[1968] HCA 91

(b) Order that the assessment be remitted to the Commissioner of Taxation to be reduced by treating the amount so ascertained as an allowable deduction.

In matters numbered 110-113 of 1966 vary the orders appealed from by adding in each case a declaration that the income of the whole of the fund known as the Marine Plastics Superannuation Fund was in the relevant year of income exempt from income tax by virtue of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act 1936, as amended. Cross appeals dismissed with costs.

1966, Oct. 13 Taylor J . delivered the following written judgments: -

Driclad Pty. Limited v. Commissioner of Taxation (Cth).

This is an appeal against an assessment to income tax in respect of income derived during the year ended 30th June 1958, by which the respondent disallowed as a deduction an amount of £1,500 claimed under the provisions of s. 66 of the Income Tax and Social Services Contribution Assessment Act 1936-1957 Cth. The amount in question appears in the company's accounts as a payment made on account of "Superannuation Fund Contribution". Upon the conclusion of the hearing of this appeal four other appeals relating to assessments for each of the four succeeding years came on for hearing together and each of these appeals raises a like question. It was agreed that the evidence taken in the first appeal, as far as it is relevant, should be evidence in the other four appeals and that the evidence taken on the hearing of those appeals should also, as far as it is relevant, be evidence in the first appeal. It is, therefore, convenient to deal with all five appeals together.

The appellant company (Driclad) is an associated company of a company known as Marine Plastic Co. Pty. Ltd. and by deed bearing date 21st June 1956 that company purported to establish a fund to be known as the Marine Plastics Superannuation Fund. The deed was made between Marine Plastic Co. Pty. Ltd. (Marine Plastics) of the first part and Donald Ernest Rollason and William Berge Phillips (the trustees) of the other part, and it recited that the company had determined to establish a superannuation fund for providing benefits to such of the present and future employees of the company, and of associated and subsidiary companies, as thereinafter defined, as under the rules thereinafter provided should be eligible to elect to participate and, further that the said Donald Ernest Rollason and William Berge Phillips had been nominated by the company and had respectively agreed to act as trustees of the fund. Thereafter the deed witnessed that for the purpose of carrying such determination into effect and in pursuance and in consideration of the premises the company thereby covenanted with the trustees and the trustees thereby covenanted with the company "so far as the agreements and stipulations are or ought to be performed or observed by the company and the trustees respectively" in the manner thereinafter set forth. It was said that the purpose of the deed was to provide retiring allowances for members of the fund upon their retirement and it sufficiently appears that male members were to be entitled to retire on reaching the age of sixty-five and females upon attaining the age of sixty. The scheme embodied in the deed did not involve the members of the fund in making contributions; it was to come into operation on such date as the company should by resolution of its directors determine and the company was out of its own moneys to pay to the trustees such sums as the company should from time to time determine. The fund itself was to consist of two separate parts - section "A" and section "B" - and the deed provided that the company should specify in respect of each member entering the "A" section of the fund what amount was to be allocated to each member of such "A" section. In relation to the "B" section the company was to have the right to specify what portion, if any, of any contribution should be credited to the "B" section of the fund and also the right to specify what amount or amounts out of such portion credited to the "B" section of the fund should be entered in the register of members opposite the name of each member who should be admitted to the "B" section of the fund. Also, although the deed does not explicitly provide that there shall be entered in the register the amount allocated to each member of the "A" section of the fund it is implicit, having regard to the terms of cl. 16 of the deed and r. 8 (b) of the rules appended to the deed, that it was intended that this should be done. Upon retirement of a member of the "A" section of the fund he became entitled to an amount calculated in accordance with r. 8. This rule provided that as at the prior (to retirement) 30th June or 31st December, whichever should be the "sooner", the net assets of the "A" section of the fund representing both corpus and income should be valued by the auditor of the fund and from the total amount of the value so certified there should be deducted the sum of all amounts in the "A" section of the fund standing to the credit of the members of the "A" section at the date of such valuation and the amount remaining so ascertained should be referred to as the divisible "A" section of the fund. By cl. 16 of the deed the trustees were required to keep a register of members and, in relation to members of the "A" section of the fund, to enter in the register opposite the name of each member of the fund the number representing the number of points allocated to each member at the time of his admission as a member. Such points were to be calculated by taking one hundred per cent to the nearest pound of the member's remuneration for the year ended 30th May immediately prior to the date of his entry and at the end of each subsequent year ended 30th May an addition to the number of points already allocated to each member was to be made. The amount of such addition so to be made should be ascertained by taking one hundred per cent to the nearest pound of such member's remuneration for that year. Upon retirement the amount payable to the member out of the divisible "A" section of the fund pursuant to r. 8 was specified to be such proportion of that portion of the fund as the total number of points then allotted to the member bears to the total number of points then allotted to all members for the time being of the "A" section of the fund. A retiring member also became entitled to receive from the trustees such moneys as had been received by them by way of initial contribution or by way of additional contributions paid to them for the benefit of such retiring member as should appear to his credit as a member of the "A" section of the fund as at the date of retirement in the register of members kept in accordance with the provisions of the deed and the rules.

However, it was contemplated by the deed that employees who were members might not remain in the employment of the company until the retiring age, that they might be dismissed either for misconduct or otherwise or that they might die before reaching the retiring age. Such contingencies were provided for in the deed. In the event of the death of a member while still in the service of the company the trustees were bound to pay to such of the dependants of the deceased member as they should in their discretion think fit such amount or amounts as they should in their absolute discretion determine, such amount not to be less than the amount calculated in accordance with the procedure laid down in the rules which would have been payable to such member if he had left the employ of the company on the date of his death (cl. 9). For this latter contingency rr. 10 and 11 of the appended rules made provision. The first of these rules provided that in the event of a member leaving the service of the company without the written consent of the company or being dismissed from the company's employ on account of misconduct, fraud or dishonesty or wilful damage to the company's property the trustees might

calculate in accordance with the procedure laid down in Rule 8 the amount at the date of dismissal which would "otherwise" be payable to the member and the Trustees might, in their discretion, deduct a sum equal to the value of the money or goods misappropriated or damage done to the property of the Company and pay the same to the Company or subsidiary Company. But by sub-r. (b) of this rule any sum remaining after the deduction in accordance with the previous sub-clause was to be reduced by ten per cent for each year by which the member's age at the date of leaving the company's employ should fall short of the normal retiring age. Under this rule it seems that no employee leaving the service of the company without written consent would be entitled to any payment if this occurred, in the case of a male, before his fifty-fifth year or, in the case of a female before her fiftieth year. In the event of a member leaving the service of the company with its written consent and approval r. 11 provided that the amount payable to him should be the amount of the retiring allowance computed in the manner provided by the rules as if he had reached the retiring age on that date less, however, such deduction, if any, as the company might recommend but not exceeding the amount recommended by the company to be deducted.

By cl. 8 of the deed it is provided that if the fund be dissolved "under the provisions hereof or of the Rules hereunder" the fund shall be wound up and dissolved. Subject to the payment thereout of all proper costs, charges and expenses the fund is to be divided forthwith and distributed amongst the members remaining at the date on which it is dissolved in such shares and proportions "as the Trustees shall consider just and equitable and having regard to the provisions of this Deed and the within Rules". The only other provision contained in the deed specifically relating to winding up is that which is contained in cl. 23 which provides that the trustees may at any time on a unanimous vote of the trustees determine that the scheme shall be discontinued and the fund wound up. It was pointed out that by cl. 17 it is provided, inter alia, that the company, other than an associated or subsidiary company, may by notice in writing to the trustees remove from office any trustee or trustees and appoint a new trustee or new trustees for the purposes of the deed in place of any trustee or trustees who shall die, or be removed from office.

There is considerable difficulty in ascertaining the meaning and effect of a number of the provisions of the deed which is not diminished by the prima facie meaning of "The Company", as defined. In the circumstances in which it was executed it was designed to serve the interests of employees of both Marine Plastics and the appellant company (Driclad) and the difficulties are accentuated by the use simply of the term "the company" in many parts of the deed. However, these difficulties may be left until I have dealt with the manner in which the scheme has, in fact, been administered.

On 30th June 1956 the directors of Driclad were Roland and Asta Sarv but they do not appear to have held any shares in that company. Marine Plastics was the holder of two ordinary shares and the trustees were the holders of fifty A class £1 shares to which reference will be made presently. The directors of Marine Plastics were at that time the said Roland and Asta Sarv and each of the trustees of the fund. The "fund" had come into operation on 21st June 1956, when Marine Plastics paid to the trustees of the fund £17,400 of which £16,850 was espressed to be for the "A" section of the fund and £550 for the "B" section, the members of which were Roland, Asta and Runno Sarv, A. J. Tanimae and R. J. C. Chalmers. Of the amount of £550, £150 was entered in the "B" section of the register to the credit of Roland Sarv, like amounts were entered to the credit of Asta and Runno Sarv and £100 to the credit of A. J. Tanimae. On the same day Driclad paid to the trustees the sum of £3,200, being £2,800 to the "A" section of the fund and £400 to the "B" section to be credited to Asta (£150) and Roland Sarv (£150) and R. J. C. Chalmers (£100). Again, on the same date the trustees, at the request of Asta Sarv pursuant to a proviso to cl. 5 of the deed, to which I shall presently refer, applied for and were allotted fifty A class shares in the capital of Driclad and on the same date a dividend of £1,000 was declared upon these shares and paid to the trustees. These shares, it may be said, did not carry any voting rights. Again, on the same date the trustees of the fund, at the request of Roland Sarv, applied for and were allotted fifty B class fully paid shares in the capital of Marine Plastics and in respect of these shares on the same date a dividend of £3,500 was declared and paid to the trustees. Again, these shares did not carry any voting rights. On the following day, 22nd June 1956, Marine Plastics accepted a loan at call of approximately £24,000 from the trustees. The loan was unsecured and bore interest at the rate of eight per cent per annum.

As at 30th June 1956 the shareholders in Marine Plastics were Roland Sarv as to eight thousand ordinary shares, Asta Sarv as to seven thousand ordinary shares, Driclad as to one thousand A class shares and the trustees in respect of fifty B class shares for which application had been made by them at the request of Roland Sarv. These last-mentioned shares were those which had been allotted to the trustees on 21st June 1956.

On 5th July 1956 a further company, Asrol Pty. Limited (Asrol), was incorporated in the Australian Capital Territory. Roland Sarv and Asta Sarv were the first directors of this company and on 17th April 1957 they sold to this company their respective holdings, totalling, in all, fifteen thousand ordinary shares, in the share capital of Marine Plastics.

On 29th April 1957 Driclad declared and paid a dividend of £1,750 on its B class shares held by the trustees on behalf of Roland Sarv, a dividend of £1,750 on its A class shares held by the trustees on behalf of Asta Sarv and a dividend of £7,000 on its ordinary shares held by Marine Plastics. On the same day Marine Plastics declared a dividend on its ordinary shares held by Asrol. This dividend was not paid but on the same date the directors of Asrol resolved to lend to Marine Plastics and lent to that company the sum of £6,000 at eight per cent per annum repayable on call.

On 26th June 1957 Marine Plastics paid to the credit of the bank account of the trustees the sum of £13,800 as a contribution to the fund which was allocated as to £13,250 to the "A" section and £550 to members of the "B" section (£150 each for the benefit of Roland, Asta and Runno Sarv and £100 for A. J. Tanimae). Driclad on the same date made a contribution to the fund of £2,200 allocated as to £1,800 to the "A" section and as to £400 to members of the "B" section (£150 each for the benefit of Roland and Asta Sarv and £100 for R. J. C. Chalmers). Again, on the same day the trustees drew from their bank account the sum of £15,700 and lent the same to Marine Plastics at eight per cent payable on call. Previously, on 15th March 1957, the trustees had, at the request of Roland Sarv, applied for and were allotted fifty B class shares in the share capital of Driclad and the allotment moneys were paid on 29th April 1957.

Over the years to 1962 the contributions by each company to the so-called fund have been as follows:

Year Marine Plastics Driclad 1956 £17,400 £3,200 1957 £13,800 £2,200 1958 £ 6,000 £1,500 1959 £18,800 £3,600 1960 £16,200 £3,200 1961 £ 800 £ 400 1962 £ 800 £ 400

and the contributions made by Driclad during the last five years are the contributions now in question. During this period the income of the "fund" has consisted of the contributions made by each company, interest on loans made by the trustees to each company and dividends on the special shares held by the trustees in each of the companies to which I have referred. Over the same period the loans made by the trustees to Marine Plastics have been as follows:

Year Loan Repayment Balance 1956 £23,900 £23,900 1957 £19,200 £43,100 1959 £31,900 £20,000 £55,000 1961 £15,000 £25,000 £45,000 1962 £10,000 £55,000

In the case of Driclad there have been no repayments and loans were made in 1960 of £10,000, 1961 £68,000 and 1962 £3,500. The amount outstanding at the end of this period was £81,500. Interest on these loans received by the trustees during the same period was £20,472 from Marine Plastics and £8,959 from Driclad. The dividends upon the shares held by the trustees during the same period amounted to £37,600 and of this amount £532 was paid to the "A" section of the fund for the benefit of employees generally and the balance, over £37,000, was paid to the "B" section of the fund and credited to Roland Sarv £19,784, Asta Sarv £15,784 and Runno Sarv £1,500.

At this stage it is of importance to refer to cl. 5 of the deed which confers the widest power of investment on the trustees and which, by a proviso stipulates, that

in respect of the "B" Section of the Fund the Trustees may from time to time, in their absolute discretion upon request in writing made by a member of the said "B" Section invest an amount of money up to but not exceeding the amount or total of the amounts entered in the "B" Section of the Register of Members opposite the name of the said member in such securities or investments or in such other manner as such member of the said "B" Section may specify in such request and the income, return, profit, capital appreciation or loss which may result from such investment made upon request and at the absolute discretion of the Trustees as aforesaid, shall be credited or debited, as the case may be, opposite the name of such member in the said Register of Members in respect of such member's interest in the "B" Section of the Fund. It is pursuant to this proviso that Roland Sarv and Asta Sarv had on 21st June 1956 requested the trustees to purchase, respectively, fifty B class shares in Marine Plastics and fifty A class shares in Driclad and, on 15th March 1957 at the request of Roland Sarv, fifty B class shares in Driclad. By the end of 1959 the trustees were the holders of two hundred and seventy-five shares in Marine Plastics, Driclad and Asrol, made up as follows:

Date of Purchase Company Type of Shares No. of Shares Purchased at the request of 21.6.56 Driclad A class 50 Asta Sarv 21.6.56 Marine Plastics B class 50 Roland Sarv 15.3.57 Driclad B class 50 Roland Sarv 26.9.58 Asrol Ordinary 2 Allocated to A section of the fund 29.9.58 Marine Plastics C class 25 Runno Sarv 17.4.59 Asrol Ordinary 49 Roland Sarv 17.4.59 Asrol Ordinary 49 Asta Sarv

As already seen the dividends from these shares up to 1961 totalled £37,600 of which £532 only was paid to the "A" section of the fund and the balance, approximately £37,000, was credited in the "B" section of the register, as to £19,784 to Roland Sarv, £15,784 to Asta Sarv and £1,500 to Runno Sarv.

The number of members of the "fund" has varied from time to time but since its inception there have been approximately one hundred and sixty-six members of the "A" section, which also includes the members of the "B" section, and, as at 30th June 1960, there were some ninety-five members. Of those who have ceased to be members seven have received benefits on the termination of their membership. The contributions which have been made by each company were made, in the main, to the "A" section of the fund whilst the contributions to the "B" section have been comparatively minor. On the other hand, the dividend income of the trustees has been, in accordance with the deed and the requests that were made thereunder, almost wholly credited to Roland and Asta Sarv and, in a lesser degree, to Runno Sarv. Their interests in the "B" section of the fund grew during the period from the inception of the fund up to January 1963 to £28,845, £22,747 and £4,624 respectively. The only other person who became a member of this section in addition to R. J. C. Chalmers and A. J. Tanimae, was K. H. Commins, and all of the members of the "B" section were or became directors of either or both Marine Plastics and Driclad.

Much criticism, some of which is of a more or less formal character, has been advanced concerning the provisions of the deed. It was said that its purpose was not confined to the provision of benefits of the kind described in s. 66 to employees of the company. Further it was said that the deed was not one which provided benefits of the requisite character and that, if it did, the rights to those benefits were not fully secured. The arguments on these points were advanced on the basis that there was one single scheme and that only one fund had been established but before considering them it is both necessary and convenient to decide whether the deed did not envisage the establishment of two separate and distinct schemes in spite of the fact that it was recited that the company had determined to establish a superannuation fund to be designated the "Marine Plastics Superannuation Fund".

The deed contemplates that there is to be a fund for the benefit of members of the "A" section and that members of the "B" section, who are also members of the "A" section, should, individually and independently of one another, be entitled to additional benefits. I have already indicated the manner in which the entitlement of members of the "A" section upon retirement should be calculated. Briefly it was to be determined by reference to the amounts which had been contributed by the company from time to time for the benefit of the retiring member and which stand to his credit in the register plus a proportion of what is called the divisible "A" section and which is not allocated in the register to any particular member of that section. In substance the "divisible "A" section" represents income and capital accretions standing to the credit of the "A" section of the fund and both the retiring member's length of service and his salary from time to time are reflected in the amount of his interest in the fund ascertained by the application of the formula provided.

On the other hand, the entitlement upon retirement of a member of the "B" section of the fund is, in effect, to be the amount standing to his credit, both capital and income, in the register. It will be observed that r. 8 specifies that the entitlement of a member of the "B" section upon retirement shall be,

in addition to accounts payable to him as a member of the "A" Section of the Fund, the total of the amounts calculated as set out in Clause 16 of this Deed under the heading "B" Section of Fund together with a further amount representing the final valuation or assessment by the trustees of the income, return, profit, capital appreciation or loss in respect of the interest of the member in the "B" Section from the period of the last valuation or assessment up till the date of retirement. The relevant portion of cl. 16 requires the trustees to enter opposite the name of each member of the "B" section the amount or amounts of money contributed by the company which the company has upon such contribution specified should be entered in the register opposite the name of the member of such "B" section and from time to time in their absolute discretion make further entries opposite the name of such member of the "B" section, such further entries to represent valuations or assessments by the trustees of the income, return, profit, capital appreciation or loss arising from investment (whether or not at the written request of the member as provided for in cl. 5) of the total amount or any portion of the total amount from time to time appearing in the register opposite the name of such member. Accordingly the deed contemplates, and indeed requires, that a separate account shall be kept of the moneys contributed for the benefit of each individual member of the "B" section and that his entitlement upon retirement will depend upon the success or failure of investments made out of the amounts standing to his individual credit in the register. As I see the case, therefore, the contributions made by the company for the individual benefit of members of the "B" section were not sums "set apart or paid as or to a fund " from which benefits of the kind specified in s. 66 were to be provided for, or for the dependants of, employees of the appellant. Nor were the contributions for the individual benefit of members of the "B" section for the purpose of providing such benefits. No member of that section had any recourse to any part of moneys standing generally to the credit of the "B" section; he was, as I have already said, restricted to the fund established for his individual benefit and to this no other member of the "B" section could have recourse. I should add that the "B" section of the scheme seems to have been devised mainly for the benefit of the two original holders of the ordinary shares in Marine Plastics who, for all practical purposes, were in control of that company and also of Driclad and who, after the sale of their shares in Marine Plastics to Asrol - probably because of the provisions of s. 66 (2) (c) - remained, again for all practical purposes, in control of all three companies. It seems to me that the scheme envisaged by the deed in so far as what is called the "B" section is concerned was devised in order to enable these shareholders, and, to a lesser extent, Runno Sarv, to obtain the ultimate benefit of special dividends declared by these companies without subjecting themselves to liability for tax. Much of this may be by the way but in my view it is impossible to regard the deed, which provides for the investment of moneys standing to the credit of each individual member for his individual and sole benefit, as establishing, in toto, a fund from which benefits of the description contained in s. 66 are to be provided. Accordingly, I am of the opinion that the contributions made in respect of the individual members of "B" section were not deducted pursuant to s. 66.

But this does not mean that contributions made to the "A" section of the fund are not deductible for, in my view, that so-called section of the fund was designed to be and was, in fact, a separate and distinct fund and the deed provided benefits of the requisite character for employees and their dependants out of that fund. I, therefore, return to the other arguments advanced by the respondent to support the contention that the contributions made to it by Driclad were not deductible.

In support of the first contention, it was pointed out that cl. 3 provides that "such person who shall be an employee of the Company or engaged in the business of the Company shall be eligible if invited in writing by the Company to make application for membership in the form set out in the First Schedule hereto". The italicized words, it was suggested, opened the fund to persons who were not employees. But this, it seems to me, is not so. Its apparent result is merely caused by a piece of careless drafting. The definition of "member" - which "means and includes any person resident in Australia and employed by the Company or any associated or subsidiary Company and who shall from time to time be approved by the Trustees as eligible for inclusion in the scheme and satisfy the Trustees of their acceptance of the terms provisions and conditions of this Deed" - is against such a construction as also is the form of application which describes "the undersigned" as being an employee.

The second contention was based upon the provisions of cl. 9 and rr. 10 and 11 and, to some extent, on the provisions of cll. 9, 17, 21 and 23. The first of these provisions, which deals with benefits to dependants of deceased members gives rise to considerable difficulty. Its substance has already been set out and the difficulty arises from the fact that the clause is said to leave the amount of the benefit in each case to the discretion of the trustees. The amount to be paid is to be "not less" than the amount, calculated in accordance with the procedure laid down by the rules, which would have been payable to such member if he had left the employ of the company on the date of his death. However, the calculation of the amount payable to a member if he leaves the employ of the company depends upon whether he leaves with or without the written consent and approval of the company. As already pointed out, if he leaves without consent before attaining sixty-five years he is not entitled to anything but if with consent his entitlement falls to be determined under r. 11. The first point is whether "the procedure laid down in the Rules" (cl. 9) is the procedure prescribed by r. 10 or r. 11. On the whole I think that the quoted expression in cl. 9, contemplating, as it does, that a payment shall be made to the dependants of a deceased member whatever his age at the time of death, refers to r. 11. But, even so, there is a residual objection for under that rule the dependant's entitlement is to be the amount of the retiring allowance computed in the manner provided by the rules as if he had reached the retiring age on the date of leaving the company's service less such deduction (if any) as the company may recommend and the trustees may in their absolute discretion think fit to deduct but not exceeding the amount recommended by the company to be deducted. The respondent sees this circumstance as a serious defect in the deed. It establishes a fund, it is said, and, inter alia, purports to give to the dependants of a deceased member a right to a benefit upon his death but the right to receive it is, in effect, left in the successive discretions of the company and the trustees. It is, of course, not necessary in order to answer the description of a "fund from which such benefits, pensions or allowances are to be provided" (s. 66) that it should provide, in addition to pensions or retiring allowances to employees, benefits for the dependants of deceased employees. But such provision is usual and, if it is made, the section requires as a condition of its operation that the right to receive such benefits shall be fully secured. But what does s. 66 mean when it specifies as a condition of its operation that "the rights of the employees or dependants to receive the benefits, pensions or allowances are fully secured"? Somewhat different answers have been given to this question but assuming that the fund answers the description contained in the earlier part of the section the initial question must be: What are the rights conferred - in this case by the deed - upon employees and their dependants? The next question is, in my view, whether the fund has been constituted in such a way that the right to receive the benefits provided by the deed are "fully secured"? The intention of this provision, found, as it is, in the Income Tax and Social Services Contribution Assessment Act, is to deny the character of a deduction to any employer's contribution to such a fund if the fund itself remains, either directly or indirectly, under his control or within his disposition so that the rights of his employees and their dependants to receive the benefits provided by the scheme are liable to be defeated at his option. I do not wish to suggest that this exhaustively describes the effect of the provisions but it is clear that what must be "fully secured" are the rights to receive the benefits as defined by the deed (cf. Metropolitan Gas Co. v. Federal Commissioner of Taxation [1] ). Holding this view, I am of the opinion that the argument of the respondent touches only the question of the definition of the rights given by the deed and is, in no way, relevant to the question whether those rights, or the rights to receive the benefits provided, are fully secured.

The objections based upon the other provisions of the deed to which I have referred are concerned with the rights of members upon a winding up. Clause 8 provides that, in that event, subject to the payment thereout of all proper costs, charges and expenses,

the Fund shall be divided forthwith and distributed amongst the members remaining at the date on which the Fund is dissolved in such shares and proportions as the Trustees shall consider just and equitable and having regard to the provisions of this Deed and the within Rules. It is also the subject of objection that the trustees may at any time on a unanimous vote determine that the scheme shall be discontinued and the fund wound up (cl. 23) and that the company other than an associated or subsidiary company may by notice in writing to the trustees remove from office any trustees and appoint a new trustee or new trustees for the purpose of the deed in the place of any trustee who shall be removed from office. I do not think that these two last-mentioned clauses add anything to the objection that cl. 8 invests the trustees with considerable discretion upon a winding up and that cl. 21, which deals with a similar topic, envisages a distribution if the company other than an associated or subsidiary company ceases to carry on business or becomes insolvent or goes into liquidation and that thereupon there is a direction that the fund shall be distributed "amongst the members in accordance with the provisions of this Deed and the Rules". However I am of the opinion that the objection which is taken to these clauses cannot be sustained for upon a winding up the trustees would be subject to the control and direction of a court of equity (cf. Metropolitan Gas Co. v. Federal Commissioner of Taxation [2] ). 1. (1932) 47 C.L.R., at p. 633.

Finally, it is contended that the rights of members of the "A" section to receive the benefits provided by the deed were not "fully secured" because of the magnitude of the loans made by the trustees to Driclad and Marine Plastics. It was pointed out that these loans were unsecured, that one or both companies had other creditors and, therefore, that an element of risk was involved. In my view, this submission fails. What s. 66 requires to be fully secured are the rights of the members of the fund to receive the benefits given, in this case, by the deed and this is to be determined upon consideration of the manner in which the fund has been constituted. It is true that very substantial loans were made to the companies in question by the trustees. Indeed, it seems they exercised their powers of investment exclusively in this fashion, except with respect to moneys required for premiums on policies of insurance taken out for the benefit of members of the "A" section, and, which from 1957 to 1962 amounted to £15,249. But I am unable to see how the right of a taxpayer to a deduction pursuant to s. 66 can, in any way, be affected by the manner in which the trustees, in the exercise of their discretion, choose to invest the moneys which constitute the fund. Nor do I think that the question whether the rights of members to receive the benefits provided are fully secured calls for an assessment of the stability of the investments which they had made.

Accordingly, in my view, the assessments, now in question, to the extent to which they disallowed deductions claimed in respect of contributions to the so-called "A" section of the fund, were excessive.

Rollason and Another v. Commissioner of Taxation (Cth).

These four appeals are brought by the trustees of the Marine Plastics Superannuation Fund against their assessments to income tax in respect of the income of the fund during the income years which ended on 30th June 1956, 30th June 1957, 30th June 1958 and 30th June 1959. Income tax was assessed upon taxable incomes in these years, respectively, of £4,449, £5,441, £3,321 and £8,658.

The constitution of the fund in question has already been the subject of consideration in the appeals brought by Driclad Pty. Ltd. against the disallowance of its claim to deductions pursuant to s. 66 of the Income Tax and Social Services Contribution Assessment Act in respect of its contributions to the fund and for the reasons given in those appeals I am of the opinion that the income of the so-called "B" section of the fund was not exempt income pursuant to s. 23 (j) of the Act. In view of what I have previously said I may state shortly that my reason for this conclusion is that the income from that section of the fund was not, within the meaning of that subsection, the income of a provident benefit or superannuation fund established for the benefit of employees.

It seems to me that the view which I have already expressed that the "A" section of the fund constituted a separate fund disposes of a number of arguments which were addressed to me by the respondent on the basis that one single fund, constituted by both the "A" section and the "B" section, had been established. However, it is necessary to examine these arguments in order to see whether on the view which I have expressed concerning the "A" section of the fund they have any residual force. Briefly stated these contentions were that the fund was not established for the benefit of employees and that it was not, during the relevant years, being applied for the purposes for which it was established.

The foundation for the first contention is the assertion that the proper inference to be drawn from the evidence - which by agreement includes the evidence given in the earlier cases - is that the fund - and when I refer to the fund I now mean what is called the "A" section of the fund - was formed for the purpose of enabling the contributing companies to avoid tax upon a substantial part of their profits by making contributions to the fund. This contention is reinforced by pointing to the magnitude of the loans to the companies by the trustees and to the fact that substantial portions of the interest received from those companies were continually returned to those companies. In my view, these matters are, in the circumstances of the case, by no means conclusive. Section 23 (j) is not concerned with the reasons which induce a company to constitute a superannuation fund; it is concerned with the purposes to which the fund is, or is to be, devoted and in the present case these are ascertainable from, and only from, the provisions of the trust deed. Approaching the problem in this way I see no reason to doubt that the fund answers the description of a "superannuation fund established for the benefit of employees".

Nor, in my view, does the evidence indicate that the fund was, as is suggested, being used for the benefit of the contributing companies or, that during the relevant periods, it was not being applied for the purpose for which it was established. The investments in question were within the investment powers of the trustees and, to my mind, it was immaterial whether the funds were invested in this or some other manner. It may be true that the moneys, when lent, we used by the companies in their respective businesses but it is erroneous to say that the evidence reveals that the trustees were not applying the fund for the purpose for which it was established but, rather, for the benefit of the companies concerned. I do not say that if it could be shown that the trustees, in exercising their powers of investment, were applying the fund in derogation of, or, so as to defeat, the rights of employees in the fund as constituted, the conclusion would not follow that the fund was not being applied for the purpose for which it was established. But there is nothing to suggest that this was so in this case. On the whole I am satisfied that the fund was being applied for the purpose for which it was established and that the appeals must succeed on the ground that the assessments were excessive in so far as they were based upon the income of the so-called "A" section of the fund.

These appeals come before us in a rather odd manner. Appeals to the Court by the taxpayers against income tax assessments for a number of years were heard and determined by Taylor J. There were five appeals by the present appellant Driclad Pty. Ltd., five appeals by the appellant Marine Plastic Co. Pty. Ltd., and four appeals by certain trustees namely the appellants Rollason and another. In each of the fourteen appeals his Honour made an order allowing the appeal and setting aside the assessment. On the face of the orders, therefore, the taxpayers appeared to have succeeded completely. The reasons for judgment, however, showed that his Honour, while holding that the assessments made against the two company taxpayers were excessive, had declined to hold that they were as excessive as those taxpayers had contended that they were. The reasons also showed that his Honour, while holding that the assessments made against the trustee appellants were excessive because a part of the income of their trust fund was exempt from tax, had declined to uphold their contention that the whole of that income was exempt from tax. The Commissioner in making the assessments had proceeded on the footing that a certain deed under which the company appellants had made certain contributions, and of which the trustee appellants were the trustees, created a trust fund which was not a fund for the benefit of employees within the meaning of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act 1936 Cth as amended up to 1962, or a fund to provide individual personal benefits for employees within the meaning of ss. 66 and 79 of the Act. The decision on appeal was that the deed, though it spoke of one "fund" which it dealt with in two parts described respectively as "the "A" section of the fund" and "the "B" section of the fund", in reality created two funds of which one fell within the relevant provisions of the Act and the other did not. In his Honour's view, payments made to the "A" part, but not the "B" part, were allowable deductions under ss. 66 and 79, and income from the "A" part, but not the "B" part, was exempt under s. 23 (j).

It will be seen that to set aside the assessments in toto was to go further in favour of the taxpayers than was necessary for giving effect to the actual decision, but the orders were nevertheless open to the objection on the part of the taxpayers that the Commissioner was left at liberty, as his Honour intended he should be, to make fresh assessments on the footing, which the reasons for judgment decided conclusively against the taxpayers, that the "B" part of the fund was outside the relevant sections. The taxpayers were therefore aggrieved by the orders, notwithstanding their form, so far as they had that effect as to the "B" part of the fund. In our opinion that fact entitled the taxpayers to appeal to the Full Court for the purpose of having the orders so moulded as to bind the Commissioner, contrary to the opinion of Taylor J., to treat the fund as falling wholly within the relevant sections of the Act. In the case of the companies this result might be achieved either by adding suitable declarations to the orders or by substituting for the setting aside of the assessments directions that they be amended by treating contributions to both parts of the fund as allowable deductions. In the case of the trustee appellants the result might be achieved by adding to the setting aside of the assessments a declaration that the income of both parts of the fund was exempt from income tax, thereby establishing that no new assessment could properly be made.

It may be mentioned here that, as counsel for the Commissioner pointed out in argument, where an assessment is held to be merely excessive, questions of times for objecting, questions as to interest upon tax assessed but unpaid, and questions as to the possibility of new objections may all be unnecessarily opened up if the assessment be wholly set aside so that the Commissioner has to make a completely new assessment. Ordinarily it is sufficient in such a case to direct that the assessment under appeal be amended so as to give effect to the opinion of the Court.

The taxpayers lodged notices of appeal to the Full Court which were expressed as if the appeals were against the reasons of Taylor J. relating to the "B" part of the fund rather than against the orders that he made. Needless to say, this was erroneous, because it is of the nature of appeals, as s. 73 of the Constitution recognizes, that they lie only against "judgments, decrees, orders and sentences", not against reasons. The word "judgments" in this connexion refers only to operative judicial acts, and is not used, as it often is in other contexts, as a convenient abbreviation for reasons for judgment. But in each of the companies' appeals the notice of appeal sought an order "whereby the setting aside of the assessment includes taxation claimed by the respondent in respect of contributions by the appellant to the "B" section of the said fund", and in each of the trustees' cases the notice of appeal sought an order "whereby the setting aside of the assessment includes taxation claimed by the respondent in respect of income of the "B" section of the fund". This obviously means, though it is not happily expressed, that orders are being sought which will preclude the making of any fresh assessment on the basis that part "B" of the fund fell outside the relevant sections of the Act. Since relief of this nature can be given in the ways above indicated the notices of appeal are, in our opinion, effectual to invoke the appellate jurisdiction of the Court. The Commissioner, accepting this position, has cross-appealed in order to contend that the income of neither part of the fund was exempt from income tax, that no payment to the fund was an allowable deduction, and that the appeals from the assessments should therefore have been dismissed.

Taylor J. has set out fully the relevant provisions of the superannuation deed in question and we will not repeat them. We agree with his Honour that the deed set up two funds and we consider the argument for the Commissioner to the contrary gave less than due weight to provisions such as cll. 2, 3, 6, 18, 19, 21 and 24 of the deed. We think it clear that what the deed constituted are two funds to be held by the same trustees and administered together, but, subject to an obligation by appropriate accounting, to keep separate the identity of the "A" section fund and the "B" section fund.

Taylor J. held that the "A" section fund was one of which the income was exempt under s. 23 (j) and payments to which were allowable deductions under s. 66, and with these conclusions we agree. We do not wish to add to what his Honour has said.

This brings us to the real point of the taxpayers' appeals, viz. whether the "B" section of the deed constituted a fund to which ss. 23 (j) and 66 applied. His Honour said [1] :

Accordingly the deed contemplates, and indeed requires, that a separate account shall be kept of the moneys contributed for the benefit of each individual member of the "B" section and that his entitlement upon retirement will depend upon the success or failure of investments made out of the amounts standing to his individual credit in the register. As I see the case, therefore, the contributions made by the company for the individual benefit of members of the "B" section were not sums "set apart or paid as or to a fund " from which benefits of the kind specified in s. 66 were to be provided for, or for the dependants of, employees of the appellant. Nor were the contributions for the individual benefit of members of the "B" section for the purpose of providing such benefits. No member of that section had any recourse to any part of moneys standing generally to the credit of the "B" section; he was, as I have already said, restricted to the fund established for his individual benefit and to this no other member of the "B" section could have recourse. I should add that the "B" section of the scheme seems to have been devised mainly for the benefit of the two original holders of the ordinary shares in Marine Plastics who, for all practical purposes, were in control of that company and also of Driclad and who, after the sale of their shares in Marine Plastics to Asrol - probably because of the provisions of s. 66 (2) (c) - remained, again for all practical purposes, in control of all three companies. It seems to me that the scheme envisaged by the deed in so far as what is called the "B" section is concerned was devised in order to enable these shareholders, and, to a lesser extent, Runno Sarv, to obtain the ultimate benefit of special dividends declared by these companies without subjecting themselves to liability for tax. Much of this may be by the way but in my view it is impossible to regard the deed, which provides for the investment of moneys standing to the credit of each individual member for his individual and sole benefit, as establishing, in toto, a fund from which benefits of the description contained in s. 66 are to be provided. Accordingly, I am of the opinion that the contributions made in respect of the individual members of "B" section were not deductible pursuant to s. 66. 1. Ante, pp. 56, 57,

We are not ourselves satisfied that the amounts standing to the credit of individual members of the "B" section of the fund have to be invested separately, nor that in some circumstances one "B" section member might not obtain more than the amount standing to his credit. Thus it is provided by the rules that upon the retirement of a member of the "B" section of the fund there shall be paid -

the total of the amounts calculated as set out in cl. 16 of this deed under the heading "B" section of the fund together with or less a further amount representing the final valuation or assessment by the trustees of the income return profit capital appreciation or loss in respect of the interest of the member in the "B" section from the period of the last valuation or assessment up to the date of retirement. This seems to us to contemplate the payment of a share of the "B" section of the fund as a whole, in addition to the amounts set out against the name of the retiring member by virtue of payments for him and earlier valuations.

However, even if a member of the "B" section of the fund were entitled to nothing beyond the amount standing opposite his name and to particular investments representing that amount, we do not think that this would make it necessary to deny to the fund the character of a superannuation fund for the benefit of employees or a fund for the purpose of making provision for individual personal benefits to employees if it should otherwise have that character.

We think, therefore, that Taylor J. was in error in denying the "B" section of the fund the character of a fund for the purposes of ss. 23 (j) and 66 on the particular ground which his Honour adopted. It is to be observed that his Honour referred to the fact that the members of the "B" section were shareholders and that [1] :

the scheme envisaged by the deed in so far as what is called the "B" section is concerned was devised in order to enable these shareholders to obtain the ultimate benefit of special dividends declared by these companies without subjecting themselves to liability for tax. His Honour points out that what he said might be by the way because the shareholders were directors and therefore employees for the purpose of s. 66 - they also had contracts of service - but of course it might not have been by the way had the proceedings taken a course different from that which they did. 1. Ante, p. 56.

The Commissioner, however, sought to support his Honour's conclusion by arguing that, in any event, the income of the "B" section was not being applied for the purposes of a benefit or superannuation fund established for the benefit of employees. It seems to us that if the fund was established for the benefit of employees only, there is no doubt that the income was being applied for these purposes, notwithstanding that the "B" section employees were a very exclusive class of employees. If the fund was not exclusively for the benefit of employees, then it did not fall within s. 23 (j) as has recently been held in Compton v. Federal Commissioner of Taxation [2] . Turning to s. 66 we find in that section a very precise requirement that the payments allowed as deductions must be for the purpose of making provision for individual personal benefits of employees and for that purpose only. If, therefore, it were the case that the payments were simply made to the trustees of a fund, and, that the fund had been established from which such benefits are to be provided and for another purpose as well, e.g., to return to the company as loans payments made by the company to trustees, we ourselves would think that the income of the fund would not be within s. 23 (j) nor would payments to the fund be allowable deductions under s. 66. So, for instance, if a deed were to contain a clause requiring the trustees to lend to taxpayers the payments made by them to the trustees as and when made, and to do so at favourable rates of interest, we would think that much could be said against treating such a deed as constituting a fund falling within either s. 23 (j) or s. 66.

In this case, evidence has shown that the bulk of the moneys in the hands of the trustees were lent to the taxpayers making the payments, but, although the deed permits this, it does not require it, and attention was not directed to the question whether or not there was, towards the end of a financial year, an arrangement whereby payments were made to avoid tax liability and moneys which would otherwise have had to be found to meet that liability were paid to trustees for the benefit of employees and also for return to the companies as loans, with the advantage of the payments being, by the terms of the deed, ultimately secured to the shareholders of the companies.

In circumstances that were proved, however, we think that the income of the whole fund, both "A" section and "B" section, was exempt income under s. 23 (j) and the payments by the companies to the trustees of the fund - "A" section and "B" section - were allowable deductions under s. 66.

For the foregoing reasons we would allow the appeals with costs. In the companies' appeals we would vary the orders appealed from by vacating so much of each order as set aside an assessment and making in lieu thereof the following declaration and order:

(a) a declaration that in respect of the whole of the contributions made by the appellant in the relevant year of income to the fund referred to in the notice of cross appeal as the Marine Plastics Superannuation Fund, whether to the "A" section or the "B" section thereof, an amount ascertained in accordance with s. 66 of the Income Tax and Social Services Contribution Assessment Act, 1936, as amended, was an allowable deduction in the assessment of the tax payable by the appellant upon income derived in the said year of income; and

(b) an order that the assessment be remitted to the Commissioner of Taxation to be reduced by treating the amount so ascertained as an allowable deduction.

In the appeals of the trustee appellants, since the income in question was the whole income of the fund it will suffice to vary the orders appealed from by adding in each case a declaration that the income of the whole of the fund known as the Marine Plastics Superannuation Fund was in the relevant year of income exempt from income tax by virtue of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act 1936, as amended.

In this case it makes no difference whatever to the parties whether the appeals of the companies are allowed or dismissed. It is with the reasons for judgment that the appellants are concerned.

In these circumstances, and because we agree entirely with the reasons published by the Chief Justice and Kitto J. upon the questions of substance, we do not dissent from the orders which their Honours propose which involve allowing appeals from orders which went too far in the appellants' favour in setting aside assessments which ought merely to have been varied.