Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation

Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation | Case summary | Zoe

[22]

The issue in this case is the timing for tax purposes that Mr Bennetts derived interest on contributions he made to the Construction Industry Long Service Leave Fund ("Fund") in Victoria.
The interest payment was received by Mr Bennetts on 6 July 2021. The tax year at issue is the 2022 year ("Relevant Year").
Mr Bennetts says that the relevant statutory provisions, Trust Deed and the Rules of the Fund operate so that he derives the interest payments for tax purposes each year that it is included in his account. This, he says, stretches back to 1988, 1989[1] or the early 1990s. Many of those years are now time barred under section 170(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936").
Because of that view, Mr Bennetts did not return the interest that he received on 6 July 2021 in his tax return for the Relevant Year which was filed on 2 August 2022.[2] An original assessment was issued by the Commissioner consistent with that return.[3]
The Commissioner says that Mr Bennetts is not correct about when he derived the interest for tax purposes, and says that Mr Bennetts derived that interest when it was received by him i.e., 6 July 2021.
On 22 November 2023, the Commissioner issued an Amended Assessment which increased Mr Bennetts' taxable income for the Relevant Year by the interest payment he received and calculated tax accordingly.[4]
Mr Bennetts objected on 14 December 2023,[5] and the Commissioner disallowed that objection on 19 June 2024.[6] I note that Mr Bennetts' objection relies upon and attaches a version of the Rules that is different to the applicable version which Mr Gerardson later rightly corrected the Commissioner on.[7] On 13 August 2024[8] Mr Bennetts filed an application in this Tribunal[9] to review the Commissioner's objection decision. Mr Bennetts bears the onus of proving on the balance of probabilities that the Commissioner's objection decision should not have been made or should have been made differently.[10]
I have concluded that Mr Bennetts has not met that burden of proof, and I affirm the Commissioner's decision.
Before setting out the factual background and my detailed reasons, I record my thanks to the parties' representatives Ms Paull and Mr Gerardson. This case was well managed and presented. Each party's respective case was set out in a focused and clear manner, focusing only on the interpretive issue and not on extraneous skirmishes. Each party treated each other's technical position with respect and courtesy. I record this because it made the Tribunal's job easier.

[91]

Speaking generally, in the assessment of income, the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form [emphasis added].

(b) Permanent Trustee Company of New South Wales (executors of the estate of Frederick Henry Prior, deceased) v Federal Commissioner of Taxation (1940) 6 ATD 5 ("Estate of Prior") - the issue related to interest that was capitalised on a loan owed to the deceased by his partner in a partnership. When the partnership dissolved as a consequence of the death of the deceased, a deed was entered into under which the debtor partner agreed he was personally liable for capitalised interest (totalling £2,535) and agreed to provide security for that liability. Due to his financial circumstances however, the debtor partner ended up making no payments of interest. The amount at issue was £2,097 (due to the deceased having returned £438 as income in prior years). The High Court held that the £2,097 was not derived by the deceased. In referring to a forebear of subsection 6-5(4) the Court held (at 12-13):

Section 19 of the Income Tax Assessment Act, 1922-1933 provides that: - "Income shall be deemed to have been derived by a person within the meaning of this Act although it is not actually paid over to him but is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs." In the present case the interest was by the deed carried to the capital account and in this sense capitalised. But, s.19 does not say that wherever this happens income shall be deemed to be derived but it says that it shall be deemed to be derived income on the assumption that it is income and in other respects is derived notwithstanding that there is no actual payment over but a capitalisation or other dealing on behalf of the taxpayer or under his direction. The object is to prevent a taxpayer escaping tax though his resources have actually been increased by the accrual of the income and its transformation into some form of capital wealth or its utilisation for some purpose. .... To see whether income has been derived one must look to realities. Usually, payment of interest by cheque involves a receipt of income but payment by a valueless cheque does not. "For income tax purposes receivability without receipt is nothing... The facts in this case show that there was not "an actually realised or realisable profit": Cross v London & Provincial Trust Ltd [1938] 1 K.B. 792 at 798. All that happened in this case was to change a forlorn hope of interest into a still more forlorn hope of capital. In my opinion income was not derived even if the sums for interest included in the Commissioner's £2,097 were really due and not as the taxpayers claim only in part due owing to error [emphasis added].

(c) Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation [1965] HCA 58; (1965) 114 CLR 314 ("Arthur Murray") - the issue related to prepaid fees for dancing lessons which were held in a suspense account. The issue was whether those fees were derived by the taxpayer when they were paid or when the dancing lessons were completed, and the prepaid fees were allocated to the taxpayer's ordinary revenue account. In holding that the income was derived when the dancing lessons had been completed and not before, the High Court said at 319:

[93]

(d) There are other cases which follow Arthur Murray and determine whether there is a contingency impacting the derivation of income. Those cases include Sent v Federal Commissioner of Taxation (No.2) [2012] FCAFC 187 ("Sent No.2"). In that case there were amendments made to bonus entitlements of a senior executive taxpayer. The bonus entitlements had been subject to eligibility conditions, or were accruing, or were said to potentially arise in future. In return for waiving those bonus entitlements, the employer paid an amount of approximately $11.6m to a trust in which the taxpayer held units, and those funds were used by the trust to acquire shares in the employer, with a deferral period of one year before the taxpayer could acquire the benefit of the shares. The issue before the Full Federal Court was whether the $11.6m was derived by the taxpayer. The Court upheld the decision of the Federal Court that there was no contingency impacting the taxpayer's derivation of the $11.6m and he derived that amount for tax purposes. He simply directed it to the trust. The deferral period for the shares that the $11.6m was used to ultimately acquire, did not impact the taxpayer's derivation of the $11.6m.

(e) Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418 ("Brent") - the issue related to the sale of the story of the taxpayer's life on the run with her husband Ronald Biggs. The story was to be provided by the taxpayer in return for $65,250 payable by the newspaper which was due in the same income year. The agreement was that $10,000 was paid on signing the agreement with the newspaper, $15,250 30 days later and $40,000 on her signing a manuscript. The Commissioner assessed the taxpayer for the entire $65,250 in the 1970 income year, but the taxpayer was paid only $10,000 in that year. The newspaper paid the tax assessed by the Commissioner and directed the remaining funds to the taxpayer in 1971. In holding that the Commissioner's position was incorrect and only $10,000 was derived in 1970, the High Court cited Carden's case and said at [12]:

[94]

The Act does not define the word "derived" and does not establish a method to be adopted as a general rule to determine the amount of income derived by a taxpayer, although particular situations not relevant to the present case are dealt with. The word "derived" is not necessarily equivalent in meaning to "earned". "Derive" in its ordinary sense, according to the Oxford English Dictionary, means "to draw, fetch, get, gain, obtain (a thing from a source)".... However the [Carden's case] decision itself shows that his Honour did not intend to hold that moneys realizable, but not received, in an accounting period should always be treated as income derived during that period. Indeed, Dixon J. went on to advert to the distinction between trade and other sources of income drawn by Sir Houldsworth Shaw and Mr. Baker in their Law of Income Tax in the following passage which he cited (1938) 63 CLR, at p 155:

"There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something 'coming in'; that is, for income tax purposes, receivability without receipt is nothing" [emphasis added].

(f) Federal Commissioner of Taxation v Clarke (1992) 24 ATR 230 ("Clarke") - the issue related to an annuity invested in by the taxpayer, a retired teacher. The policy had a five-year term, and relevantly provided that allocations of surplus were made to the taxpayer's Investment Account as interest. The Commissioner assessed the taxpayer on both the annuity payments received by him, and the interest payments credited to his Investment Account. After reviewing the contractual arrangements comprising the investment, the Full Federal Court held that the interest payment was not derived by the taxpayer because (at 236):

In no sense can it be said that Mr Clarke derived the sum of $4443 during the year of income. He had a contractual right which required Capita to adhere to its obligations of crediting the investment account at the end of each year with the appropriate amount of interest and of crediting the Investment Account and the Capital Growth Account with various monies in accordance with the conditions of the policy. Capita was entitled to debit the Investment Account with various administrative charges, but until the termination of the policy Mr Clarke had no rights to receive or to have held on his behalf any monies except the annuity payments.

By condition 6 of the policy Mr Clarke, or a successor annuitant, could attempt to obtain a benefit from attached bonuses by notifying Capita of the wish to receive a revised annuity payment of an increased amount. Only if Capita agreed to such a request would a revised annuity payment become payable and entitlement to the payment of any part of a credited sum crystaIIize. Upon the receipt of such a revised annuity payment the amount of the undeducted purchase price of the annuity would need to be determined (see s. 27H). The amount of assessable income received would then be calculated. Until such an event occurred, or the policy was terminated, Mr Clarke held no more than the expectation of a benefit. The account maintained by Capita recognized that expectation but did not in itself "bring home" to Mr Clarke the amount of the bonuses credited or attached to his policy. [emphasis added].

(g) In Federal Commissioner of Taxation v McNei__l [2007] HCA 5 ("McNeil") the taxpayer held shares that were subject to a buy back arrangement that gave her rights to sell the shares back to the company. Those sell back rights were held on trust and could be sold for the benefit of the taxpayer despite her passively doing nothing once the rights were issued to her. Much of the case revolved around the nature of the sell back rights, whether capital or revenue in nature. On determining the taxpayer acquired the rights as income, there was also an issue as to whether the taxpayer derived that income. The High Court held at [51] that upon review of the various contractual arrangements and deeds, it was clear that the sell back rights were held on trust for the absolute benefit of the taxpayer on issue of those rights. This meant that she derived the market value of those rights at that time.

(h) Other cases also support the view that a review of the relevant contractual arrangements and deeds are important to determining whether a payment is derived for tax purposes. A further example is Hedges v Federal Commissioner of Taxation [2023] FCAFC 105 ("Hedges"). In that case, on interpretation of a partnership deed, the Full Federal Court confirmed that on retirement from a partnership, the taxpayer's entitlement to various payments had crystallised prior to a set-off contemplated in other provisions of the partnership deed. That meant the taxpayer derived those amounts for tax purposes.

(i) In Federal Commissioner of Taxation v White [2010] FCA 730 ("White"), the issue concerned an employee share plan. The issue was whether amounts credited to the employee share plan in the taxpayer's name by the employer entity (Kallix) comprised ordinary income which was assessable to him. In holding that each of those amounts were derived by the taxpayer when they were credited, the Federal Court held at [28] to [29]:

[110]

(a) For a start, the Trustee is not required to make an annual determination. Instead, it may do so. It is not a must. It is entirely left to the Trustee's discretion. Clause 3.9 provides what happens if an annual determination is not made about all or any part of the Fund's Income. The existence of clause 3.9 alone counters Mr Bennetts' argument. I agree with the Commissioner's Submissions at [43(d)] and [43(e)] on this aspect. In addition, clause 3.5 of the Deed provides the Trustee can exercise its power under clause 3.1 at any time. It could be many times a year, or it could not occur. > > (b) While rule 28 of the Rules requires interest to be credited annually, there is nothing requiring the Trustee to make an annual determination of Applicable Income or any other kind of income. The calculation of and crediting of interest is not the same as the determination of Applicable Income. It does not, per clause 2.3 of the Deed, give Mr Bennetts any rights to that interest income. > > (c) Clause 3.1 has nothing at all to say about Mr Bennetts' entitlement. It is a determination provision, mechanical in nature. It says nothing about Mr Bennetts' ability to call for any Applicable Income or any other income nor about his entitlement to it. The definition of Beneficiary of itself refers to a person entitled to a payment from the Fund and that this is determined under the Rules. Prior to determination under the Rules as to entitlement, a person is a "Potential Beneficiary" as defined in the Deed. > > (d) If there is Applicable Income determined by a Trustee, the Trustee must pay it (in accordance with clause 3.3), but critically, this is only after the Trustee has determined which Beneficiaries to pay it to and in what proportions, and otherwise in accordance with the Rules. > > (e) The Rules set out detailed requirements prior to any entitlement to anything - for instance the requirements of rule 26.1.4 and the other matters set out above. > > (f) Clause 2.3 gives Mr Bennetts no entitlement to anything until clause 3.3 is satisfied. Clause 3.3 cannot be satisfied until clause 3.1 and the Rules are satisfied. > > (g) Under clause 3.1, the Trustee may determine other kinds of income than Applicable Income in any event. Assuming the Trustee does make a determination under clause 3.1, there is no requirement for a Trustee to determine Applicable Income. For instance, the Trustee can determine Accumulated Income or Appropriation. That does not give rise to an entitlement for Mr Bennetts to receive that income. > > (h) Because of the nature of interest calculated under rule 28, that is, it is calculated on interest previously calculated, interest could well comprise Accumulated Income treated as an addition to the Fund under clause 3.6, and part of the Fund as that term is defined in the Deed. That does not mean the interest is Applicable Income available to be paid to Mr Bennetts or realisable by him.

[113]

"The Rules of the Fund do not contain any specific provision requiring the Beneficiary to accept those rules to be a member."[30] The Rules are a part of the Trust Deed. They appear in Schedule 2 to the Deed. Clause 5.3 of the Deed makes it clear that the Rules form part of the Trust Deed. This submission also seems contrary to Mr Bennetts' "implied direction" submission "in applying to the Fund to be a Beneficiary, [Mr Bennetts] accepts the Deed and Rules of the Fund, and this is implied 'direction'."[31]
"The ability to obtain withdrawal entitlements is not connected to the crediting of earnings on a Beneficiary's account."[32] Rule 28 of the Rules provides for a calculation of interest but what Mr Bennetts' submissions fail to recognise is that this is insufficient for the Tribunal to be able to conclude that Mr Bennetts derived interest income. As is demonstrated by cases such as Arthur Murray, Clarke, and the Estate of Prior even if income is credited to an 'account' (which rule 28 does not say happens in any event), that of itself is insufficient to demonstrate income is derived if there are contingencies or additional steps required before Mr Bennetts can access the interest in realisable form. That is the case here.
The calculation of interest income is not the same as income that is "applied or dealt with in any way on your behalf or as you direct" as required by subsection 6-5(4) of the ITAA 1997. This is because Mr Bennetts had no entitlement so nothing could be "applied" on his behalf or as he directed, as was noted in Clarke.[33]
The 'implied direction' argument also cannot be accepted. It is not the passive joining of the Fund by Mr Bennetts that directs the Trustee, the obligations of the Trustee under the Deed, the Act and the Rules direct the Trustee. The obligations do not give rise to realisable interest income that Mr Bennetts can then direct be applied in some way. The derivation event had yet to occur for Mr Bennetts. This case is distinguishable from Sent No.2, Hedges and White in this regard. It is also distinguishable from McNeil where the taxpayer derived income because the contractual provisions made it clear that the taxpayer's passive holding of sell back rights gave her an absolute entitlement to their value. A passive holding was not considered to be an 'implied direction' what was important in McNeil was the entitlement of the taxpayer. For Mr Bennetts it is the reverse position to McNeil. The contractual provisions do not give him any rights to any Income or Assets of the Fund until particular requirements are met. There is no absolute entitlement.
By email dated 6 June 2024,[34] Mr Gerardson attached Mr Bennetts' 'ledger' card from the Fund. That document indicates that interest was calculated by the Trustee as required by rule 28, but it says nothing about Mr Bennetts' entitlement to that interest. The same point can be made about the annexures to Mr Bennetts' objection.[35] Mr Bennetts has a mere expectation of income once he met the requirements of the Deed and the Rules. The recording of the calculation of interest is not the same as an entitlement, an application or a dealing on Mr Bennetts' behalf. Derivation cannot occur because the interest is subject to contingencies and additional steps before Mr Bennetts has any entitlement to it.
Mr Gerardson drew an analogy with the managed investment fund regime in suggesting that Mr Bennetts had a sub-account within the Fund.[36] In my view, this was a mere analogy for emphasis, and it does not make a difference to my holdings on the derivation point. Even if Mr Gerardson was right and there is a "sub account"[37] the operation of the Deed, Rules and Act do not provide that Mr Bennetts derives interest income any earlier than the Relevant Year as the mere calculation of interest does not give him any entitlement.
Finally, and for completeness, I note the reference made in the Applicant's SFIC at [25] to Australian Taxation Office Taxation Ruling TR 98/1 Income tax: Determination of income; receipts versus earnings ("TR 98/1"). That ruling is not law, but in any event, there is nothing in that ruling (which deals with accruals vs cash method of accounting for taxation) that is inconsistent with this decision. Other rulings from the Commissioner - for example the edited private ruling 1012079167245 - provide that interest that is credited to an account is derived, but this is in a context where "you allowed the entity to reinvest the money on your behalf." That is similar to White, Sent No.2, Hedges in that the derivation event had occurred. That is not the case here. Mr Bennetts does not have any entitlement to the interest income until the requirements of the Deed and the Rules are satisfied and this means the derivation event had yet to occur.

At a glance

Court

Decision date

Before

Source

Judgment (137 paragraphs)

Bennetts and Commissioner of Taxation (Taxation) [2025] ARTA 1092 (22 July 2025)

Parties

Legislation Cited (6)

Cases Cited (3)