Commissioner of Taxation v Bamford

Commissioner of Taxation v Bamford - [2010] HCA 10 - HCA 2010 case summary — Zoe

[13]

In respect of the 2000 year, the subject of the taxpayers' appeal, the state of affairs giving rise to the dispute is more complex. Shortly put, the issue of construction concerns the application of the phrase "that share" in s 97(1) in circumstances where the entitlement of beneficiaries is not to fixed proportions of the income of the trust estate but, as to some beneficiaries, to specific amounts and, as to another beneficiary, to the residue.
The Trustee determined under the Deed that the income for the year ended 30 June 2000 be distributed, as to consecutive amounts of $643 each to a child of Mr and Mrs Bamford, the next $12,500 to Narconon Anzo Inc, the next $106,000 to the Church, the next $68,000 to Mr and Mrs Bamford in equal shares, and the balance to the Church. The Trustee determined pursuant to cl 7(n) of the Deed that certain outgoings be treated as expenses and, in error, treated them as allowable deductions in computing the net income of the trust estate for the purposes of s 97(1). This was shown as $187,530.
Upon making the distributions in the above sequence, there was insufficient remaining to provide the $68,000 to Mr and Mrs Bamford, and no balance to go to the Church. There remained $67,744, which was distributed equally between Mr and Mrs Bamford (ie each received $33,872).
Rather than being merely $187,530, the net income of the trust estate included the non‑deductible outgoings of $191,701. The Commissioner assessed Mr and Mrs Bamford by calculating the ratio which the actual distributions of $33,872 bore to the total of $187,530, and then applied that ratio to the excess of the net income addition of $191,701 over the distributable income. The Commissioner included the product of that calculation ($34,624) in the assessable income of each of the taxpayers. The taxpayers (contrary to the decision of the Full Court) contend that their share of the net income of the trust estate and thus the amounts included in their assessable incomes should have been ascertained as if the terms of the Deed, including the effect of any exercise of power of appointment over income, applied to the calculation of that "net income".
The difference between the parties' submissions may be illustrated as follows. Upon the taxpayers' case, if there were trust income of $300,000 and net income of $180,000 and a beneficiary with an annuity of $100,000, the beneficiary's assessable income would be fixed at $100,000. Upon the Commissioner's case, the beneficiary's assessable income would not be fixed at $100,000 but would be the same one‑third proportion (ie $60,000).

[14]

Before turning to consider further the relevant provisions of the 1936 Act, the following points of a general nature should be made respecting the intersection between the statute and the law of trusts.
First, both sides in argument on the present appeals accepted that whichever of the competing constructions of Div 6 were accepted examples could readily be given of apparent unfairness in the resulting administration of the legislation; it is more than 20 years since Hill J observed that "the scheme of Div 6 calls out for legislative clarification, especially since the insertion into [the 1936 Act] of provisions taxing capital gains as assessable income"[4]. Secondly, as Stone and Perram JJ emphasised[5] in the Full Court, the distinction between income and capital in trust law was a product of the administration of successive equitable estates with the balancing in particular of the concern of those with life interests in the receipt of income and those with remainder interests in the conservation and augmentation of capital. Thirdly, the "rules" which were developed in Chancery regarding apportionment between capital and income of receipts and outgoings and losses largely took the form of presumptions which would yield to provision made in the trust instrument[6]. Fourthly, against this background it was to be expected that the treatment of receipts and outgoings by a trustee would not necessarily correspond with that in a taxing statute such as the 1936 Act. Fifthly, the degree to which a revenue statute adopts or qualifies or supplants the general understanding of terms with a particular application in property law will be a matter of statutory construction, but bearing in mind the caution expressed by Lord Wilberforce in Gartside v Inland Revenue Commissioners[7] that the transfer from one context to another may breed confusion.
Finally, there is the difficulty that while the general provisions in s 17 and s 19 of the 1936 Act[8] speak of income derived by a "person" and a trustee will answer that description, the trust itself, in the absence of special provision in the legislation, will not be a separate entity with the distinct character of a taxpayer.
Writing of the provisions of the 1936 Act dealing with trusts and companies as they stood in 1958 Professor Ford said that looking at "a trust in the abstract" there appeared to be two methods by which it could be dealt with in the scheme of income taxation[9]. He continued[10]:

[28]

Nevertheless, the reach of Div 6 beyond settlements and testamentary trusts is illustrated by three decisions of this Court. The official receiver of the estate of a bankrupt was taxed under Div 6 in Official Receiver v Federal Commissioner of Taxation (Fox's Case)[14]. In Harmer v Federal Commissioner of Taxation[15] Div 6 applied to moneys paid into the Supreme Court of Western Australia where no claimant had any vested interest in them; it was sufficient to attract Div 6 that the effect of the relevant West Australian legislation and Rules of Court was that the moneys were held upon trust for statutory purposes.
On the other hand, in Registrar of the Accident Compensation Tribunal v Federal Commissioner of Taxation[16] the majority in this Court held that the Registrar was a trustee "pure and simple"[17] of awards of compensation required by Victorian legislation to be paid into a fund under control of the Registrar. The trusts were for the benefit of those entitled to the compensation moneys, as individual beneficiaries, notwithstanding that the trusts arose under the legislation, rather than as a result of the acts of individuals[18]. The result was that interest then earned was income of trust estates to which Div 6 applied.
Division 6 is now drawn to distinguish between a trust estate which is "a resident trust estate" and "a non‑resident trust estate" in relation to the relevant year of income (s 95(2), (3)). Nothing turns on that distinction for these appeals, which, it is accepted, concern resident trust estates. Section 97 is now expressed to be subject to the "closely held trust" provisions of Div 6D (ss 102UA‑102UV). The purpose of Div 6D is to provide the Commissioner with information respecting the "ultimate beneficiaries" of certain net income and tax‑preferred amounts (s 102UA(1)). A "tax‑preferred amount" includes "income of the trust that is not included in its assessable income in working out its net income" (s 102UI).
If a "net capital gain", as defined in s 995‑1(1) of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"), is made it will be taken into account in computing the net income of the trust estate within the meaning of s 95(1) of the 1936 Act as part of the assessable income, which is defined by reference to Div 6 of the 1997 Act[19]. Special rules found in Subdiv 115‑C of the 1997 Act then may allow beneficiaries to reduce their liability by their available capital losses and unapplied net capital losses.
So far as is presently relevant s 97(1) reads:

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