Charles v Commissioner of Taxation

[14]

In the relevant year, the appellant participated in half-yearly distributions of "cash produce". The amounts distributed included moneys belonging to each of the three classes comprised in the definition: dividends, proceeds of sale of rights, and profits realized on sales of securities. The question presents itself at once whether the case is distinguishable in any material respect from a case in which moneys of the same descriptions are distributed amongst beneficiaries by the trustees of a will or settlement, to whose hands the moneys have come in consequence of the exercise of usual powers to invest and to vary investments, and to whom the trust instrument gives a discretionary power to make such distributions. The assumption is that in the handling of the investments the trustees of the will or settlement are not carrying on a business. In such a case the character of the moneys in the hands of the trustees is clear: dividends are income, whether the companies concerned have paid them out of income profits or out of capital profits: Inland Revenue Commissioners v. Reid's Trustees [1] ; proceeds of sale of rights are accretions to capital, on the reasoning of Inland Revenue Commissioners v. Blott [2] ; and profits realized on sales of securities are necessarily capital. And in such a case the position of a beneficiary in respect of income tax upon the moneys distributed is equally clear. In so far as dividends are concerned, the case falls within s. 101 of the Income Tax Assessment Act, with the result that the beneficiary is deemed to be presently entitled to the amount paid to him out of the dividends as income of the trust estate, and as a consequence that amount is either included in his assessable income by force of s. 97 or taxed as a separate assessable income in the hands of the trustees by force of s. 98, according as the beneficiary is or is not free from legal disability; see the discussion of this group of sections in Federal Commissioner of Taxation v. Belford [3] . In so far as the proceeds of sale of rights and the profits realized on sales of securities are concerned, however, neither general principle nor statutory provision requires that such capital moneys of the trust should be treated as assessable income of the beneficiaries when distributed to them. Is there any such distinction between a case of that kind and the present that a different conclusion should here be reached?

[18]

A more difficult question, however, is whether it is not true to say of the entire amount of each half-yearly distribution that as a whole, without any distinction being drawn amongst its ingredients, it should be put into the category of income as being the fruit of the carrying out of a plan or scheme, devised by the managers, carried out by the managers and the trustees in co-operation, and joined in by the certificate holders, for the purpose of yielding regular periodical returns to the certificate holders upon their invested capital. This was not exactly the view taken by the commissioner when he made the assessment; he was content to treat that portion of the distributed fund which came from dividends received by the trustees as the income of the certificate holders derived from property; and it was only that portion which came from the proceeds of sale of rights and from profits on realizations of investments that he took to be the certificate holders' income from personal exertion as having arisen from the carrying out of a profit-making scheme. In order to support one or other of these views, counsel for the commissioner devoted a great deal of attention to the history of the dealings in securities and rights which actually took place in the course of the administration of the trust. The evidence established that these dealings were considerable; they occurred frequently and produced substantial profits. Indeed, most sales of securities were made at prices in excess of cost. Moreover, all the profits thus made, less such losses as were sustained, were paid out to the certificate holders in the half-yearly distributions, the managers exercising the discretion given them by cl. 13 (B) to include all these profits (less losses) in the "cash produce". This was a course of action which obviously had been contemplated from the beginning; and if the proper conclusion from the evidence were that the managers and the trustees co-operated in pursuing a systematic course of buying and selling securities for the purpose of producing profits and thereby swelling the half-yearly amounts of "cash produce" available for distribution to certificate holders, the commissioner's opinion that such profits should be treated as assessable income of the certificate holders when paid over to them would be clearly correct. But the evidence of the only witness in the case, Mr. T. R. Groom the managing director of Unit Trusts Ltd. was that at no time were securities acquired for the express purpose of re-sale at a profit, and that sales were normally made when the managers anticipated a fall in the value of shares. The purpose (he explained in effect) was to preserve for the fund any increase in value which had occurred and which it seemed likely would otherwise be lost. He said (p. 115) that the general policy of the managers was to hold the securities as investments, and that their "standard idea" in buying was to buy the best available securities and to hold them unless there appeared to be some very good reason for selling. The factors they had before them in buying, he said (p. 114), were security, realizability, yield and possibility of capital appreciation, in that order. They had said something similar in a report for the half-year ended 15th December 1946: " it is not the policy of the managers to buy securities with a view to their resale at a profit " Now, Mr. Groom's evidence on these points was accepted by the Board of Review who saw him as a witness, and on this evidence the majority of the Board made findings which a member, Mr. Bock, expressed in these words (p. 14): "The over-riding consideration in the changing of investment was to ensure security of capital, which, in the manager's view, included not only the purchase cost to them but also any advance in the market price which may have taken place after the date of purchase. From the witness's evidence I think it must fairly be said that during the relevant period the managers kept themselves closely informed of market trends and wherever they were of the opinion that securities were likely to fall in market value, parcels of shares were sold to avoid a reduction in value of each unit in the trust which would be consequent upon a decline in market value of the shares held". We would not be justified in taking a different view, and the case therefore cannot be treated as one in which beneficiaries receive from trustees profits made by the sale of property acquired for the purpose of profit-making by sale.

[19]

The view adopted by the Board of Review appears to have been that the amounts distributed to certificate holders ought not to be dissected and treated as partly income and partly capital according as the components of the fund of "cash produce" were derived as income or as capital by the trustees, but should be treated as distributive shares of a blended fund, provided for by the trust deed as the source from which investors in the trust fund should receive regular periodical returns, and possessing as a whole the income character of its principal ingredient, namely dividends and interest. But the fact that half-yearly distributions were prescribed by the trust deed, and that the moneys to be distributed were given by the deed a collective title, cannot suffice to change the character of those moneys. It is true that in the advertising matter which the managers used to promote sales of units - and thereby to obtain the seven and one-half per cent "service charge" which provided them with their remuneration for launching and carrying out the scheme - the language used was calculated to divert the attention of prospective investors from the fact that distributions would include capital moneys as well as income; and it could hardly fail to lead them, when weighing the relative advantages of investment in Trust units and investment in shares by purchase on the stock exchange, to think of the total sums likely to be received in half-yearly distributions under the Trust as comparable with the dividends likely to be derived from shares. But to obscure the facts is not to alter them. We are considering here moneys which fall into the distributable fund because they are the proceeds of sale of rights or profits realized on the sale of capital assets of the trust not acquired for the purpose of sale at a profit. The title of the participants to have those moneys included in the distribution depends, therefore, upon the very facts which give them their capital nature. The case is not like that of an annuity payable out of a capital fund, for the very conception of an annuity imparts its own character to the payments made, notwithstanding the character of the fund resorted to for the payment. Here, it is as capital moneys of two particular descriptions that the sums in question find their way, via the distributable fund, into the hands of the certificate holders.

Charles v Commissioner of Taxation - [1954] HCA 16 - HCA 1954 case summary — Zoe

At a glance

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Before

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Judgment (22 paragraphs)

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Cited By (4)