Stasos v Tax Agents' Board of NSW

Re: THE COMMISSIONER OF TAXATION
And: RONALD WINSTON HARMER; JOHN DAVID FINLAY and ROBERT GRAEME HEBBARD as
Trustees for the RONALD WINSTON HARMER; JOHN DAVID FINLAY and ROBERT GRAEME
HEBBARD COURT TRUST
No. WA G133 and G134 of 1989
FED No.379
Income Tax
24 FCR 237

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop(1), Wilcox(2) and Lee(2) JJ.

CATCHWORDS

Income Tax - trust estate - moneys paid out of Court to solicitors "on trust" for investment pending determination of matter - whether solicitors were trustees - whether beneficiaries "presently entitled".

Income Tax Assessment Act 1922, sub-ss.31(1), 31(2); para 31(2)(b)

Income Tax Assessment Act 1936, Div.6 Pt.II, Div.6 Pt.III (ss.95-102); ss.95A, 97, 98, 99, 99A, 99B, 100A, 101A, 102, 161; sub-ss.6(1), 26(b), 95A(2), 97(1), 98(2), 254(1); paras 6(1)(b), 97(1)(a), 254(1)(d), 254(1)(e)

R.W. Parsons, Income Taxation in Australia, paras 2.233, 4.26-30, 4.88

Scott, The Law of Trusts (4th Edition), para 5.1 p.64

Rules of the Supreme Court of Western Australia, O.24, r.12, O.52, r.2; Third Schedule, paras.11, 13, 14; items 3, 14

Avco Financial Services Ltd. v. Commonwealth Bank of Australia (1989) 17 NSWLR 679

Collins v. Morgan County National Bank 226 Ala 376, 147 Sol 161 (1933)

Commissioner of Taxation (Cth.) v. Commonwealth Aluminium Corporation (1980) 143 CLR 646

Deputy Federal Commissioner of Taxation v. Trustees of the Wheat Pool of Western Australia (1932) 48 CLR 5

Executor Trustee and Agency Company of South Australia Limited v. Federal Commissioner of Taxation (1932) 48 CLR 26

Federal Commissioner of Taxation v. Higgins (1930) 44 CLR 297

Federal Commissioner of Taxation v. Totledge Pty. Ltd. (1982) 40 ALR 385

Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199

Fermanis v. Cheshire Holdings Pty. Ltd. (1990) ATC 4201

Gartside v. Inland Revenue Commissioners (1968) AC 553

Hospital Products Ltd. v. United States Surgical Corporation (1984) 156 CLR 41

Howey v. Federal Commissioner of Taxation (1930) 44 CLR 289

Kinlock v. Secretary of State for India (1819) LR 1 A and E 109

Melbourne v. Secretary, Department of Social Security (1988) 20 FCR 496

Saunders v. Vautier (1841) 4 Beav 115 (49 ER 282)

Taylor v. Commissioner of Taxation (Cth.) (1970) 119 CLR 444

Te Teira Te Paea v. Te Roera Tareha (1902) AC 56

Tito v. Waddell (No. 2) (1977) 3 All ER 129

The Union-Fidelity Trustee Company of Australia Limited v. Commissioner of Taxation (Cth.) (1969) 119 CLR 177

HEARING

PERTH

#DATE 25:7:1990

Counsel for the appellant: Mr C.J. Pullin QC and Mr D.A. Dawes

Solicitor for the appellant: Australian Government Solicitor

Counsel for the respondents: Mr R.K. O'Connor QC and Mr M.J. Hawkins

Solicitors for the respondents: McCusker and Harmer

ORDER

The appeals be allowed and judgments set aside.

The matters be remitted to the learned trial judge for further determination.

Respondents to pay the appellant's costs of the appeals and of the costs to date of the hearings at first instance.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

These two appeals, which were heard together, raise for consideration the same issues involving the application of the provisions of the Income Tax Assessment Act 1936 relating to trust income as contained in Division 6 of Part III of the Act. Proceedings had been instituted in the Supreme Court of Western Australia to determine the rights of three corporations and a natural person with respect to a sum of $198,195 resulting from commercial dealings between them and a fourth corporation Riverhall Pty. Ltd. Riverhall commenced interpleader proceedings and on 30 June 1981 was directed to pay the said sum of $198,195 into Court and directions were given as to the trial of issues between Residence Pty. Ltd. (In Liquidation), MPP Pty. Ltd., Amberwood Pty. Ltd. and Raymond John McDonald Sweeney being the three corporations and natural person respectively being in dispute as to their shares, if any, in the said sum. On 8 April 1982, the Supreme Court made an order, by consent, which forms the basis of the arguments on this appeal. The order which was made with respect to the said sum of $198,195 was as follows:-

"1. The moneys paid into court by the Plaintiff

herein be paid out of court to the solicitors for the First Defendant for investment with Town and Country Permanent Building Society in a redeemable investing share certificate account, such deposit to be made in the names of Ronald Winston Harmer, John David Finlay and Robert Graeme Hebbard, and that such moneys be held on trust by them pending the determination of these proceedings.

2. ..."

It should be noted that Ronald Graeme Harmer was the solicitor for In Residence, the first defendant in the Supreme Court proceedings, John David Finlay was the solicitor for Amberwood and Robert Graeme Hebbard was the solicitor for Sweeney. In the Supreme Court proceedings the interests of Amberwood and MPP were the same.
On 30 April 1982 the said sum of $196,195 was deposited with the Building Society on a redeemable interest bearing investment deposit. Mr Harmer made the arrangements for the investment which arrangements are contained in a letter from him to the Building Society as follows:-
"I refer to our telephone conversation of late last
week in which I advised of a forthcoming investment
of $198,195.00 to be made on a redeemable interest
bearing investment deposit with the Society for a
period of 4 months.
The investment certificate is to be in the names of
"Ronald Winston Harmer, John David Finlay and Robert
Graeme Hebbard" with all signatories required to
effect any negotiations on the certificate."
Interest in the amounts of $39,883.30 and $30,665.90 respectively was received in May 1983 and May 1984 on the sum invested for the years of income ending 30 June 1983 and 30 June 1984 respectively with the result that the credit balance in the investment account was $238,078.30 on 30 June 1983 and $268,744.20 on 30 June 1984. On 11 January 1985 orders to the following effect were made by the Supreme Court with the consent of In Residence and Sweeney:-
"1. That Sweeney was entitled to $25,000 of the sum

of $125,000 lent to Riverhall Pty Ltd.

2. That In Residence was entitled to 20% of the

profits of the home unit development.

3. That Sweeney receive from the money amounting to

$198,195 invested with Town and Country WA Building Society in Redeemable Investment Share Number 88672/2-153284 the sum of $25,000 together with interest accrued thereon from time to time calculated as and from the date of deposit of such moneys until the date of payment of such sum to Sweeney.

4. In Residence do receive such sum as together

with the amount paid to Sweeney would equal 20% of the total moneys inclusive of interest thereon invested at the Town and Country WA Building Society in Redeemable Investment Share Number 88672/2-153284.

5. Town and Country WA Building Society pay to

Sweeney and In Residence respectively from the account such sums to which each of them is entitled by virtue of the orders.

6. In Residence pay Sweeney's costs fixed at the

sum of $3,500 to be paid by In Residence from its entitlement in the moneys invested with the Building Society."

On 23 January 1985 the respondents withdrew the sums of $37,007.74 and $21,092.55 respectively from the Building Society account and paid them to Sweeney and In Residence respectively.
On 16 January 1985, the Supreme Court, after a contested hearing, made a number of orders including orders to the following effect:-

"1. MPP and Amberwood are entitled to the sum of $100,000 and to a further sum equal to four fifths share of the profits of a home unit development payable by Riverhall under the agreement dated 1978 between In Residence and Riverhall.

2. Four fifths of the amount including interest thereon if any, standing to the credit of Town and Country WA Building Society Redeemable Investment Certificate 088672/2-153284 be paid to the solicitors for MPP and Amberwood with liberty to apply."

On 3 July 1985 the respondents withdrew the sum of $140,094.71 from the Building Society account and paid that sum to MPP and Amberwood.
On 5 March 1986, the Commissioner issued notices of assessment directed to "the Trustee for R.W. Harmer, J.D. Finlay and R.C. Hebbard Court Trust." The notices were for the income tax years ended 30 June 1983 and 30 June 1984 and assessed tax for each year at $23,929.80 and $18,399.60 respectively together with additional tax of $10,437.32 and $4,375.45. In addition, a further amount of $127.57 was assessed for the year 1984 for the health insurance levy. The assessments were issued pursuant to s.99A of the Act.
Objections to the assessments were disallowed by the Commissioner and the respondents appealed to the Federal Court. The trial Judge held that the respondents were trustees of the fund under the Act but that there were beneficiaries "presently entitled" to the income earned by the fund or otherwise had a vested or indefeasible interest in that income. In the result the appeals were allowed and the two assessments set aside. The Commissioner has appealed from the orders made. The respondents, by notice of contention, claim that the judgment appealed from should be upheld on the ground that they were not trustees under the Act.
The questions raised before this Court are:-

1. Were the respondents trustees under the Act of the fund being the amount in the investment account with the Building Society and of the income received on that fund.

2. If yes to 1, were any of the beneficiaries of the fund "presently entitled", within the meaning of the Act, to the income or any part thereof received on the fund during the relevant years of income.

3. Whether any beneficiary not "presently entitled" to any income had a "vested and indefeasible interest" within the meaning of the Act in any income and if so, the consequences resulting thereupon.

The trial Judge held that the respondents were trustees under the Act. The respondents challenge that conclusion contending that the fund at all times was under the control of the Supreme Court of Western Australia, not the respondents, and that in those circumstances the respondents were not trustees under the Act.
A very wide meaning is given to the word "trustee" appearing in the Act. Sub-section 6(1) provides that in the Act, unless the contrary intention appears:-

""trustee" in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes-

(a) an executor or administrator, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability;"

It must be remembered that Division 6 of Part III of the Act is headed "Trustee Income" and contains provisions relating to income of trust property. The meaning to be given to the word "trustee", unless the contrary attention appears in Division 6 of Part II, includes not only a trustee in the equitable sense of that word but, by paragraph (b), is extended to include a person having the administration or control of income affected by any express or implied trust as well as a person acting in any fiduciary capacity.
The order of the Supreme Court made on 8 April 1982 directed that the moneys paid into Court be paid out to Mr Harmer and to be invested in a fund which was to be in the names of the respondents and that the moneys "be held on trust by them" pending the determination of the Supreme Court proceedings. The use of the words "be held on trust" in an order of a court suggests that the word "trust" is being used in its equitable sense. The respondents are persons in whose name property is vested but who have no beneficial interest in the property or income deriving from the property. From this fact alone there is much to be said for the view that the respondents are constituted trustees by operation of law. Further, on any view, having regard to their control of the fund and the income received thereon, the respondents are acting in a fiduciary capacity with respect to the persons entitled to the beneficial interest in the fund and the income. The nature of a fiduciary obligation has been discussed by the High Court in Hospital Products Ltd. v. United States Surgical Corporation (1984) 156 CLR 41. In that case Dawson J. said at p 142:-

"There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship is a position of disadvantage on vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other ...".

In the present case, the order of the Supreme Court makes no reference to the income to be received on the fund. At the very least equity would impose a fiduciary obligation on the respondents to hold income received for the benefit of the persons entitled to the fund.
Counsel for the respondents sought to rely upon the provisions of the Rules of the Supreme Court (W.A.) O.24, r.12, O.52, r.2 and Third Schedule, paras 11, 13 and 14, to show that the respondents were acting in the capacity of officers of the Supreme Court and performing duties imposed upon them by that Court. In those circumstances, it was contended, no trust or fiduciary relationship arose with respect to the beneficial owners of the fund or the income on the fund. Counsel sought to rely upon a line of authorities which showed that even the use of the word "trust" in the relevant document was not sufficient to create the relationship of trustee and beneficiary. These authorities included Kinlock v. Secretary of State for India (1819) LR 1 A and E 109 and Te Teira Te Paea v. Te Roera Tareha (1902) AC 56, and Tito v. Waddell (No. 2) (1977) 3 All ER 129 commencing at p 216. In that passage Megarry V.C. discussed this general question during which he analysed the other two cases as well as a number of other authorities on this general subject. None of these authorities involved the extended meaning given to the word "trust" in the Act, but more importantly none were illustrations of cases where legal title to property was vested in persons different from persons entitled to the beneficial interest in property. They were illustrations of cases where the word "trust" was used in the sense of imposing an obligation to perform a public duty.
The other authorities relied upon by counsel for the respondents, namely Deputy Federal Commissioner of Taxation v. Trustees of the Wheat Pool of Western Australia 48 CLR 5 at p 14 and Commissioner of Taxation (Cth.) v. Commonwealth Aluminium Corporation (1980) 143 CLR do not assist in the resolution of this issue.
In my opinion, the respondents are trustees under the Act of the fund and income received on that fund. The first question posed should be answered in the affirmative.
In considering the application of Division 6 of Part III of the Act, it must be remembered that, under s.17, income tax is levied annually on income derived during each year of income. An aspect of this general principle was illustrated in its application under Division 6 of Part III in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199 by Latham C.J. and Williams J. at p 215:-

"The main assumption underlying the Act would appear to be that the person who derives income should be in a position to pay the tax out of the income."

Reference should be made also to sub-section 254(1) of the Act. At the hearing of the appeal, no submissions were directed to this sub-section and the application of the sub-section to the facts of this appeal will not be considered. Nevertheless it is instructive to set out that sub-section:-

"254.(1) With respect to every agent and with respect also to every trustee, the following provisions shall apply:

(a) He shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income derived by him in his representative capacity, or derived by the principal by virtue of his agency, and for the payment of tax thereon.

(b) He shall in respect of that income make the returns and be assessed thereon, but in his representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

(c) If he is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.

(d) He is hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income.

(e) He is hereby made personally liable for the tax payable in respect of the income to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.

(f) He is hereby indemnified for all payments which he makes in pursuance of this Act or of any requirement of the Commissioner.

(g) Where as one of 2 or more joint agents or trustees he pays any amount for which they are jointly liable, the other or others shall be liable to pay him each his equal share of the amount so paid.

(h) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possesion of any agent or trustee, as he would have against the property of any other taxpayer in respect of tax."

Questions 2 and 3, as set out earlier in these reasons, remain to be considered. These questions relate to the phrases "presently entitled" and "vested and indefeasible interest" respectively as used in Division 6 of Part III of the Act and their application, as properly construed, to the facts of this case. Since writing the earlier part of these reasons, I have had the opportunity of reading the joint reasons for judgment of Wilcox and Lee JJ. Their Honours have considered these two questions under the headings "Presently Entitled" and "Vested and Indefeasible Interest" respectively. I agree with the reasons so expressed and in particular I concur with their Honours' reasons expressed under the headings "Scheme of Act", "Presently Entitled" and "Vested and Indefeasible Interest" and have nothing further to add to those reasons. Further, I agree with their Honours' reasons expressed under the heading "The Existence of a Trust Estate".
I agree with the orders proposed by their Honours.

JUDGE2

The Commissioner of Taxation ("the Commissioner") appeals from a decision of a judge of this Court allowing appeals by the respondents against decisions of the Commissioner to disallow their objections to assessments of taxation for the years ending 30 June 1983 and 30 June 1984. His Honour ordered that the assessments be set aside.

Pursuant to s.99A of the Income Tax Assessment Act 1936 ("the Act") the assessments were raised against and directed to the respondents as trustees for the "R.W. Harmer, J.D. Finlay and R.G. Hebbard Court Trust".
The respondents denied that they were trustees of a trust. They further contended that, in any event, they were not trustees assessable and liable to pay income tax in respect of the income of a trust estate.
His Honour held that the respondents were trustees of property held on trust but further held that the beneficiaries of the trust were, at all material times, presently entitled to the income of the trust within the meaning of s.97 of the Act and that, therefore, the assessments had not been properly raised against the respondents as trustees.

The Commissioner now appeals from that decision and seeks to have the assessments restored.
Scheme of the Act
In Div.6 of Pt.III (ss.95-102) the Act has made express provision for the levying of income tax upon income of a trust estate.
Section 95 defines some of the terms used in Div.6. A trust estate is not defined but meanings are given for a "resident trust estate" and the "net income" of a trust estate. The definition of "net income" treats the trust as an entity and the trustee as a taxpayer and makes part of the income of a trust equivalent to the taxable income of a taxpayer as defined in sub-s.6(1) of the Act.
The object of Div.6 is to set out some principles of derivation in respect of the income of a trust estate from which liability to income tax may follow. In broad terms the liability to pay income tax is distributed between the trustee of the trust estate and the beneficiaries according to those principles of derivation. (See R.W. Parsons, Income Taxation in Australia, paras 2.233, 4.26-30, 4.88.)
A beneficiary is liable to pay income tax upon a share of the net income of a trust estate if the beneficiary is presently entitled to a share of the income of that trust estate, unless the beneficiary is under a legal liability (s.97). If the beneficiary is not a natural person, that liability may be imposed by the beneficiary being deemed to be presently entitled to income of a trust estate if the beneficiary has a vested and indefeasible interest in that income but is not presently entitled thereto (sub-ss.95A(2) and 98(2)). In certain circumstances, a beneficiary may also be liable to pay tax on amounts which, as property of a trust estate, have been paid to the beneficiary or applied to the beneficiary's benefit (s.99B). Otherwise liability to pay tax is imposed on the trustee (ss.98, 99, 100A, 101A and 102). Notwithstanding that Div.6 may impose liability for income tax upon a beneficiary, a trustee is required to file an income tax return pursuant to s.161 of the Act, and pursuant to paras 254(1)(d) and (e) of the Act may be liable to discharge the beneficiary's assessed tax liability in any event.
The Facts
The relevant facts commenced in 1978. In that year Riverhall Pty. Ltd. ("Riverhall") and In Residence Pty. Ltd. ("In Residence") made an agreement in writing pursuant to which In Residence agreed to lend the sum of $125,000 to Riverhall for use in the construction of home units. It was a term of the agreement that Riverhall and In Residence would share the profits earned from the sale of the units. In due course, moneys were advanced pursuant to the agreement.
In July 1979, In Residence assigned to MPP Pty. Ltd. ("MPP") absolutely the right to $100,000 of the debt of $125,000 to be repaid to In Residence by Riverhall pursuant to the agreement. Notice of the assignment was given to Riverhall. In March 1980, In Residence went into liquidation. In June 1980 MPP further assigned its interest to Amberwood Pty. Ltd. ("Amberwood"). Notice of that assignment was given to Riverhall.
The project was duly completed by Riverhall in mid-1980.
By late 1980, or early in 1981, when Riverhall had completed its accounting for the project and pursuant to the loan agreement was ready to repay the loan together with the proportion of profits of the project payable to In Residence, it had received competing claims from the liquidators of In Residence, MPP, Amberwood and one Sweeney for the whole, or part, of that sum.
In May 1981, Riverhall issued an originating summons in the Supreme Court of Western Australia seeking orders as to whom it should pay the sum for which it had accounted. In June 1981, the Court ordered Riverhall to pay that sum into Court, an amount of $198,195.00. In July 1981, the Court ordered that two separate issues be tried, namely the claim of MPP and Amberwood against In Residence and the claim of Sweeney against In Residence.
Pursuant to their respective pleadings, it was alleged by MPP and by Sweeney that the sum of $125,000 advanced by In Residence to Riverhall had been advanced by In Residence in its own right as to $50,000 and as trustee for MPP and Sweeney as to $50,000 and $25,000 respectively being the contributions to the sum advanced provided by those parties. It was pleaded that In Residence was to hold as trustee for MPP and Sweeney any profits received from Riverhall pursuant to the agreement in the same proportions as the contributions of MPP and Sweeney to the moneys advanced to Riverhall. MPP and Amberwood further pleaded that In Residence had assigned to them the whole of its interest.
In relation to each issue, In Residence denied that it had received moneys on trust and pleaded that the funds had been lent to it by MPP and Sweeney. With regard to MPP and Amberwood, In Residence pleaded that the assignments were void.
In April 1982, after statements of claim in the issues had been filed, an order was made in the following terms:

"1. The moneys paid into court by the Plaintiff herein be paid out of court to the solicitors for the First Defendant for investment with Town and Country Permanent Building Society in a redeemable investing share certificate account, such deposit to be made in the names of Ronald Winston Harmer, John David Finlay and Robert Graeme Hebbard, and that such moneys be held on trust by them pending the determination of these proceedings. ..."

Harmer, Finlay and Hebbard were solicitors instructed by the parties to the two issues. Harmer was solicitor for In Residence, the defendant to each issue; Finlay solicitor for MPP and Amberwood, the plaintiffs in the first issue; and Hebbard solicitor for Sweeney, the plaintiff in the second issue.
In December 1984, the trial of the first issue came on for hearing. The Court made findings that In Residence had received, as trustee, $50,000 from MPP to be advanced to Riverhall pursuant to the agreement and that In Residence was trustee for MPP as to a proportionate share of any profit derived from the project. The Court found that the deeds of assignment were enforceable and that the assignment from In Residence to MPP was intended to be an assignment of the whole of the interest of In Residence in the sum of $50,000 to which In Residence was entitled upon repayment of the Riverhall loan and of the proportionate share of profits attached to that sum. His Honour declared that MPP and Amberwood were entitled to the sum of $100,000 and four-fifths of the share of the profits of the project and ordered that that amount, together with interest thereon, be paid out of the account standing in the name of Harmer, Finlay and Hebbard.
The hearing of the second issue did not proceed to trial. By consent, orders were made declaring Sweeney to be entitled to $25,000 of the sum of $125,000 lent to Riverhall, but declaring In Residence to be entitled to the 20 per cent of the profits of the project referable to that contribution. It was ordered that Sweeney be paid the sum of $25,000 together with interest thereon as earned in the account standing in the name of Harmer, Finlay and Hebbard and that the remainder of the account being the 20 per cent share of the profits and interest thereon be paid out to In Residence.
The Existence of a Trust Estate
At the time Riverhall completed the project and accounted for the profits earned, the moneys advanced under the loan agreement became due and repayable together with the ascertained share of the profit. Riverhall had notice that part of that debt was payable to a legal assignee. The remainder was payable to In Residence. Upon receiving notice of a claim that the assignment was void and notice of a claim by Sweeney to an equitable interest in the remaining sum to be paid to In Residence, Riverhall sought a Court direction before it paid over any part of the sum it had allocated to discharge its debt. Upon payment of that sum into Court pursuant to an order of the Court, no relationship in the nature of trust arose in respect of that sum in the hands of the Court accountant or the Treasurer of the State. Pursuant to Item 3 of the Third Schedule of the Rules of the Supreme Court of Western Australia, money paid into Court is required to be paid by the accountant to the Treasurer unless ordered to be invested pursuant to Item 14 of the Third Schedule whereupon it is required to be transferred to the Public Trustee. A bare order requiring moneys paid into Court to be invested may not carry sufficient indicia to constitute a trust estate of the moneys so paid in and transferred to the Public Trustee. In receiving and dealing with such moneys, it seems to us, the Public Trustee does no more than comply with the requirements of its statute and the requirements of the Rules of Court. It is probably correct to treat him as a mere mandatory. (See Deputy Federal Commissioner of Taxation v. Trustees of the Wheat Pool of Western Australia (1932) 48 CLR 5 at p 14; but cf. Fermanis v. Cheshire Holdings Pty. Ltd. (1990) ATC 4201.)
However, the circumstances of the present case raised more clearly the elements of a trust. Messrs Harmer, Finlay and Hebbard received the funds pursuant to a Court order requiring them to hold the moneys "on trust" pending the determination of the proceedings. Although the use of the words "on trust" did not conclusively determine that a trust existed, it provided an important indication of the intended relationship. Prior to that order, there was no trust fund, or trust relationship in respect of the moneys paid into Court. Upon payment of the moneys into Court, Riverhall divested itself of the title and right to possession of that sum and the Court had the power to vest the moneys in others. Messrs Harmer, Finlay and Hebbard did not receive a legal title to the funds by operation of Rules of Court, or any other statutory provision. They obtained title by virtue of the Court order which contemplated that they would receive such a title for the purpose of holding the funds pending further orders which would define the beneficial interests for which the fund was held. The parties to the issues to be litigated recognized that the worth of the sum paid into Court could be preserved if a trust fund were constituted in their solicitors as trustees, the solicitors undertaking to invest the fund and to hold it for the benefit of the parties to the litigation pending resolution of those claims by the Court. (See Federal Commissioner of Taxation v. Higgins (1930) 44 CLR 297.)
The intention of the Court order was to deliver the moneys to the nominated solicitors to allow them to earn income by way of interest from investment of the sum. In making the order by consent, the Court was acknowledging an undertaking by the solicitors that they would hold the moneys for the benefit of interests which may be created by orders made in respect of that sum as part of the determination of the litigation. The solicitors were unable to distribute the fund, or the income earned, and were to hold the fund and income until directed to do otherwise by the Court.
The Court retained a discretion to make various orders in respect of the moneys held by the solicitors. In addition to making orders that may have given effect to any judgment the Court made in determination of proceedings litigated pursuant to the originating summons, the Court may have ordered that part of the fund, or the income thereof, be applied to the costs of a party including the costs of Riverhall as plaintiff to the originating summons.
It may be said that the solicitors were mere custodians who held the funds as agents, or bailees, for the Court and not trustees in that they were merely holding the moneys whilst awaiting directions from the Court, or holding the sum pending demand for redelivery of the moneys by the Court, and that no obligations in the nature of trust obligations arose from that arrangement.
However, there was no contract of bailment such as that involved in a bank's possession of a customer's property in a safe deposit box, or a department store's possession of a customer's goods purchased under a lay-by arrangement. Nor were the solicitors, as agents of the Court, merely carrying out an obligation to the Court to be found in the provisions of a statute, or regulations, or rules of Court, such as the duty to be performed by a Court accountant or registrar. (See Melbourne v. Secretary, Department of Social Security (1988) 20 FCR 496 at p 499.)
An undertaking to receive and hold property for others may create a trust. (See Collins v. Morgan County National Bank 226 Ala 376, 147 Sol 161 (1933); Scott, The Law of Trusts (4th Edition) para 5.1 p 64.) In that case the bank was held to be a trustee where it had agreed to hold discovered coins on trust until ownership of the coins could be traced and determined.
Legal title to the moneys was given to the trustees to enable them to invest the moneys and earn income therefrom. There was no mere grant of enjoyment of possession of the money pending demand for redelivery to the Court coupled with a right to collect any income accruing to the owner. The object of the Court order was to deliver the funds to the solicitors to hold the same for the eventual use of others. The nature of that use and the identity of those for whom the sum would then be held would depend upon the outcome of the proceedings and the further order of the Court. In the meantime the solicitors were to use their best endeavours to protect and preserve the value of the sum by earning income from the investment of the moneys.
The fact that an order of the Court directed the manner in which the fund was to be invested did not prevent trust obligations arising in respect of the fund at the time it was received for investment by the solicitors. The form of investment specified in the Court order was descriptive of the nature of investment to be undertaken. It may have contained an implied power to reinvest the moneys as the trustees saw fit commensurate with their duty to protect the worth of the sum delivered to them by earning appropriate income to be added to it. So much was understood by the solicitors in that the building society with which the moneys were invested was not informed that the investment was to remain with the society until further Court order. The society was advised that the three solicitors together were entitled to deal with the invested funds.
The obligations which arose upon the Court vesting the funds in the solicitors, with their consent, were in the nature of trust obligations. The Court, by its order, and the solicitors, by their consent, intended that the moneys received by the solicitors be kept separate from their personal moneys and be accounted for accordingly. Such an arrangement was consistent with a trust relationship. The existence of a trust was clearly demonstrated and his Honour's careful analysis of the facts resulted in the correct conclusion that the respondents were trustees of a trust estate to which Div.6 of the Act applied.
"Presently Entitled"
Having determined that the three solicitors were such trustees it is necessary to ascertain their liability, if any, to pay income tax upon the income of the trust estate. Pursuant to s.96 of the Act a trustee is not liable as trustee to pay income tax upon the income of a trust estate except as provided by the Act. Pursuant to sub-s.99A(4) of the Act, a trustee shall be assessed and is liable to pay tax on the net income of a trust estate if no part of the net income of a resident trust estate is included in the assessable income of a beneficiary of a trust estate pursuant to s.97 of the Act.
Section 97 of the Act stipulates that the assessable income of a beneficiary shall include a share of the income of a trust estate to which the beneficiary is presently entitled if the beneficiary is not under any legal disability.
It was contended by the Commissioner in this appeal that, in the relevant years of income, there were no beneficiaries "presently entitled" to the income of the trust fund.
The term "presently entitled" has appeared in the Act and in earlier legislation for many years although in different contexts. As it appeared in sub-s.31(1) and para 31(2)(b) of the Income Tax Assessment Act 1922, there was debate as to whether the expression "presently entitled" could only be satisfied if there was an actual receipt of income. (See Federal Commissioner of Taxation v. Higgins; Howey v. Federal Commissioner of Taxation (1930) 44 CLR 289; Executor Trustee and Agency Company of South Australia Limited v. Federal Commissioner of Taxation (1932) 48 CLR 26 per Gavan Duffy C.J. and Starke J. at pp 35-36, per Rich J. at pp 39-40.)
In ss.97 and 98 of the Act, which deal with the matters formerly governed by sub-s.31(1) and 31(2) of the preceding Act, there is no reference to actual receipt of income. At one time it was suggested that the statement therein that a beneficiary's present entitlement to a share of income of a trust estate is to be included in the beneficiary's assessable income had no application to income actually received and to which sub-s.26(b) of the Act applied directly. (See The Union-Fidelity Trustee Company of Australia Limited v. Commissioner of Taxation (Cth.) (1969) 119 CLR 177.) However, the Act was amended in 1979 by the insertion of s.95A and substitution of a new sub-s.26(b) to make it clear that a beneficiary was to be taken to have continued to be presently entitled to income notwithstanding that the income had been paid to, or applied for, the benefit of the beneficiary.
The object of s.97 is to fix the beneficiary of a trust with liability to pay tax and to include the share of the net income of the trust estate to which the beneficiary is entitled with other income of the beneficiary for the assessment of that liability. Section 97 provides an exception for a beneficiary who is presently entitled to a share of the income of a trust estate but is under a legal disability. Such a share of the income of a trust estate is assessable in the hands of the trustee who becomes liable to pay tax in respect of that share pursuant to s.98 of the Act.
The meaning of the words "presently entitled" has been taken to accord with the general principles of entitlement applied in law and equity. In Executor Trustee, Gavan Duffy C.J. and Starke J. equated the term to "entitlement to an estate or interest" (p 36). Dixon J. considered that the ambit of the term could be tested by asking whether the beneficiaries were able to make immediate demand for their share of the net income of the estate (p 41).
To meet the purpose of the Act, it is clear that the present entitlement and interest in the trust estate possessed by a beneficiary must be more than an interest in a trust recognized in equity and that it must be an interest coupled with a right directly related to the income of the trust estate, the right being at least a right to have the present enjoyment of the income and not merely a right to be considered in the eventual distribution of income, or accumulated income (See Gartside v. Inland Revenue Commissioners (1968) AC 553.)
If the accumulation of income directed by the terms of the trust relates to an interest that is absolute and vested in possession, the beneficiary will be presently entitled in the year of income to any income so accumulated (see Saunders v. Vautier (1841) 4 Beav 115 (49 ER 282) and Taylor v. Commissioner of Taxation (Cth.) (1970) 119 CLR 444 at pp 448-449).
In Taylor, Kitto J. held that the beneficiary of accumulated income became absolutely entitled to the income of the trust estate although, pursuant to the terms of the trust, the beneficiary's personal enjoyment of the income was postponed. However, being absolutely entitled, the beneficiary was entitled to ignore the terms of postponement and require payment of the income if he so wished. In that case, the Commissioner had relied upon the decision of Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199 which defined a present entitlement to a share of income as a right of a beneficiary to obtain immediate payment and not a mere vested interest. Whiting concerned an unadministered estate which raised particular consequences in law which the Court assumed were recognized in the provisions of the Act. The essence of the decision in that case was analyzed by Kitto J. in Taylor at p 451 as follows:

"Their Honours held that the provisions of the Act must be construed in the light of the general principles of law applicable to the administration of estates by executors and trustees, and that consequently the crucial question was at what moment of time, having regard to those general principles and to the provisions of the trust instrument, could it be said that a beneficiary had become presently entitled to a share in the income of a trust estate. The answer given was that only when the debts and liabilities, the annuity and the legacies had all been paid or provided for in full would it be possible to say that there was any income to which the residuary beneficiaries would be presently entitled. ...

the Full Court considered that a beneficiary is not "presently entitled" to any income of the trust estate unless the administration has reached such a point that an amount of income has become identifiable as being the subject of a present interest in possession vested in him by the trust instrument."

Kitto J. then identified as a component of the term "presently entitled" the requirement that the relevant income be legally available for distribution.

In Federal Commissioner of Taxation v. Totledge Pty. Ltd. (1982) 40 ALR 385 at p 394, the Full Court of this Court noted that in sub-s.97(1) of the Act the present entitlement of a beneficiary refers to a share of the income of a trust estate whilst the amount to be included in the assessable income of the beneficiary is restricted by para 97(1)(a) to the share of the net income of the trust. The Full Court considered the foregoing authorities and adopted the analysis of Kitto J. in Taylor when it said as follows:

"...the preferable construction of s97(1) is to treat the requirement of present entitlement to a share of the income of the trust estate as not being concerned with distinctions between gross income as derived and 'surplus income' after payment of costs, expenses and outgoings but as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate. Such a right to demand and receive payment represents a present entitlement to receive a share of what retains its character as income of the trust estate regardless of whether, upon closer analysis, it can be seen to reflect a beneficial interest in gross income as derived or whether it represents no more than, for example, the right of an annuitant to be paid a particular amount from surplus or net income. Examination of the decided cases in which reference has been made to s97(1) supports this approach."

Turning now to examine the nature of the trust established by the payment of funds out of Court to the respondents, it is immediately apparent that the limited character of the trust was such as not to include the elements of a present entitlement, as adumbrated by the Full Court in Totledge.
In paying the moneys into Court, Riverhall discharged whatever obligation it may have had to its creditor, or creditors, and initiated a process by which competing claims between the creditor or creditors and third parties could be resolved by the Court. Riverhall did not hold the moneys on trust at the time it paid the moneys into Court. Although there were claims in law and equity to the moneys paid into Court, there were no prior beneficial interests created by a trust in respect of these moneys as a trust fund or in respect of the income of such a fund. (cf. Avco Financial Services Ltd. v. Commonwealth Bank of Australia (1989) 17 NSWLR 679.) Upon the formulation of an order by consent for the payment of the moneys out of Court to the respondents, the terms of the trust thereby established were that the trustees would hold the sum for the Court and for such interests of the parties to the litigation as may be eventually created by the Court. In particular, the respondents were to hold the moneys and make no distribution of the trust fund, or its income, without further order of the Court. The purpose of the trust was to maintain the value of the trust fund pending the determination of the litigation and the declaration of the legal entitlements of the litigants inter se.
The competing claims of the litigants as pleaded were as follows:

1. In Residence was a creditor of Riverhall for the entire sum advanced under the loan agreement, $125,000, and corresponding share of the profits of the project, and MPP and Sweeney were creditors of In Residence for the amounts they had lent to In Residence.

2. MPP and Amberwood were the legal assignees of In Residence of four-fifths of the debt due from Riverhall to In Residence including a proportionate share of profits.

3. In Residence was trustee for Sweeney of a beneficial interest of one-fifth of that debt including the proportionate share of profits.

If the claim of In Residence succeeded, the whole sum would be paid to the liquidator. If MPP, Amberwood and Sweeney succeeded, no part of the sum would be paid to In Residence.
It was argued that a trust was created in favour of persons whose identity was yet to be determined but would be determined by reference to existing extrinsic facts; accordingly, it was said, the eventual identification of those persons would merely confirm that a vested present interest was held by those persons throughout, no new interest would be created at the time, and by the process, of identification.
However, the terms of the trust were not so defined. The moneys were paid into Court after Riverhall sought a declaration as to whom it could pay moneys so as to receive a discharge from its indebtedness. The eventual answer to that question was In Residence and Amberwood. But the issues for hearing were much wider, involving the claim "in personam" by Sweeney against In Residence and possible orders for the payment, out of the fund, of costs. It was left to the Court to determine how the trust fund and its income might be applied to accommodate any orders the Court might make. None of the parties had a right to any part of the income of the trust fund. The further Court orders established those rights.
The creation of the trust established the litigants as a class of persons from which the eventual beneficiaries would emerge upon determination of the pending litigation. Members of that class had an interest in due administration of the trust and preservation of the trust fund. However, in no sense could it be said that any one of the litigants in any of the years of income had a present vested right to demand and receive payment of the whole, or part, of the income of the trust estate received by the trustee in that year. This was not a case of the postponement of enjoyment of the benefit of a right to income but rather the postponement of the vesting of a right to the income of that trust fund. The parties may have compromised their claims at any time and approached the Court to obtain an order distributing to them the trust fund and its income pursuant to the terms of the compromise, but as far as the terms of the trust were concerned, the vesting of rights to the corpus and income of the trust fund would occur upon the making of that order of the Court. That approach to the Court would not be an exercise of any right arising out of an absolute entitlement created by the trust.
For these reasons we are of the opinion that there were no beneficiaries of the trust estate presently entitled to a share of the income of the trust estate within the meaning of s.97 of the Act.
"Vested and Indefeasible Interest"
It is, therefore, necessary to consider the effect of sub-s.95A(2) of the Act which states as follows:

"For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate."

Whatever the scope for operation of this sub-section may be, for the reasons outlined above in respect of the question of "present entitlement" the facts of the present case do not permit a conclusion that there were any beneficiaries who had a vested and indefeasible interest in the income of a trust estate according to the ordinary meaning of those words as understood in law. The Act provides no indication that the words are to be understood in other than their ordinary meaning.
Whether there is a vested and indefeasible interest depends on the terms of the trust. None of the litigants was provided with a vested and indefeasible interest by the creation of the trust. Any interest that members of the class from which beneficiaries would emerge may have had was wholly contingent upon the outcome of the litigation and the orders of the Court. It was not vested either in possession or in interest.
We are of the opinion that the appeals should be allowed and the judgments set aside. The matters should be remitted to his Honour for determination of the appeals against the appellant's decision to disallow the respondents' objections to the assessments, such determinations to be limited to the ground of objection that the appellant erred in failing to allow as a deduction the expenses incurred by the respondents in preparing and filing income tax returns and notices of objection.
The respondents will be ordered to pay the costs of the appeals and of the hearings before his Honour prior to the appeal.

[1990] FCA 379

25 JULY 1990