Secretary to Department of Social Security v Read, C.C
[1987] FCA 99
•10 MARCH 1987
Re: SECRETARY TO THE DEPARTMENT OF SOCIAL SECURITY
And: CLARA CAROLINE READ
No. QLD G95 of 1986
Social Security - Statutes
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Fisher J.
Spender J.
Pincus J.
CATCHWORDS
Social Security - reduction of pension in accordance with pensioner' s "income" - definition of "income" in statute - whether literal reading produces absurdity - bonus units issued to pensioner holding interest in trust - whether bonus units "income" within definition - whether bonus units income in ordinary sense of word.
Statutes - whether statutory definition should be applied - whether to be read down - implication in definition.
Social Security Act 1947, ss.18, 28
HEARING
BRISBANE
#DATE 10:3:1987
COUNSEL for the applicant: Mr. Greenwood Q.C. with Mr. P. Dutney
COUNSEL for the respondent: Mr. Davies Q.C. with Mr. M.W.D. White
ORDER
The appeal be allowed.
The decision of the Administrative Appeals Tribunal be set aside.
The matter be remitted to the Secretary to the Department of Social Security for reconsideration in accordance with the reasons for judgment of the majority.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
In this matter I have had the advantage of perusing in draft form the reasons for judgment of Pincus J. The facts and questions relevant to this appeal are well set out in his judgment and I have no need to repeat them.
This appeal raises basic and difficult questions as to the proper construction of the Social Security Act 1947 ("the Act") and the definition of "income" therein contained. As Pincus J. correctly states there does not appear to be anything in the provisions of the Act making use of the word "income", nor I might add, anything in authoritative decisions on the Act, which show a clear tendency to support the construction favoured by either the applicant or the respondent. Pincus J.'s conclusion is to uphold the arguments of the applicant while for my part I am ultimately inclined to accept those of the respondent and dismiss the appeal. I wholeheartedly adopt the words of Wilson J. in Harris v. Director General of Social Security infra which can be fairly applied to this matter, namely that the arguments of counsel together with a perusal of the Act, indicate "a bewildering array of conflicting theories as to how the question is to be answered, all of them claiming support from the provisions of the Act". Since the addition of provisions providing for an assets test, the words of the Chief Justice in that case, namely that it is "necessary to refer to a mosaic of provisions which do not easily interlock" are even more appropriate.
The problem was whether the receipt by the respondent ("the applicant") on 31 May 1984 of certain bonus units constituted a receipt of "income" as defined at that time by s.18 of the Act. That definition provided -
"'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..."
There are then set out numerous categories of exclusions comprising receipts which in ordinary parlance are of a capital nature and an income nature. If it is contemplated that all "personal earnings, moneys, valuable consideration or profits" received fall within the definition of income then that definition is all embracing and few, if any, receipts would be excluded unless they are expressly specified.
It has been said on a number of occasions that the word "income", unrestricted by definition or by the Courts, covers every form of receipt. It is as large a word as can be used to cover a person's receipts. As Hood J. said at the commencement of this century in relation to the Victorian Income Tax Acts (In re The Income Tax Acts (No.2) 27 VLR 39 at p 41)
"Primarily 'income' means everything that comes in , but the Court has placed certain limitations on that meaning. The first limitation is that it shall not include moneys received by accident, such as gifts. The second is that to be taxable it must be in its nature probably recurring - something that would happen yearly. These limitations would exclude a legacy, or the value of a gold mine discovered by an owner on his land, or money received for the sale of property..."
In this Victorian Act there was, as in the Income Tax Assessment Act (Cmwlth) 1936, no definition of income. It is accepted that the restrictions placed on that word by the Courts when considering those Acts do not necessarily assist when the word is defined.
The restricted sense in which the word "income" as the subject of income tax law could have been but in fact has not been regarded was referred to by Dixon J. as he then was in Resch v. Federal Commissioner of Taxation (1942) 66 CLR 198 at p.224 as follows:
"The subject of the income tax has not been regarded as income in the restricted sense which contrasts gains of the nature of income with capital gains, or actual receipts with increases of assets or wealth".
The question for determination in this matter is whether by definition the word "income" encompasses everything that comes in to the pensioner whether or not that which comes in is of a periodical or non-recurring lump sum nature, whether or not it is essentially of a capital nature, whether or not it comprises "property" (being the word introduced by the Assets Test legislation) or the proceeds of conversion of that property. In my opinion if there be no limitation on the word "income" and it encompasses every receipt of the pensioner, an absurdity results. It could not seriously be contended that the proceeds of sale of a motor vehicle or an item of furniture, moneys borrowed, a legacy under a will or the proceeds of sale of shares would comprise "income" for the purposes of this Act. Of course that which is periodically returned to the pensioner consequent upon the investment of these proceeds would be income.
In my opinion there are indications to be found in the legislation itself and in the reasoning of Courts which have considered the Act that the definition was not intended to cover every form of receipt. Within the definition itself I attach significance to the following three matters.
First the use of the word "income" which although capable of an unrestricted meaning is seldom used in common parlance to apply to receipts of capital lump sums. It has in this sense an accepted meaning which however I acknowledge is not of great significance when the word is defined for the purposes of a particular Act. The fact that the word "income" appears in an Act providing for payment of periodical pensions is also not to be wholly ignored.
Turning to the definition itself, I do not regard the words "personal earnings, moneys, valuable consideration or profits earned, derived or received" as requiring that everything of this nature received by a person is income for the purpose of the definition. Rather it is saying that it is immaterial whether that which is income is received by the pensioner in the form of personal earnings, moneys, valuable consideration or profits. For example personal earnings would normally be received in the form of wages or salary, other income can be received in the form of a cash receipt (moneys) or some other form of valuable consideration i.e. board and lodgings, goods, meals, rent free accomodation or provision of gratuitous services. Likewise income can be received in the form of profits of a business undertaking. The definition in my opinion does not state that all moneys, in whatever circumstances received, and all valuable consideration, for whatever it is exchanged, is income. Rather it contemplates that the form in which the income is received is immaterial. In my opinion the definition is directed at including that which is income in the ordinary parlance notwithstanding that in the hands of the recipient it has the characteristics or is in the form of something which would not normally be regarded as income. A payment on revenue account is not always income in the hands of the recipient and likewise in respect of payments which are capital in nature (See Federal Commissioner of Taxation v. Blakely (1950) 82 CLR 388, Federal Commissioner of Taxation v. Uther (1965) 112 CLR 630 and Federal Commissioner of Taxation v. Harris (1980) 30 ALR 10). The legislature may well have wished to negate the normal test, namely that "whether or not a particular receipt is income depends upon its quality in the hands of the recipient" Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 at p.526 per Windeyer J.
There is a further indication in the definition that the legislature had in mind that that which is "income" is something periodically received. This is to be found in the express inclusion in the definition of "any periodical payment or benefit by way of gift or allowance". If the word "income" in the definition is construed without restriction, a gift of cash would come within the scope of the words "monies received" and would not require express inclusion. However the legislature has seen fit expressly to include such a gift probably because it would not normally be "income" as that word is generally understood. It has also considered it necessary to attach a qualification, namely that the payment by way of gift must be periodical in nature, thereby requiring it to bear another characteristic of income, namely that it be of a recurring nature. If the definition of income encompasses all receipts of money, whether of a capital nature and whether received periodically or not, the express inclusion of periodical payments of gifts or allowances is surplusage and unnecessary.
I refer only briefly to the reasons for judgment in the High Court decision of Harris v. Director General of Social Security infra and the Full Court decision in Haldane-Stevenson v. Director General of Social Security (1985) 60 ALR 621 which in dealing with the word income in this Act use terminology which characterises income as being generally of a recurrent nature. In Harris v. Director General of Social Security (1985) 57 ALR 729 at 733 Gibbs C.J. Brennan, Deane and Dawson JJ. said:
"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."
I draw attention to the dichotomy between sources of income and what those sources yield by way of income.
There are other provisions in the Act as it was at the relevant time which indicate the characteristics of the "income" under consideration, namely that it is of a recurrent and not a capital nature. Sub-section 28(2) requires that the annual rate of an age or invalid pensioner shall be reduced by 50% of the annual rate of income in excess of a specified amount. I have added the emphasis. The expression "annual rate of income" is a concept not easy to relate to the proceeds of sale of an item of furniture, the receipt of a legacy or the amount of cash received by way of a loan. Similarly difficulties occur in applying to receipts such as these the obligation under s.74(1) of the Act to notify the Department where "the average weekly rate of income in any period of 8 consecutive weeks".... Likewise s.130 which requires notification "whenever a beneficiary receives income at a weekly rate". Sections 45, 30B, 130, 133L all refer to the concept of a "weekly rate of income", and there are doubtless other references to this effect. Section 47 is also difficult to reconcile with a wide meaning of the word "income".
My view that a capital receipt would not fall within the definition of income is reinforced by the amendments to the Act made in late 1984 to provide an "Assets Test". These amendments expressly differentiate between property and income in circumstances in which the definition of income remained for all essential purposes unaltered. It can fairly be said that the legislature thereby acknowledged a distinction between a receipt of property and a receipt of income. I need only refer to ss.6AC(1), 6AC(8), 6AC(9) all of which deal with disposal "of property or income", sub.s.6(3), para.(a) of which refers to the value of property and para.(b) to the annual rate of income.
In referring to the legislation it is also helpful to note the amendment made to the definition of income by Act No. 106 of 1986. The legislature, doubtless in consequence of the decision here under review, included in the definition of "income" the words "whether of a capital nature or not". Furthermore, it appreciated the absurdity of labelling all capital receipts as income. In consequence of this, the concept of a "domestic payment" was added to the exemptions from the definition of income. The term "domestic payment" is defined in the amending legislation as follows:
"'domestic payment' means a payment received by a person on the disposition of any property of the person, being property that, for a period of 12 months or such lesser period as the Secretary considers appropriate before that disposition, was used by the person or by the person's spouse wholly or substantially for private or domestic purposes."
Therefore proceeds from the sale of domestic assets such as furniture are excluded from income. Where the exemption and the addition of the words "whether of a capital nature or not" now leave the scope of the definition of "income" is for another day.
It follows that it is my opinion that the definition of income is not so wide as to encompass everything that "comes in", with the exception of the items expressly excluded. In my opinion it should, prior to its amendment this year, be construed as restricted to receipts which are not of a capital nature. Stated positively it means income according to ordinary concepts or parlance irrespective of the form in which that income is received together with gifts or allowances if paid periodically but excluding the specified exemptions. Such a construction does not damage the definition, and the particular provisions of the Act dealing with annual or weekly rates of income can more easily be applied to "income" construed in this manner.
Turning to the particular question in this matter I am of opinion that the receipt by the applicant of the bonus issue of units was not a receipt of income and thus should be ignored in the application of sub.s.28(2). It was in my view a receipt which is capital in nature. It represented on this occasion the applicant's share of the capital gain which on a revaluation of assets had occurred during the preceding 3 years. The issue of units which she received did no more than reflect the then value of her share in the trust assets. In truth she was as a matter of law entitled to her share in such appreciation in value whether or not she received an issue of units acknowledging such entitlement.
Furthermore the fact that the applicant received additional units which on this occasion reflected her interest in a capital gain is of little significance. She would have received additional units if there had been a capital loss. But the total value of her investment would have diminished because of a reduction in the realizable value of each unit which she then held. The receipt of additional units on such an occasion can hardly be seen as a gain, whether of a capital or income nature.
In applying my view of the correct construction of the word "income" to the facts of this matter I note that the relevant provisions and the modus operandi of the trust have been set out in detail by the President of the Tribunal and by Pincus J. I shall merely refer to what I see as the salient features.
In my opinion the applicant's parcel of units and their corresponding interest in the assets of the trust fund represent the source capable of producing income for her. It also represented, for the purpose of the assets test shortly thereafter enacted, her "property". Under the terms of the trust deed the holders of units agreed that they would not receive distribution of income from the trust. As a matter of law they could of course have terminated the trust and this and any other provision. However they were not under the trust deed wholly excluded from obtaining a benefit with the characteristics of income from the trust prior to its determination. The assets of the trust, primarily real estate, produced income which, as gross income, was in the trust deed defined as receipts "liable to be included in the assessable income of the fund as a trust estate within the meaning of the Income Tax Assessment Act". These receipts would include assessable income under s.25 as well as "deemed" assessable income under provisions such as s.26 of that Act.
This gross income was applicable in the first instance in payments of expenses and deductions set out in clause 34 of the deed. Provision was then required to be made for payments of income tax on the net income as taxable income doubtless in accordance with Division VI Part III of the Income Tax Assessment Act. Clause 35 then provided that no distribution of income would be made to holders of units, the net income after providing for tax being transferred to capital reserve. At the end of each capital distribution period this capital reserve was transferred to form part of the Capital Gain or to assist in reducing the amount of the capital loss for the period. To the extent that any Capital Gain distributed as bonus units represented income transferred from the capital reserve the bonus units would in my opinion fall within the definition of income. This was not in dispute and there was no suggestion that in this particular matter the distribution of bonus units represented anything other than capital appreciation of assets. It could well be argued that in circumstances of a capital loss the issue of bonus units would also be income to the extent to which the loss was reduced by the transfer of income from the capital reserve.
It is also pertinent to note that even in circumstances where there was no capital appreciation disclosed by valuation at the end of the period additional units were allocated to registered holders. These units were distributed on the basis that holders who had held units for only a short time received more units than those who held for longer periods. The effect of the loss was achieved by reducing the value of all units held and by this differentiation between holders in accordance with the time they had held units. In this manner the loss was apportioned between the holders. It is hard to contemplate that the receipt of additional units in these circumstances with an accompanying reduction in realizable value of all units could fairly amount to the receipt of income with consequential impact on the quantum of a pension entitlement.
I note that Pincus J. agrees that the Tribunal correctly found that the bonus units did not constitute income in the ordinary sense. I agree with this conclusion although because he is of opinion that the word "income" in the Act has a different meaning his decision on the appeal is contrary to mine. I would however state that in my opinion the present case is stronger than those which arise under income tax law relating to bonus issues of shares by companies. This is a consequence of the fact that companies can only make distributions to shareholders by way of dividends, which are essentially income in character, which dividends are then satisfied by the issue of bonus shares.
In my opinion this appeal should be dismissed with costs.
JUDGE2
The facts of this appeal appear in the judgment of Pincus J., which I have had the advantage of reading. It is therefore unnecessary to repeat them.
The principal question on the appeal is whether the rate of income of the respondent calculated for the purposes of s.28(2) of the Social Security Act 1947 was affected by her receipt on 31 May 1984 of additional units in A.F.T. Real Property Growth Trust. In January 1985, a delegate of the Secretary of the Department of Social Security calculated the value of those bonus units at $4,027.00, concluded that that sum was income for the purposes of the Social Security Act 1947, and reduced her age pension from $212.80 per fortnight to $135.30 per fortnight.
It is conceded that, if that receipt constituted "income" as defined, then it was proper that Mrs. Read's pension be reduced.
At the relevant time, income was defined by s.18 of the Social Security Act 1947 ("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..."
There then appear numerous exclusions, including receipts that would in ordinary parlance be of a capital nature. By way of example, "income" was defined so as not to include:-
"(cc) insurance or compensation payments made by reason of the loss of, or damage to, buildings, plant or personal effects;
...
(cf) a payment under a law of the Commonwealth, being a law having an object of assisting persons to purchase or build their own homes;"
The definition of "income" was omitted from s.18 and inserted in s.6 of the Principal Act by Act No.93 of 1984 (assented to on 21 September 1984), which amending Act introduced the Assets Test for pensions. These changes occurred after the period with which this appeal is concerned. The Social Security and Veterans' Affairs (Miscellaneous Amendments) Act 1986 (No.106 of 1986), assented to on 27 October 1986, inserted the words "whether of a capital nature or not," after "valuable consideration or profits" in the definition of "income". Further, by way of a specific exemption from the definition of "income", it added "a domestic payment", which was defined to mean "a payment received by a person on the disposition of any property of the person, being property that, for a period of twelve months or such lesser period as the Secretary considers appropriate before that disposition, was used by the person or by the person's spouse wholly or substantially for private or domestic purposes;".
These amendments and their relevance to the present question will be referred to later.
"Income", in its ordinary meaning, according to the Shorter Oxford Dictionary, is "that which comes in as the periodical produce of one's work, business, lands, or investments". However, "income" being defined by the Act, that definition cannot be ignored and the ordinary meaning of the word substituted for its statutorily defined meaning. Cases under the Income Tax Assessment Act 1936, where "income" is not defined, do not assist in the interpretation of the word in the Social Security Act 1947, where it is defined. The question is what is the meaning of "income" as so defined.
The applicant submitted that, read literally, the definition of "income" would include any capital asset purchased by a pensioner or the price received by him or her on the sale of any capital asset. Unless such a wide-ranging definition were read down, it was said that an absurdity would result. It was therefore submitted that the first four lines of the definition down to and including "within or outside Australia" should be construed as describing the various sources of income and the ways in which they become income of the person and thus the words "personal earnings, moneys, valuable consideration or profits" serve the function of describing all the categories of income which may be "earned, derived or received".
This submission amounts to reading the definition as if it said "Income, in relation to a person, means income whether by means of personal earnings, moneys, valuable consideration or profits earned, derived or received by that person ...". So read, "income" would have its meaning in ordinary parlance, with the consequence that any receipt of a capital nature would not be income. The receipt of the bonus units by Mrs. Read, being of a capital nature, would therefore not result in a reduction of her pension.
The President of the Administrative Appeals Tribunal concluded that:-
"...the receipt by Mrs. Read of the additional units amounted to an accretion of capital and not to a derivation of income."
I respectfully agree that the receipt was of a capital nature, for the reasons which Pincus J. gives.
It is therefore necessary to consider the correctness of the applicant's primary submission, namely, that the definition of income has to be read down so as not to apply to receipts of a capital nature.
There are difficulties about each of the competing interpretations. Acceptance of the natural meaning of the definition would mean that the proceeds of the sale of a person's home or motor vehicle or moneys received by way of loan would constitute "income", and result in a reduction in the rate of pension. On such a reading, also, the words "and includes any periodical payment or benefit by way of gift or allowance..." would be unnecessary. Conversely, if the applicant's submission be correct, the exclusion from the definition of "income" of certain receipts clearly of a capital nature would be unnecessary. Frankly acknowledging those difficulties, nonetheless, in the context of the Social Security Act 1947 and its purpose, I am unable to see any necessary logical justification for making the implication for which the applicant contends. I accept that there may be circumstances where to regard certain capital receipts as "income" would have to be regarded as an unintended unfairness of the statutory definition. However, I respectfully reject the view that a reduction in the rate of an age or invalid pension is dependent upon whether a receipt is of an income or of a capital nature (as understood in the context of trusts or income tax).
Many examples could perhaps be given, but perhaps one should suffice.
The authorities establish that bonus shares allotted to shareholders on a capitalisation and appropriation of profits are, in their nature, capital and not income: Commissioners of Inland Revenue v. Blott (1921) 2 AC 171; Commissioners of Inland Revenue v. Fisher's Executors (1926) AC 395; 10 TC 302; and see Federal Commissioner of Taxation v. W.E. Fuller Proprietary Limited. (1959) 101 CLR 403. In considering the applicant's primary submission, I think it helpful to ask, in the context of the Social Security Act 1947, why the receipt of those shares should have a different consequence on the rate of pension than if the profits had been divided and paid as dividends.
While the Court is, of course, concerned with the definition of "income" as it was at the relevant time, reference to later amendments is sometimes of assistance. See, by way of example, Grain Elevators Board (Victoria) v. President, Councillors and Ratepayers of the Shire of Dunmunkle (1946) 73 CLR 70 per Dixon J. (as he then was) at pp 85-6.
An amendment to the Act made in 1986 inserted the words "whether of a capital nature or not" after "valuable consideration or profit" in the definition of "income". Such amendment, one may infer, was made in response to the decision under review: in any event, it does not sit happily with a submission that, in 1984, Parliament could not have intended to include any capital receipts in the definition of income. I think the provision excluding payments received on the disposition of property used substantially for private or domestic purposes, was to ameliorate some undesired consequences of the definition as previously defined.
I am, for the foregoing reasons, of the opinion that the receipt by Mrs. Read of the bonus units was the receipt of income.
I share the view of the Tribunal that the manner of adjustment of Mrs. Read's income was incorrect. What had to be assessed was the current rate of income of the pensioner calculated in annual terms. Since distributions from the trust may be expected every three years, I would consider it appropriate to regard the annual rate of receipt of income from the distribution of bonus units as one-third of their value, namely $1,342.00.
I would allow the appeal and set aside the decision of the Tribunal. Pursuant to s.44(4) of the Administrative Appeals Tribunal Act 1975, I think the appropriate order for the determination of the rate of pension of Mrs. Read is to remit the matter to the applicant to be dealt with in accordance with the reasons of Pincus J. and with these reasons.
As to costs, the applicant has been successful on the issue argued on the appeal, yet the Tribunal was of the view, which the majority on the appeal share, that the determination of the rate of pension by the delegate was incorrect. In those circumstances, in my view, there should be no order as to costs.
JUDGE3
This is an appeal from the Administrative Appeals Tribunal constituted by Davies J. His Honour set aside a decision of a delegate of the present appellant under which the present respondent's age pension was reduced on the ground of receipt by her of additional units in a trust called the A.F.T. Real Property Growth Trust. If the issue of those units to the respondent produced the result that she earned, derived or received "income" within the meaning of the definition in s.18 of the Social Security Act 1947 as it was at the relevant time, then, as is admitted, the appellant was entitled to reduce her pension.
The definition just mentioned commences as follows:
"'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 - ..."
There are then set out numerous categories of exclusions. The argument for the appellant was that the units issued to the respondent constituted "valuable consideration ... earned, derived or received ... by any means from any source whatsoever ..." within the meaning of the definition. The respondent conceded that the words quoted are capable of including the units issued within their scope, but said they should be so read down as to exclude capital receipts, into which class, it was argued, the units fell. It should be mentioned that by Act No. 93 of 1984, the definition was altered and inserted into s.6 of the Act; that change occurred too late to affect this case.
Although there is no dispute as to the facts, and the question depends purely upon the meaning of the definition of "income", it is necessary to set out the circumstances, and more particularly the effect of the relevant trust deeds, in some detail.
The basic deed is dated 23 April 1981; by an amendment made on 6 May 1981 it was provided that the trust thereby created should continue for 30 years from the "commencing date", the definition of which expression it is unnecessary to analyse. An important defined concept is "capital distribution period"; the first such period begins on the commencing date and ends, at most, three years later. Each subsequent distribution period, similarly, begins immediately after the last capital distribution period and ends, at most, three years later. Under the deed, a named trustee is to hold property purchased for the purpose of the trust, and there is to be a distribution of units at the end of each capital distribution period - i.e. prima facie, at the end of each three years. The purpose of the distribution process is to distribute what are described as capital gains, or capital losses, of the trust fund. The scheme of the deeds is to arrive at a valuation of the fund at the end of each capital distribution period when, under the terms of the original deed as varied by a deed dated 27 July 1984, there is to be an evaluation of all the fund investments (clause 12(3)). There are then elaborate provisions for distributing units to reflect the capital gain or loss.
The scheme of those provisions is as follows. Under clause 36, a calculation is made of the number of "unit days" in the capital distribution period; that figure equals the number of units in each holding multiplied by the number of days for which the same has been held; then the number of unit days is divided into the capital gain or loss in the relevant period. Each unit holder has then to receive his due proportion of the capital gain, or suffer his due proportion of the loss. The gain or loss is distributed amongst the registered holders in proportion to the number of unit days attributable to each.
The distribution of a capital gain is achieved by giving each holder an additional number of units of sufficient value - in practice 46 cents each. The respondent was initially issued 20,000 units of value 46 cents each on 6 August 1981 and received 8,555 units at the end of the first capital distribution period in May 1984.
Thus capital gain, and not capital loss, is all that is in issue here, but it is desirable to mention what would have happened in the event of a loss. In that case, a loss per unit day is calculated and each unit holder has to bear that loss in proportion to his or her individual number of unit days. If each unit were held for the same period of time, there would be no need for a distribution: each unit would simply be reduced in value by the same proportion to absorb the loss, but the use of the concept of unit days achieves the result that the loss is attributed to units in proportion to the length of time each has been held since the beginning of the capital distribution period; the loss falls, for example, twice as heavily on a unit which has been held for the whole period as upon one which has been held for only half the period. To take account of this, the deed provides for the issue of new units, so that by the combined process of reduction in value and issue of units, each unit holder is left with a number of units of value such as to reflect his or her due proportion of the capital loss.
To turn to some other relevant aspects of the deeds, clause 11 of the original deed requires that the fund be valued daily. That is not, however, as onerous a task as it might seem, because under clause 12(3), inserted by the amending deed of 27 July 1984, referred to above, property and mortgage investments are to be valued at cost of acquisition. Prima facie, under clause 13(4), all the units into which the beneficial interest in the fund is divided are to be of equal capital value; that principle is carried through into, and necessitates the reduction in, the capital value of units issued on account of losses appearing at the end of capital distribution period, as explained above. Under clause 17, subject to a proviso which it is unnecessary to set out in detail, unit holders have a right to have their units repurchased by the "managers" at the end of a 28 day period of notice and the expression "managers" has a prima facie definition, namely A.F.T. Property Company Limited. The price at which units have to be repurchased depends, of course, on the daily value of the fund.
According to the evidence, no market for sale of the units was ever established and the only likely means of realising a unit holder's investment was by means of the repurchase provision. In practice, then, a person such as the respondent buying into the trust would realise her investment either by participating in a distribution of the surplus at the termination of the trust (i.e. after 30 years) or, more probably, would sell the units to the managers under clause 17 as mentioned above. Apart from other benefits, it should be noted that the "managers" make a profit at the inception of each holding, in that 50 cents has to be paid for a 46 cent unit. Then, during the capital distribution period, the daily value of the fund might increase somewhat from 46 cents, but that daily value would not reflect the underlying value of the assets. This proposition may conveniently be illustrated by the figures in the present case. On 29 May 1984, a letter written to the trustee disclosed that the revaluation at the end of the first capital distribution period gave a figure of $141,963,000 as opposed to a book value of $116,016,174. There was thus a valuation surplus of $25,946,826. That was the principal source of the bonus issue ($26,420,580), the rest coming from a sum of $858,934 in respect of property disposed of. The respondent could not, however, have obtained a price corresponding to the true value of the assets, absent the new issue, because of the method of valuing the property - e.g. at cost of acquisition.
It was not suggested that the sum of $858,934 constituted income of the trust in the ordinary sense of that word, and it seems right to act on the assumption that it was, at all material times, part of the trust capital. So the source of the bonus units was principally a revaluation of assets, a small additional ingredient being a capital profit on sale of assets. It should be added that the annual report of the trust for the period from 1 August 1983 to 31 July 1984 shows that there was a transfer at the end of the capital distribution period of $117,612 from income earned to reserve. No doubt that sum came from rentals and the like. It appears clear that the distribution with which the Court is concerned was in no part attributable to income earned.
From the legal point of view, the responent's interest had a dual character: she was, at all material times, a part beneficial owner of all the assets of the trust; she also had important contractual rights associated with her holding. Of those, the one of most significance for present purposes was the right to require the managers to buy her interest at the price fixed under the deed. Although, immediately before the new issue, the respondent's units had attached to them the potential of a substantial gain, that did not become a reality until the additional units were actually issued, whereupon the total value of the respondent's holding increased substantially, i.e. by $4,027, a sum arrived at by multiplying the number of additional units by 46 cents. It should be observed that immediately before the issue, a buyer other than the "manager" who was aware of impending events could have been willing to pay more than 46 cents for each of the respondent's additional units; in that sense, in theory, the value of her holding could be said not to have risen by the whole $4,027. However, the view acted on below was simply that the respondent received additional units of value $4,027 and that, no doubt, is as a practical matter correct.
But for the provision for issue of additional units, and that for purchase of units by the managers, a holder such as the respondent would have had a fixed number of units of value fluctuating in accordance with buyers' assessments of the value of the holder's interest, and it may safely be assumed that that assessment would have been depressed by the consideration that the trust would produce nothing until the end of the 30 years - i.e. until 2011. The rights given under the deed, then, provided a means, looking at the matter commercially, of adjusting the total value of the holding at the end of each three years, and a means of realising the additional value.
The Administrative Appeals Tribunal expressed the view that the receipt "of the additional units amounted to an accretion of capital and not to a derivation of income". It derived that from the consideration that what the respondent received as a beneficiary took its character from the funds out of which the distribution was made, and also by reference to the analogy of an issue of bonus shares. The Tribunal also discussed the definition of "income" set out above, but said that the definition contemplated matters having, in general, the character of income in the ordinary sense of the word.
It appears that, logically, the starting point must be the definition. It was not argued that it is inapplicable and there is nothing in the context to exclude it. If it were to be regarded as excluded by the context of s.28, the definition would serve no function anywhere in the statute, in which the word appears to be used only in provisions which relate the amount of pensions or other benefits payable to income received: see ss.32(2), 45, 63(2), 74, 106(2), and 130(1).
The argument on behalf of the appellant was that the definition catches the issue of bonus units. That on behalf of the respondent was that the definition cannot be read literally, but must be read down so as to cover, so far as relevant, only payments which are income in the ordinary sense. More specifically, it was argued on behalf of the respondent that the part of the definition down to and including the words "within or outside Australia" should be construed as referring only to income in the ordinary sense. Counsel relied upon the decision of this Court in Haldane-Stevenson v. Director General of Social Security (1985) 60 ALR 621 and that of the High Court in Harris v. Director General of Social Security (1985) 59 ALJR 194 as supporting his contention, but it is doubtful if there is anything in the judgments in those cases which affords much direct assistance. In the Haldane-Stevenson case the issue was whether the appellant was entitled to have taken into account in his favour expenditure made in the hope of earning income in the future. In the Harris case, the question was how one takes account of income irregularly received. In none of the reasons in those cases was attention directed to the present topic, namely the extent to which (if at all) the definition catches transactions which do not bring to the pensioner income in the ordinary sense of that word.
Nor does there appear to be anything in the provisions in the Act making use of the defined word which shows a clear tendency to favour either the appellant's argument or that of the respondent. It is true that in some of those provisions the draftsman seems to have assumed that income will be received at fairly frequent intervals (see for example s.45), but other sections which speak of "income" introduce the notion of the annual rate of income and one which does so is the section immediately relevant here, namely s.28, which it is unnecessary to set out. It is clear from Harris' case (above), and as a matter of common sense, that sums which are properly called income may be paid at intervals of a year or even more; for example, an interest in a unit trust may yield a distribution of income, properly so called, in a year in which the trust happens to operate profitably, and then no further such distribution for some years, or ever. While it is true that sums received frequently and regularly are more likely to be income than those received infrequently and irregularly, payments in the latter class may well be income. Nothing conclusive can be taken from the assumption underlying some provisions of the Act, that "income" is likely to consist in sums paid rather frequently.
There are other difficulties in the way of accepting that the definition should be read down as contended for by the respondent. If, apart from the reference to gifts and allowances, Parliament intended the word "income" to be understood in its ordinary sense, the opening part of the definition, before the exclusions, achieves nothing. One tends to infer from the presence of the definition that its words were not intended to be treated as mere surplusage. Further, the words actually used in the definition do not encourage the reader to adopt the construction contended for. Counsel for the appellant emphasised the width of the expression "valuable consideration", which is apt to cover advantages of various kinds, such as mere promises, which could not possibly fall within the ordinary meaning of income. The word "profits", which is the next concept introduced, is narrower than "valuable consideration", but the language of the description of the "valuable consideration or profits earned" suggests an intention to achieve a wide scope and is difficult to reconcile with an intention that a narrow one only be adopted, by implication; the relevant words should be repeated:
"... valuable consideration or profits earned, derived or received ... by any means from any source whatsoever...."
It is not easy to think of expressions which could more strongly have evinced an intention to catch all profits, whatever their type. To reduce this to practical terms, suppose that one pensioner is successfully buying and selling property such as land or shares, but not to such an extent as to make his net receipts income in the ordinary sense: cf. AC Williams v. Commissioner of Taxation of the Commonwealth of Australia (1972) 128 CLR 645. Suppose another is regularly trading in property as a business, so that his profits constitute income in the ordinary sense. There is nothing in the definition to support the hypothesis that Parliament intended to catch profits of the latter kind only, and not those of the former kind; in particular, the words "by any means from any source whatsoever" do not support it. If one were to start from the assumption that the Act is intended to operate fairly, it is hard to see why such capital profits as I have just mentioned should be treated more favourably than, say, earnings from part-time employment.
One does not get much help toward the making of the desired implication from the words "and includes a periodical payment or benefit by way of gift or allowance;" if the definition as a whole related only to income in the ordinary sense, gifts other than periodical ones would, prima facie at least, have been excluded. In my opinion, the words just quoted probably were intended exhaustively to set out the sorts of gifts (including gifts by will) to be included, but it is unnecessary to reach a concluded view on that point.
It should also be noted that some of the specifically excluded items would not necessarily or typically constitute income.
One argument in favour of the view that the definition cannot be read literally, but must be read down in some fashion, is that, if read literally, its scope seems unreasonably wide - or, at least, wider than would accord with modern views of the proper treatment of pensioners.
The definition is able to be traced back at least as far as the Commonwealth Invalid and Old-Age Pensions Act 1908. Section 4(1) of that Act included a definition reading in part as follows:
"'Income' means any moneys, valuable consideration, or profits earned derived or received by any person for his own use or benefit by any means from any source whatever, whether in or out of the Commonwealth, and shall be deemed to include personal earnings, but not any payment ..."
There followed certain exclusions which it is not necessary to set out. There is no reason to think that the legislature then intended the definition to be read other than literally; the pension scheme was then ungenerous, by our standards. It has become progressively more liberal, but progress was not rapid; for example, in 1935 no person was entitled to an old age pension unless of good character (s.17(c) of the Invalid and Old-Age Pensions Act 1908-1935), nor was a person entitled if adequately maintained by relatives (s.17(fb)).
Instances may be found of authorities in which appellate courts have felt free to disregard the precise language used by the legislature, to achieve a result according with the Court's notions of its true intention. A striking example, in the House of Lords, is the case of R. v. Pigg (1983) 1 WLR 6, where a statute allowed acceptance of a majority verdict only if the jury foreman stated "the number of jurors who respectively agreed to and dissented from the verdict"; the Court upheld the verdict although there was no compliance with the latter requirement. It may be that courts of high authority in Australia have not felt quite so free as those in England to disregard the actual language used or make extensive implications. However that may be, it would seem improbable that in 1908 the legislature had the precise intention claimed, namely that the word "income" should not be read in the defined sense, but in the sense in which it was used, for example, in the law of trusts and in the, then relatively undeveloped, law of income tax. Nor does it seem probable that on any occasion when the definition has been re-enacted or amended the legislature acquired that intention.
Although it was argued, in effect, that adherence to the actual words used produces absurdities, the results which have best claim to that description appear to be those which derive from taking the reference to "profits" literally, not those following from application of the expression "valuable consideration". For example, it would seem to be odd that a pensioner should have an age pension substantially affected by selling his or her dwelling-house to go into a nursing home, producing a profit. No one would suggest, however, that an implication should be made that the value of the house should be implicitly indexed to allow for the decline in the value of money. A more plausible implication might be that transactions of a purely private and not commercial nature should, subject to the provision as to gifts, be assumed to be excluded; that would not bring success to the respondent.
It was argued that the implication contended for by the respondent should be made because otherwise even an acquisition of property such as a house could affect the pension, the conveyance bringing to the pensioner "valuable consideration" within the meaning of the definition. That contention, however, does not go any distance towards showing the necessity of the implication. Firstly, the Haldane-Stevenson case is authority that it is only net and not gross income which is caught by the definition, so that the price would have to be set off against the value of the property. Secondly, even in the ordinary sense, "income" may extend to property other than money: F.C.T. v. Cooke and Sherden (1980) 29 ALR 202 at 211, 212.
The essence of the argument for the respondent was that "the so-called definition of income ... means income according to ordinary concepts, plus gifts if they are periodical ... less the matters contained in the lettered subparagraphs that follow". In the end, the point of most strength in favour of making the implication contended for is that application of the definition of "income", both in general and particularly in respect of adjustments of pension under s.28, requires the assessment of a periodic rate of income. That is likely to be difficult where there is no expectation of recurrence, as will typically but not necessarily be so with capital receipts. But even if the definition is read down as suggested, the Act will from time to time have to be applied to instances in which substantial amounts of income are being received, but not every year. As pointed out above, such income may be earned from interests in unit trusts; it may also come from company dividends.
I conclude, therefore, that the respondent's argument must be rejected. No sufficient reason appears to read the definition as intended to convey a meaning quite different from that appearing from the language used, or to treat it as intended merely to give examples of "income". It was not contended that if the definition applies according to its terms, the units issued are outside its scope; they appear clearly enough, as the appellant says, to constitute valuable consideration received by the respondent.
It may be that the result arrived at is one unforeseen by the legislature. If that is so, one should not be surprised: the statute attempts to define, with brevity, a concept akin to "taxable income", which the various draftsmen of the Income Tax Assessment Act have (in effect) defined over many pages of that Act; the definition plainly needs revision.
It follows from what has been said that the units acquired by the respondent in 1984 are caught by the definition of "income", whether or not they constituted income in the ordinary sense. In view of the importance of the matter, however, it is desirable, although not strictly necessary, to express an opinion on the latter point.
In my view, the question whether the units came to the respondent as income in the ordinary sense, or as capital, cannot be answered simply by saying that they constituted in law a mere alteration in what she already owned. In my respectful opinion, it is incorrect to regard the respondent as entitled under the deed only to an equitable interest in the underlying assets. She had a right to receive, and did receive, the units in question under the deed and they constituted items of property distinct from the original units, not only in a practical sense, but in law. Nevertheless, in my opinion, the conclusion at which the Tribunal arrived that the units did not constitute income in the ordinary sense was correct, on the analogy of the cases relating to bonus issues under the law of trusts and those under the law of income tax.
It is necessary to deal only with the more recent of those authorities. In F.C.T. v. W.E. Fuller Pty. Ltd. (1959) 101 CLR 403, the share issue was one from profits arising from a revaluation of assets. The question was whether the value of the bonus shares represented "exempt income", and Dixon C.J. held it did not, following Blott's case (1921) 2 AC 171. Menzies J. agreed, saying (pp.423, 424):
"... that, when a company having a fund of undivided profits uses it to increase its capital by paying up new shares which are allotted to those who would have been entitled to the fund had it been divided and paid away as dividends, the shares which the shareholders receive are in their nature capital and not income."
Fullagar J., the third member of the Court, disagreed with that view on the basis (p.419):
"... that an issue of bonus shares on a capitalization of profits necessarily involves the crediting to him of a dividend profit or bonus and its application on his behalf in payment for the new shares."
The words "him" and "his" refer, of course, in the context to the shareholder receiving the bonus issue.
The headnote to Gibb v. The Commissioner of Taxation of Commonwealth of Australia (1966) 118 CLR 628 says that the W.E. Fuller case was not there followed, but that was so only with respect to provisions of the income tax legislation then in force relating to the meaning of "dividend"; on the point discussed above, namely whether bonus shares can constitute income in the ordinary sense, Fuller's case was applied:
"In the reasons of Dixon C.J. cases relevant to the first point were discussed and he regarded it as settled law that an issue of shares made in such circumstances could not according to ordinary principles be regarded as the receipt of income by the shareholder. With this view Menzies J. agreed. We entertain the same view ..." (P.632 per Barwick C.J., McTiernan and Taylor JJ.)
See also per Windeyer J. at p.638 and per Owen J. at p.641, to similar effect.
In Curran v. The Commissioner of Taxation (1974) 131 CLR 409, Barwick C.J. said at pp 414 and 415, in effect, that a bonus issue necessarily involves a declaration of a dividend, and application of that dividend to payment for the shares. His Honour said at p.415:
"For the purposes of income tax under the Act, the amount of the distributable profits thus credited to the shareholder constitutes income. This is so whether or not the company first purports to capitalize such profits before effecting any distribution of them. Having regard to Blott's case, it may properly be said that the receipt of the bonus share, representing an interest in the capital of the company, is not income: but the crediting of the sum of profits used to effect payment for that share is income."
It appears that Menzies J. (at pp.416 and 417) took a similar view. The third member of the majority, Gibbs J., said at pp.421, 422:
"It is true that it was held in Gibb v. Federal Commissioner of Taxation that the value of bonus shares issued to a taxpayer does not constitute income in the ordinary sense, but that case was not dealing with the position of a person who traded in shares ..."
The fourth member of the Court, Stephen J., said the issue of the bonus shares involved no receipt of income by the taxpayer: pp.425, 426.
Thus, Curran's case involved a refinement of, but not a departure from, the law as laid down in Fuller and Gibb, and it should now be regarded as settled that an issue of bonus shares does not itself constitute income in the ordinary sense, although a crediting of a deemed or actual dividend for the purpose of paying for the bonus shares may involve the receipt of income.
It was argued by Mr. Greenwood Q.C., senior counsel for the appellant, that receipt of the units should be regarded as income in the ordinary sense because there was an expectation that similar issues would recur every three years. But the authorities on bonus share issues provide no support for the contention that their nature depends upon their frequency, whatever may have been the position had the matter been res integra. There appears to be no rational justification for distinguishing the bonus share issue cases. Leaving aside the refinement (applicable under the deed in question) that the number of new units received depends on the length of time the old ones were held, the position of the unit holder is basically similar to that of the shareholder, in a broad sense: he or she still has about the same proportionate interest, but has some new items of property which may be separately sold, and having all the sorts of rights which attached to the original units.
In my opinion, the appeal should be allowed, but I agree with the learned primary judge that the way in which the respondent's income was adjusted was incorrect. His Honour remarked:
"What was done was to reduce the pension as from 7 February 1985 by reference to the value of the units received on 31 May 1984. In Harris v. Director-General of Social Security, cited above, it was made abundantly clear that income was not to be calculated in that way. At all times what is to be taken into account as the annual income of the pensioner is the pensioner's current rate of income calculated in annual terms."
With respect, I agree, but think that it is possible, in accordance with the principles laid down in Harris' case, to bring the value of the units to account. The problem which arises is similar to that which has to be solved if a pensioner receives dividend income from a company, not annually, but at less frequent intervals. Here, distributions may be expected to be made every three years, and in my view the annual rate of receipt of income to be regarded as attributable to the issue of units is one-third of their value, i.e. $1,342.
I should add that I have had my attention drawn by Fisher J. to the amended definition of "income" included in Act No. 106 of 1986; it appears to me to augment the difficulty of holding that the legislature could never really have contemplated such an absurdity as including capital receipts in the statutory definition.
I would allow the appeal, but remit the matter to the appellant for reconsideration in accordance with these reasons.
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