from Californian Copper Syndicate v. Harris (1904) 5 TC 159, per Lord Trayner, at pp 167-168, the transaction may involve the conversion of the asset into a form other than money, as, for example, by the exchange of one asset for another, at least to the extent that the asset is converted into "that which can be turned to pecuniary account": Tennant v. Smith (1892) AC 150, at p 159. So employed, the expression "capital gain" is used to mean a realized capital gain, and not a mere increase in the value of the asset.

23. In our opinion a mere increase in the value of an asset does not amount to a capital profit. A profit connotes an actual gain and not mere potential to achieve a gain. Until a gain is realized it is not "earned, derived or received". A capital gain is realized when an item of capital which has increased in value is ventured, either in whole or in part, in a transaction which returns that increase in value. The position was put succinctly by the District Court of the United States for the Southern District of New York in Eisner v. Macomber (1920) 252 US 189, at p 207, by reference to the definition of "income" adopted in Stratton's Independence, Limited v. Howbert (1913) 231 US 399, at p 415 and Doyle v. Mitchell Bros. Co. (1918) 247 US 179, at p 185:

"'Income may be defined as the gain derived from capital, from labor, or from both combined,' provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case (pp 183, 185).

Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain", which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. "Derived-from-capital"; - "the gain-derived-from-capital," etc. Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived," that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; - that is income derived from property. Nothing else answers the description."

24. As the only relevant gain which is identifiable by reference to the additional units issued to the appellant is an unrealized gain, the additional units do not constitute a profit within the definition of "income" in s.18 of the Act as it stood in May 1984.

25. As the additional units issued to the appellant in 1984 were neither a valuable consideration nor a profit earned, derived or received by her, they were, accordingly, not "income" as then defined in the Act.

26. The appeal should be allowed.

BRENNANJ: The preamble to the Social Security Act 1947 (Cth) ("the Act") states that its purpose is "to provide for the payment of certain pensions, benefits and allowances and for related purposes". The Act prescribes the qualifications for entitlement to, and the rate of, various pensions and benefits. Many of the pensions and benefits are income-related, that is to say, the rate of a pension is dependent upon the annual rate of the income of a claimant or pensioner. An income-related pension provides income for a pensioner who otherwise has none or provides a supplement to the pensioner's income. The purpose of an income-related pension is to ensure that pensioners in the lower income brackets receive a measure of social security.

2. The definition of "income" in the Act is relevant to the determination of the rate of pension payable to individual pensioners and correspondingly to the level of public expenditure on social security pensions. In May 1984, Mrs Read, who was in receipt of an age pension under Pt III of the Act as it then stood, was allocated 8,755 additional units in the A.F.T. Real Property Growth Trust ("the Trust"). At that time, a statutory definition of "income" was contained in s.18 of the Act. (A similar definition now appears in s.3.) The definition read thus:

" 'income', in relation to a person, means any personal earnings, moneys, valuable consideration or profits earned, derived or received by that person for his own use or benefit by any means from any source whatsoever, within or outside Australia, and includes any periodical payment or benefit by way of gift or allowance from a person other than the father, mother, son, daughter, brother or sister of the first-mentioned person, but does not include - "

a number of items which it is unnecessary to set out but which include a number of subventions, mostly of a kind payable periodically, which the legislature considered should not be taken into account in determining the rate of a pension otherwise payable to a pensioner.

3. The definition is exhaustive: the term "income" means what it is defined to mean; it does not mean what "income" would be understood to mean if the definition were not in the Act. The definition is couched in the widest terms, presumably to ensure that public expenditure is directed to those who stand in actual need of the periodic support which income-related pensions provide. The definition is wide enough to embrace receipts of a capital nature as well as receipts of income, for "income" is defined to mean, inter alia, any moneys, valuable consideration or profits irrespective of the means by which or the source from which those moneys, etc. are received. In terms, the definition embraces the additional units allocated to Mrs Read: as we shall see, the additional units were valuable consideration to which Mrs Read was entitled under the Deed of Trust. But it was submitted that the definition should be read down and that, properly construed, it does not embrace the additional units allocated to Mrs Read. Unless the definition is read down, so the argument runs, occasional receipts of capital might work an unintended destruction of pension entitlements. Thus it was suggested that it could not have been intended to include within the definition of "income" a profit realized on the sale of a pensioner's home. The difficulty is illusory.

4. The definition of "income" is material to the operation of s.28(2) of the Act as it stood in 1984. By that provision, the annual rate of an age or invalid pension was determined by reference to the amount by which "the annual rate of the income of the claimant or pensioner" exceeded the relevant amount specified in the sub-section. The definition of "income" in the Act is therefore directed to a statutory scheme which is entirely different from the scheme to which the several provisions of the Income Tax Assessment Act 1936 (Cth) relating to income are directed. Under the Income Tax Assessment Act the receipts of an income year are examined to ascertain whether they bear the character of income and are brought to charge accordingly, but under the Social Security Act a receipt of "income" is relevant to the determination of the rate of pension only to the extent that it affects "the annual rate of income". To have that effect, a payment must be related in some way to a period; an isolated receipt of what is, by ordinary notions, a capital sum cannot affect "the annual rate of income". A pensioner who receives the sale price of his or her home does not thereby enhance his or her annual rate of income unless, perhaps, the home is exchanged for an annuity or for some other valuable consideration which is receivable over a period. The principle, which distinguishes the operation of the Act from the operation of the Income Tax Assessment Act, is stated in the joint judgment of Gibbs C.J., Brennan, Deane and DawsonJJ. in Harris v. Director-General of Social Security (1985) 59 ALJR 194, at pp 196-197; 57 ALR 729, at p 733:

" The distinction between an annual amount of income and an annual rate of income is critical to an understanding of s.28(2). ...

Income can be derived from various sources, as

the definition of 'income' in s.18 makes clear. Some items of income may be received at frequent and regular intervals during a year (for example, weekly or fortnightly wages paid to an employee), some intermittently (for example, profits of a business) and others at lengthy intervals (for example, annual dividends on shares). Subject to the exceptions stated in the s.18 definition and subject to the limitations expressed in s.29, no income derived from any source is to be left out of account in ascertaining the annual rate of income. At the time when an annual rate of income is ascertained, it is necessary to have regard to the pensioner's sources of income at that time and to find what each of those sources would yield over the period of a year assuming the current yields from those sources were to continue. It is not necessary to predict whether the pensioner will retain his sources of income for the year or whether the current yields will be maintained, for the annual rate of income is the current rate of income though it is calculated and expressed as an annual rate."

5. The concept of an "annual rate of income" is at the heart of the scheme for determining the rate of an aged or invalid pension, and it is consistent with the scheme that the definition of "income" includes (in its latter half) the periodical payments therein mentioned. It is entirely consistent with the scheme to include within a pensioner's "income" receipts of moneys etc. to which a pensioner becomes entitled periodically, even though the entitlement depends on an increment in, or in the value of, a capital asset. Such receipts may well be regarded as available to a pensioner to defray the recurrent expenses ordinarily met out of income.

6. It is neither possible nor necessary to attempt a general declaration as to what receipts are within the definition of "income" in the Act and what are outside it. But one general proposition can be affirmed by reference to the phrase "from any source whatsoever", namely, that a receipt which has its source in an increment in the value of a capital asset is not ;on that account alone excluded from the category of "income". That proposition immediately distinguishes the definition of "income" in the Act from statutory definitions which do not contain the quoted or any similar phrase. The definition of "income" in the Act falls to be construed in its unique context and care must be exercised in applying decisions on the meaning of "income" in other statutes or in other jurisdictions. With great respect for the contrary view, but in conformity with the observations of Viscount Haldane in Inland Revenue Commissioners v. Blott (1921) 2 AC 171, at pp 188-189; 8 Tax Cas 101, at p 129, I would not invoke the decision of the Supreme Court of the United States in ;Eisner v. Macomber (1920) 252 US 189 as a step in reasoning to a conclusion in this case "(f)or the taxing statute then in question was of a different order and the jurisprudence invoked was also on certain points different".

7. In order to identify the nature of the receipt to which regard was had in altering Mrs Read's rate of pension under s.28(2), I turn to the provisions of the Deed of Trust pursuant to which the allocation of additional units was made. The Deed of Trust provides for the beneficial interest in the Fund to be divided into units and prescribes the rights of the registered holders of the units. The trustee (Permanent Trustee Nominees (Canberra) Limited) holds the Fund during the lifetime of the Trust, that is, a period of 30 years beginning on the commencing date or such shorter period as is determined by the trustee in one of the events specified in the Deed: cl.28 as amended. During the lifetime of the Trust, none of the income of the Fund is distributed to unit holders; the net income of the Fund (after tax) is accumulated and invested to form part of the Fund: cl.35 as amended. Upon determination of the Trust, the trustee is to call in and convert into money the assets constituting the Fund, to give to the registered holders six months' notice of distribution of the net proceeds of the Fund, and to distribute the net proceeds accordingly among the registered holders in proportion to the number of units of which they are respectively registered as holders on the day of the notice: cl.29. A person who wishes to invest in the Fund buys units in the Fund from the managers (A.F.T. Property Company Limited). The managers deduct an initial service charge of 8% from the purchase price (cll.16 and 39) and pay the balance to the trustee: cll.2(3) and 16. Additional units are then created of the same capital value as other units: cl.13. Provision is made for the managers' and trustee's functions with respect to the management of the Fund. The trustee holds the Fund "as trustee for the Registered Holders entitled thereto upon the terms of this Deed": cl.3(1). However, a registered holder has no right to interfere with the trustee's ownership of the Fund investments or to attend meetings concerning any such investment: cl.3(2) and (3).

8. If it were not for the provisions presently to be mentioned, the investment made by a registered holder of units (less 8% of the purchase price deducted by the managers) would be locked into the Fund during the lifetime of the Trust. As the value of the Fund increases, the value of each unit holder's beneficial interest in the Fund would increase proportionately until, on the determination of the Trust, each of the then registered holders of the units would receive by way of distribution - assuming the Fund to have been profitable - an undifferentiated sum representing the capital received by the trustee from the managers and invested by the trustee, the profit derived on sale or other realization of the assets of the Fund and the income which the Fund had earned during the lifetime of the Trust.

9. The manifest purpose of the Trust is to acquire assets which will yield a profit on sale, albeit many or most assets are to be held for the lifetime of the Trust. The income yielded by the assets during the lifetime of the Trust is a secondary consideration. Statute apart, the profit on sale of an asset acquired as an investment to be held for the lifetime of the Trust or for an indefinite period during the lifetime of the Trust, so far as the profit represents merely an accretion to the capital value of the asset, would be capital in the hands of the trustee: Federal Commissioner of Taxation v. Whitfords Beach Pty.Ltd. (1982) 150 CLR 355, at pp 361-362,372,395. Statute apart, a distribution of a capital profit in the hands of a trustee would be capital in the hands of a unit holder, for the character of the moneys distributed in the hands of the unit holder would correspond with the character which those moneys bore in the hands of the trustee: Charles v. Federal Commissioner of Taxation (1954) 90 CLR 598, at p 609. The Administrative Appeals Tribunal (constituted by DaviesJ.) found - and, as a finding of fact, it could not be challenged on appeal to the Federal Court or on further appeal to this Court - that the main investments made by the trustee were long-term investments in real estate and real estate developments, that the trustee did not carry on a business of dealing in investments, and that the net income derived from the Fund investments was minimal. The Tribunal found that in the year ended 30 June 1984 a sum of $858,934 was included in the Fund in respect of property disposed of, and it may be that that sum contained an element of profit. It may be that, in the hands of the trustee, a capital profit realized on the sale of an asset in the Fund would be brought to charge by s.25A(1) (or the earlier s.26(a)) of the Income Tax Assessment Act. Even if that be so, it would not conclude the question whether a distribution of that profit to the unit holders upon determination of the Trust would constitute a receipt of "income" within the definition of that term in the Act. There are radical differences between the provisions of the Income Tax Assessment Act and the Social Security Act, to be accounted for by a variety of historical, political and administrative factors, and those differences must often be incongruous in their concurrent operation.

10. The character of profits in the hands of the trustee is not directly relevant, for Mrs Read received no distribution of profits (whether capital profits or otherwise). In May 1984 the trustee made no distribution. After the allocation of additional units, the Fund was undiminished and the trustee's duty was unaltered. What Mrs Read received were some additional units which gave her additional choses in action enforceable against the managers under the provisions of the Deed which must now be examined.

11. For the several purposes for which the value of the Fund is to be ascertained, the value of investments is set at the cost of acquisition or at the value last assessed by a qualified valuer: see the definition of "The Value" in cl.1 and cll.6(5) and 12(3). Revaluations of all real property investments, mortgage investments and personal property investments must be obtained by the managers at the latest at the end of each "Capital Distribution Period", that is, each three-year period after the commencing date: cll.1 and 12(3). The value of those assets as then assessed remains, until the next valuation, as the value of those assets in the Fund. During each Capital Distribution Period, the "value" of the Fund for the purposes of the Trust Deed will vary by reason of the infusion of new funds derived from the sale of new units and perhaps by reason of the receipt of income but not by reason of fluctuation in the value of investments unless an asset is realized during the period. During a Capital Distribution Period, the value of each unit is virtually constant despite the infusion of new funds. The managers are required to calculate a "daily capital value" of the Fund (cll.11 and 12), to calculate the value of the units which have been allocated (cl.12(5)) and to sell new units at a price ("the daily selling price") calculated by reference to the daily capital value of the Fund plus the initial service charge: cl.16. Thus all units are kept at the same value, as cl.13(4) requires.

12. When the Fund's investments are revalued at the end of each period, the major adjustments to the capital value of the Fund occur. If the Fund's investments have increased in value the then capital value of the units is kept steady by the issue of new units to the registered holders in proportion to the number of units they have held and the number of days they have held them ("unit days") during the preceding period: cl.36. If the Fund's investments have decreased in value to such an extent that the capital value of the Fund during the preceding period is diminished, the loss is cast upon the registered holders by the issuing of additional units in proportion to their unit days and by reducing the capital value of all units: cl.36. The periodic revaluation of investments thus results in an alteration in the number of units actually held by each registered holder and in the value of each holding: an increase in the number of units and the value of the holding if the preceding period was profitable, an increase in the number of units but a decrease in the value of the holding if the preceding period was unprofitable. The term "Capital Distribution Period" is in truth a misnomer for no capital is distributed either during the period or at its end. The prescription of a Capital Distribution Period is part of the drafting mechanism for effecting a periodic revaluation of the assets of the Fund (and hence of the Fund as a whole) at intervals of not more than three years. The revaluations at the end of each period are the occasions for including in "The Value" of the Fund the appreciation (or depreciation) in value of the assets of the Fund and allocating additional units at the same or a reduced value to accord with the variation in the value of the Fund as then assessed. The alteration in the value of a unit holder's holding is immaterial to the trustee and it would be immaterial to the managers also if the registered holders' investments in the Fund were locked into the Fund during its lifetime. But they are not. Provision is made for converting into money each registered holder's holding, whether in whole or in part, by requiring the managers to purchase the units held after receiving a request from the registered holder. The Deed governs not only the relationship between the unit holders and the trustee inter se; it governs the rights of unit holders against the managers. The periodic allocation of additional units creates a corresponding variation in the liability of the managers to the respective registered holders of units.

13. Clause 17 provides the machinery for unit holders to sell at any time either the units which they originally bought or any additional units allocated consequent on the periodic revaluation of assets. Twenty-eight days after receiving a request to repurchase units, the managers are obliged to repurchase the number nominated at the current daily value. Clause 17 defines "the daily capital value of a Unit" (by reference to cl.12(5)) as the "quotient arrived at by dividing the daily capital value of the Fund by the number of created Units on any day". As the value of the Fund during any distribution period must be determined by reference to the revaluation at the end of the antecedent period, the daily value of a unit is calculated by reference to the same revaluation. Although no unit holder is entitled to require the trustee to pay him any part of the Fund during the lifetime of the trust, the trustees are required to release cash from the Fund to the managers in order to enable the managers to pay for units which they are bound to repurchase from unit holders: cll.18 and 19. For this purpose the trustee is authorized to borrow money on the security of the assets of the Fund: cl.31(i). After repurchase, the managers may either resell those units (cl.21(2)) or cause them to be cancelled (cll.18 and 21(2)).

14. The effect of these rather elaborate provisions of the Trust Deed is comparatively simple: an investor who invests money in the Fund purchases units from the managers on terms that, provided the Fund is profitable, (1) the sum invested, less 8% of the initial investment taken by the managers, will be paid in cash after 28 days' notice; (2) after each revaluation, the investor can require any increase in the value of the investment to be converted into cash or the additional units can be left in the Fund to earn a larger proportion of whatever profit is earned by the Fund before the next revaluation; and (3) the cash which the investor may require is to be paid by the managers who are entitled to obtain money for that purpose from the trustee who may borrow on the security of the Fund or realize assets in the Fund to provide it. If the Fund should incur a loss, the diminution in the value of the holding after a revaluation will reduce the amount theretofore available to the unit holder.

15. It is erroneous to regard a unit holder's investment as locked into the Fund during the lifetime of the Trust: the unit holder has a right as against the managers to realize his or her investment or any part thereof and the Fund may be resorted to by the trustee in order to enable the managers to pay the price for the repurchase of units. The Trust Deed thus provides for the periodic allocation to an investor of a return in the form of units convertible into money. The units which are allocated upon each revaluation after a profitable period and the value of those units are the factors in the calculation of the profit received by the unit holder on his or her investment in respect of that period. As additional units are allocated in proportion to unit days and not in proportion to units held, the equitable interests of registered holders inter se in the Fund are altered by each issue, but there is no alteration in the rights of the unit holders as a class against the trustee. Additional units are not like bonus shares issued rateably to shareholders and paid for out of the company's profits. When a company issues bonus shares to its shareholders and the allotment moneys are paid out of profits, the company either parts with the profits to the shareholders who pay them back as allotment moneys - in which case the profits are "liberated", to use the term used by Rowlatt J. in Blott's Case (1920) 1 KB 114, at p 133; (1919) 8 Tax Cas 101, at p 112 - or the company appropriates the profits to pay for the shares: cf. Swan Brewery Company, Limited v. The King (1914) AC 231. As Dixon C.J. explained in Federal Commissioner of Taxation v. W.E. Fuller Pty. Ltd. (1959) 101 CLR 403, at pp 412-413 (a judgment followed in Gibb v. Federal Commissioner of Taxation (1966) 118 CLR 628), if the relevant statute does not give an extended meaning to "income", the liability to tax depends not on the character of the bonus shares but on the answer to the question whether the shareholder obtains such a title to the profits used to pay for the shares as make those profits "income" in his hands. The additional units which are periodically allocated under the Trust Deed are not paid for out of profits; they are not paid for at all; the trustee neither parts with nor appropriates any profits in the Fund. The additional units, like shares, are choses in action but, unlike shares, they are enforceable during the lifetime of the Trust against the managers only, not against the trustee in whom the Fund is vested.

16. The allocation of additional units to Mrs Read in May 1984 was a periodic addition to the units she already held and they were convertible into money on giving 28 days' notice to the managers. They were not allocated out of the Fund, though their number and value was calculated by reference to the value of the Fund at the end of a period and the proportion credited to Mrs Read of the total number of unit days credited to all registered unit holders in respect of the period. Even if the unrealized profit in the Fund were treated as capital and the source of the allocation, the capital character of the source would not deprive the additional units of the character of "income".

17. In my opinion, the additional units fall within the definition of "income" by reason of two factors: a unit holder's entitlement under the Trust Deed to a periodic allocation of additional units at periods of not more than three years and their convertibility into money. Additional units thus satisfy the description of "valuable consideration ... received by" the unit holder for her "own use or benefit". The periodicity of their allocation means that their value may be taken into account in determining Mrs Read's annual rate of income under s.28(2) of the Act. Moreover, as the number of additional units allocated depends on the number of units already held and the period during which they were held, the additional units might properly be regarded as a yield on the investment made by the unit holder. To deny additional units the character of income because their allocation is dependent on an increase in the value of the Fund held by the trustee during the lifetime of the Trust is to neglect the aspect of the Trust which is of dominating commercial significance, namely, the periodic allocation to the investor of a right to take in cash the equivalent of any profit (albeit unrealized profit) attributable to the sum invested. The Act reveals no principle which requires the receipt of additional units to be disregarded in assessing a pensioner's annual rate of income and in determining the rate of any pension payable. There is no reason why the definition of "income" should be read down to exclude the receipt of additional units. In my opinion the conclusion of the majority of the Full Court of the Federal Court was correct.

18. I would dismiss the appeal.

TOOHEY J: For the reasons given by Brennan J., with which I agree, the appeal should be dismissed.

Orders

Appeal allowed with costs.

Set aside the order of the Full Court of the Federal Court of Australia dated 10 March 1987 and in lieu thereof dismiss the appeal to that court with costs.