Commissioner of Taxation v ElecNet

Division 6C of the Income Tax Assessment Act (ITAA)

The context of, and background to, Division 6C 15 Prior to the introduction of Division 6C of the ITAA, the ITAA provided for taxation of certain corporate unit trusts effectively as companies, at a rate to be set by Parliament (see s 102K). That Division was introduced in 1981. It was a response to what was described by Mr Howard as the "developing practice for public companies to transfer income earning assets to unit trusts so as to eliminate company tax on the income from those assets": Explanatory Memorandum to the Income Tax Laws Amendment Bill (No 3) 1981 (Cth). 16 Division 6B did not define a "unit trust" other than in relation to a "prescribed trust estate". We return to that concept below. However, in the second reading speech of the legislation that introduced Division 6B (the Income Tax Laws Amendment Bill (No 3) 1981 (Cth)), Mr Willis explained that a "unit trust is a trust where the beneficial ownership of the trust property is divided into units which are allocated to unit holders": HanHansard, House of Representatives, 13 October, 1981, p 1885. 17 Division 6C extended Division 6B to another type of unit trust. The genesis of Division 6C was a White Paper concerning the reform of the taxation system: Draft White Paper Reform of The Australian Tax System, June 1985, Australian Government Publishing Service. The White Paper drew attention to the "increasing use of trusts to avoid company tax arrangements and engage in income-splitting practices" (p 52 [5.1]; see also p 190 [16.7]). The White Paper then continued (at p 52 [5.2]): Public unit trusts [1] - eg fixed trusts - have operated for many years as a medium for collective investment. Unlike company income which is subject to tax at two levels, the income earned by public (and other) unit trusts is subject to tax only in the hands of unit-holders if distributed in full to them. However, some unit-holders are exempt bodies (eg exempt superannuation funds) which pay no tax on income distributed to them. In addition, capital receipts derived by unit trusts are not subject to tax in the trust's or unit-holder's hands. (Emphasis added) 18 Footnote [1] defined a "unit trust" as follows: "a unit trust is a trust in which the beneficial ownership of the trust property is divided into a number of units". This emphasises a core concept of a beneficial interest in the trust property and a functional description of that interest involving units. 19 The White Paper suggested a possible solution, which was to tax trusts and limited partnerships on the same basis as companies. But it indicated that further detailed study would be desirable because of the complexities in the area. An Appendix 5A described the taxation treatment of trusts in four selected countries. In two of those, the United Kingdom and New Zealand, the taxation treatment was described as concerned with unit trusts. We discuss the details of the legislation of those countries below at [23]-[29]. 20 In September 1985, the Treasurer, the Hon Paul Keating MP, circulated a paper entitled Reform of the Australian Taxation System. He explained how the draft White Paper had drawn attention to the increasing use of trusts to avoid company tax arrangements. He explained that the introduction of a dividend imputation scheme would reduce the incentive to use trusts, but there would still be an advantage for tax-exempt institutional investors to use a trust because imputation credits would not be refundable. He continued (at 65): To ameliorate that bias, it has been decided to extend company tax arrangements to those public unit trusts which operate a trade or business. Private trusts, and public unit trusts of the more traditional kind which invest in property, equities or securities will not be affected. 21 Division 6C was introduced into the ITAA by Taxation Laws Amendment Act (No 4) 1985 (Cth). In the Explanatory Memorandum to that Act, it was explained that the new Division 6C "will tax as a company the trustee of a public unit trust carrying on a trade or business (to be known as a 'public trading trust')". The Explanatory Memorandum also explained that the new provisions had been modelled on those in Division 6B. 22 The Explanatory Memorandum also explained (at p 10) that the Act would create a regime where the "taxable income of a public unit trust operating a trade or business will be taxed at a rate applicable to companies" which was then 46%. The Explanatory Memorandum continued, explaining that "distributions to unitholders of trust income or other profits derived by the trustee will be taxed on the basis applicable to dividends paid by a company". 23 As mentioned above, the White Paper gave examples of the taxation treatment of trusts in a number of countries. Two of those countries were described as having taxation laws concerned with unit trusts. 24 The first was the United Kingdom. The White Paper described how "Authorised unit trusts", which are similar to public companies, are taxed like companies in the United Kingdom. Although the White Paper did not refer to the relevant United Kingdom legislation, the definition of a unit trust at that time in the United Kingdom derived from the Prevention of Fraud (Instruments) Act 1958, ss 17, 28. That definition was adopted by the Income and Corporation Taxes Act 1970, s 358: "unit trust scheme" means any arrangements made for the purpose, or having the effect, of providing facilities for the participation by persons, as beneficiaries under a trust, in profits or income arising from the acquisition, holding, management or disposal of securities or any other property whatsoever. 25 This focuses, again, on the concept of persons having a beneficial interest in the trust property and the functional notion of a unit involving participation in profits or income. 26 A similar definition was continued in the Financial Services Act 1986 (UK), s 75(8) which provided that a "unit trust scheme" was "a collective investment scheme under which the property in question is held on trust for the participants". "Units" were described as the "rights or interests (however described) of the participants in a collective investment scheme". That definition was again applied in s 469(7) of the Income and Corporation Taxes Act 1988 (UK) which defines a "unit trust scheme" as having the same meaning as in the Financial Services Act 1986 (UK), apart from any specific exception created by Treasury. 27 The second country referred to in the White Paper as having a unit trust scheme was New Zealand. The White Paper described how in New Zealand a unit trust is generally treated as a company for tax purposes. In New Zealand, the Unit Trusts Act 1960 (NZ) defined a unit trust (with the exclusion of various different prescribed funds) as: any scheme or arrangement, whether made before or after the commencement of this Act, that is made for the purpose or has the effect of providing facilities for the participation, as beneficiaries under a trust, by subscribers or purchasers as members of the public, in income and gains (whether in the nature of capital or income) arising from the money, investments, and other property that are for the time being subject to the trust… 28 Again, there is the emphasis on the beneficiaries' rights under the trust being capable of being described as units in the functional sense involving participation in income and gains. 29 For the taxation treatment of unit trusts, the Land and Income Tax Amendment Act 1960 (NZ) inserted into the Land and Income Tax Act 1954 (NZ) s 153B, which relevantly contained the following provision in near identical terms to the Unit Trusts Act 1960 (NZ): 'Unit trust' means any scheme or arrangement, whether made before or after the commencement of this section, that is made for the purpose or has the effect of providing facilities for the participation, as beneficiaries under a trust, by subscribers or purchasers, in income and gains (whether in the nature of capital or income) arising from the money, investments, and other property that are for the time being subject to the trust … 30 This context and background to the introduction of Division 6C reveals a focus upon a "unit trust" in a functional way involving the existence of "unitholders" as beneficiaries under a trust who are involved in a collective trust investment scheme.

The operation of Division 6C 31 For relevant purposes, a broad summary of the operation of Division 6C is based on the definition of a "public trading trust" as follows: (1) section 102N defines the circumstances in which a unit trust will be a "trading trust", which broadly includes circumstances where, in relation to a year of income, the trustee carries on a trading business; (2) section 102P defines the circumstances in which a unit trust will be a "public unit trust" including when, at any time during a year of income the units are listed on an official stock exchange, offered to the public, or held by no fewer than 50 persons; and (3) section 102R defines the circumstances in which a unit trust is a "public trading trust" including when the unit trust is a "public unit trust" and also a "trading trust" and other qualifications are met. 32 Division 6C then creates a taxation regime for public trading trusts as follows: (1) section 102S provides for the taxation of the net income of the public trading trust at the rate declared by Parliament for the purposes of this section. That rate is 28.5% for small business entities and, otherwise, 30%: see Income Tax Rates Act 1986 (Cth) s 25. (2) Section 102T(16) has the effect of excluding the taxation provisions for trusts in Division 6 from applying to a public trading trust. (3) Sections 102T(11), 102T(12), 102T(14), and 102T(19) have the effect that the section dealing with taxation of dividends paid to a shareholder (s 44(1)) also applies to a unitholder in a prescribed trust estate. 33 The effect of these provisions concerning taxation of public trading trusts can be explained, in general terms, as follows. Prior to Division 6C, a trustee of a public trading trust would pay tax on net income under Division 6 at a marginal rate of, say, 49%. A beneficiary would not pay tax on any distribution. After the creation of Division 6C, a trustee of a public trading trust would pay tax at the rate declared by Parliament (current the same as for a company, 30%) and the beneficiary would pay tax on distribution at, say, 49% but with an imputation credit for the 30% tax paid by the trustee. The effect of Division 6C in this scenario is therefore to shift part of the tax burden from the trustee to the beneficiary. 34 The substantive taxation effect of a public trading trust is therefore achieved through s 102S (which provides for taxation of the net income as if it were company income) and s 102T (which provides for taxation of distributions as if they were dividends). 35 One complication arises where a trust is a public trading trust in one year but is not a public trading trust in the next year, or vice versa. Division 6C deals with this issue by a regime where the income of the trust is taxed on the basis of the nature of the trust when the income was earned. So, income earned by a trust while it was a public trading trust will be taxed in that manner even if it is distributed when the trust is no longer a public trading trust. And income earned by a trust that is not a public trading trust will be taxed in that manner even if it is later distributed when the trust has become a public trading trust. 36 This scheme was helpfully illustrated in a chart produced by senior counsel for Elecnet as set out below. Comparison of tax payable under Division 6 and Division 6C YEAR OF INCOME TAX 2013 2014 2015 Is trust a public trading trust? x x Net income of trust $100 $100 $0 Tax payable by trustee on net income assuming no distribution Under Division 6C -- $30 $0 Under Division 6 $49 -- $0 Retained Income $51 $70 $0 Distribution -- $51 $70 (from 2013 income) (from 2014 income) Tax payable by beneficiary on distribution -- $0 $49 Franking credit -- -- ($30)

37 As this chart illustrates, Division 6C operates so that the distributions from earnings by a public trading trust are treated in the same way as dividends but not when the distributions are from earnings by a public trading trust if it was not a public trading trust when that income was earned. 38 The central effects of s 102T in relation to the above are therefore (i) to tax distributions as if they were dividends, and (ii) to do so only by reference to a year in which the income was earned as a public trading trust. The provisions in s 102T which we have mentioned above rely, for these two effects, upon a drafting technique using the defined term of a "prescribed trust estate" and, in relation to it, defined terms of "unit", "unitholder", and "unit trust dividend". 39 These definitions are contained in s 102M at the commencement of Division 6C. That section provides that a "prescribed trust estate" is "a trust estate that is, or has been, a public trading trust in any year of income". Section 102M defines "unit", "unitholder", and "unit trust dividend" as follows: unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate. unitholder, in relation to a prescribed trust estate, means the holder of a unit or units in the prescribed trust estate. unit trust dividend means: (a) any distribution made by the trustee of a prescribed trust estate, whether in money or in other property, to a unitholder; and (b) any amount credited by the trustee of a prescribed trust estate to a unitholder as a unitholder; but does not include: (c) money paid or credited, or property distributed, by the trustee of a prescribed trust estate to the extent to which the money or property is attributable to profits arising during a year of income in relation to which the prescribed trust estate was not a public trading trust; or (d) money paid or credited, or property distributed, by the trustee of a prescribed trust estate in respect of the cancellation, extinguishment or redemption of a unit to the extent to which: (i) the money paid or credited or the property distributed represents money paid to, or property transferred to, the trustee for the purpose of the creation or issue of that unit; and (ii) the amount of the money paid or credited or the value of the property distributed, as the case may be, does not exceed the amount of money paid to the trustee, or the value, at the time of transfer, of the property transferred to the trustee, for the purpose of the creation or issue of that unit.

The Commissioner's ruling and the objection by the trustee Electrical Industry Severance Scheme (the EISS)

The request for a ruling 40 In December 2012, Elecnet requested a private ruling from the Commissioner. Several questions were asked of the Commissioner in the request, the first of which was for the Commissioner to confirm, consistently with his June 2006 ruling, that the EISS is, for the purposes of Division 6C Income Tax Assessment Act 1936 … for the 2012/2013 financial year and for subsequent years, a Unit Trust. 41 The further questions sought confirmation that the EISS was a Public Unit Trust (s 102P), a Resident Unit Trust (s 102Q), and an Eligible Unit Trust (s 102F) and hence was not a Corporate Unit Trust (s 102J(b)). 42 The request for a ruling explained that Elecnet was the trustee of the EISS which was established in February 1988 "in order to provide portability and security of termination and redundancy benefits to workers in the electrical contracting industry". 43 The request for a ruling also differentiated between "sponsors" of the EISS, "members" of the EISS, and shareholders in Elecnet. 44 The sponsors of EISS are the Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia ('ETU') and the National Electrical Contractors Associates ('NECA'). The request explained the intended operation of the EISS as follows: Broadly, the scheme under which the EISS operates involves employers within the relevant industry becoming members of EISS. The employer members are required to make weekly contributions to EISS in respect of their workers pursuant to obligations under industrial agreements or awards. EISS credits these contributions to an account in the name of each of the relevant workers. At such time as a worker's employment is terminated, EISS is, subject to the class of worker, generally required to make a severance or redundancy payment to the worker. 45 As for the "members" of the EISS, the request explained that active members were employers who are currently making contributions to EISS. The EISS has in excess of 31,000 active members and a number of inactive members, being employers who have contributed to EISS but are not currently making contributions. 46 The two shareholders of Elecnet are the ETU and the NECA. 47 The request for a private ruling did not explain the identity of the beneficiaries or objects of the EISS. However, this appeal was conducted on the assumption that the trust was one for persons, not purposes, and that the persons who were either objects or beneficiaries were those 31,000 workers who have accounts held in the EISS.

The Commissioner's ruling 48 The Commissioner notified Elecnet of its private ruling that the EISS was not a public trading trust for the purposes of Division 6C of Part III of the ITAA. The essence of the Commissioner's reasoning was that any beneficial interests of the Workers were not unitised, "that is they are not discrete parcels of rights over the income or capital of the Fund". The Commissioner held that the income of the Fund was not unitised and the interests in the capital were not unitised. 49 The reason why the capital was said not to be unitised was because (i) there were no provisions in the Deed that split "the capital of the Fund into discrete parcels of rights over the entire capital of the Fund"; (ii) the maximum benefit to a Worker was limited to the credit in the Worker's account (which could be less than the capital of the EISS); (iii) there is no entitlement to a Worker's account until a qualifying event happens, so until that event the Worker has only a power to compel the due administration of the trust; and (iv) the rights under the EISS are not an absolute, indefeasible entitlement because they are personal, they are incapable of assignment, and in some instances they may be forfeited. 50 Elecnet filed an objection to this notice of private ruling. That objection was disallowed in full. Elecnet appealed to the Federal Court.

The decision of the primary judge 51 The primary judge allowed the appeal. The essence of her Honour's comprehensive decision was twofold. 52 First, the primary judge concluded that the concept of a unit trust was that of a trust in which the beneficial interest in property or income of the trust is widely held, whether or not the interest is described as a "unit", and whether or not the trust is described as a "unit trust". In reaching this conclusion, the primary judge relied heavily on the inclusive definition of "unit" in s 102M. 53 As we explain below, the definition adopted by the primary judge is a key matter to be considered in determining whether a trust is a unit trust. However, as we explained in the introduction to these reasons, in light of the way in which this case was argued it is undesirable to attempt to formulate a definition of unit trust which would necessarily apply to every case. It suffices to say that a unit trust should involve at least the concept of persons, who can be described functionally as unitholders, and who will usually be entitled to the beneficial interest in property or income of the trust. 54 Secondly, the primary judge concluded that under the EISS Deed each worker has a discrete proprietary interest in the contributions paid in respect of that worker into the trust fund and standing to their worker's account. The primary judge concluded that each worker had that interest even though the worker did not have a present right to any immediate payment. This, in her Honour's view, was sufficient to give rise to a beneficial interest in the property of the trust estate within the meaning of "unit" in s 102M. For that reason, her Honour concluded that the trust was a unit trust.

The Commissioner's grounds of appeal 55 The Commissioner had nine grounds of appeal. Many of the grounds of appeal simply focused upon allegations of error in single paragraphs of the primary judge's reasons for decision without any basis for suggesting that, even if those paragraphs were in error, the appeal should be allowed. Other grounds of appeal were in the nature of submissions, distinguishing the application of other decisions. 56 The Commissioner's written submissions did not focus on the particular grounds of appeal. Instead, his written submissions essentially condensed the grounds of appeal into two issues which he submitted should be resolved as follows: (1) the proper construction of Division 6C requires that the meaning of "unit trust" in that Division is based on common attributes of a unit trust and not any definition in the Division which requires that the trust assets are divided into proportionate shares; and (2) the EISS was not a unit trust because the beneficial interest was not divided into proportionate shares or alternatively because the Workers did not have any beneficial interest in the property of the trust.

The Commissioner's submissions on this appeal 57 The heavy focus of the Commissioner's submissions concerning construction was directed towards an argument that the meaning of a "unit trust" was not informed by the definition of "unit" in s 102M relation to a prescribed trust estate (ie as including a beneficial interest, however described, in any of the income or property of the trust estate). Instead, the Commissioner's position was that a "unit" and "unitisation" should be given the following meaning: The concept of "unitisation" as invoked in these submissions is one of the trust estate being divided into discrete parcels of rights (which could be called units, certificates, receipts, shares, percentage interests, or something else) that are held by the beneficiaries, with each parcel … representing a proportionate share of the trust estate as a whole and with each beneficiary's interest being measured by the number of units held. 58 Senior counsel for the Commissioner applied this approach rigidly. He submitted that a unit trust involved no element of discretion either as to the existence of the trust objects or as to a power to distribute the trust assets or income (ts 21). On this approach, a unit trust with a single discretionary power to apply income for any purpose, or with a power to add to the list of unitholders, would cease to be a unit trust. As we explain below, there is nothing in the text, context, or purpose of Division 6C which could support such a construction. In his reply, junior counsel for the Commissioner wisely retreated from the scope of this submission. 59 In the alternative, the Commissioner submitted that if a unit trust required only that the Workers have a beneficial interest in the income or property of the trust estate as contemplated by the s 102M definition of "unit" then the Workers did not have that interest, or an interest sufficiently meeting the description of a unit trust.

The meaning of a unit in Division 6C 60 Senior counsel for the Commissioner submitted that the definitions of "unit", "unitholder", or "unit trust dividend" operated only as an "anti-avoidance" device concerned with ensuring that distributions are taxed by reference to the status of the trust in the year in which the income was earned. He submitted that it was contrary to ordinary methods of statutory construction to consider a definition which was confined to the concept of a "prescribed trust estate" as part of a determination of the meaning of a "unit trust". He submitted that the Court must first determine the meaning of a "unit trust" in order to ascertain whether a trust is a "prescribed trust estate" independently of the concept of a "prescribed trust estate". We do not accept any of these submissions. 61 Contrary to the submissions of the Commissioner, there are seven reasons which support the broader approach of the primary judge, which was to focus upon a "unit" as including a core concept of persons entitled to a beneficial interest in any of the income or property of the trust estate. Although this "core concept" is an important matter to be considered in the assessment of whether a trust is a unit trust, it is not determinative of whether a trust is a unit trust. It is a significant indicator, but must be considered together with an assessment of whether the trust fits the functional description of a "unit trust". The seven reasons which support the broader approach which permits regard to be had to the definition, together with the functional requirements of a "unit" are as follows. 62 First, the definitions in Division 6C are a drafting device. They are not anti-avoidance provisions. The drafting device is not merely concerned only with the timing of distributions. As we have explained above at [31]-[39], the drafting device is an integral part of the scheme which is the taxation of distributions from public trading trusts. 63 As the Explanatory Memorandum to Division 6C explained (at pages 78-79): "prescribed trust estate" is a drafting measure used to identify a trust estate that is a public trading trust (as defined in section 102N) in relation to a year of income, or that has been treated as a public trading trust in relation to an earlier year of income. This will facilitate the treatment, in the hands of unitholders, of distributions of income or profits (termed "unit trust dividends") derived during a year of income in which a trust estate was a public trading trust, as if those distributions were dividends received from a company. 64 Secondly, unlike the more limited applicability of the definitions in s 102T(27), the definitions of "unit" and "unitholder" are contained in the opening section to Division 6C and defined by reference to a "prescribed trust estate" which is itself a public trading trust. This definition is contained together with other definitions that have general applicability to public trading trusts generally such as the definition of "net income". 65 The co-existence of other general definitions at the start of Division 6C does not mean that the definition of "unit" can be unshackled from the limitation that it is "in relation to a prescribed trust estate". Parliament did not directly provide that the definition of "unit" was "in relation to a public trading trust". But it is significant that the limitation of the definition of a unit - a "prescribed trust estate" - was itself defined as a "public trading trust" and the use of the concept of "prescribed trust estate" was itself an integral part of the scheme concerning public trading trusts. 66 Thirdly, it could not be the manifested intention of Parliament to have different concepts involved in the notion of a "unit" for the purpose of taxing distributions of income from the notion of a "unit" for the purpose of taxing the income. 67 Fourthly, as we have explained at [16] above, the meaning of "unit" in the definition in Division 6C, if not taken as an exhaustive definition of "unit trust", is part of the meaning taken in the second reading speech to the legislation that introduced Division 6B (upon which Division 6C was based) where the unit trust was described as "a trust where the beneficial ownership of the trust property is divided into units which are allocated to unit holders". 68 Fifthly, as we have explained at [17]-[19] above, the same approach as contained in the definition of "unit" was part of the understood meaning of a unit trust in the White Paper, from which Division 6C was conceived, where reference was made to beneficial ownership and a functional approach to a unit trust was again taken. 69 Sixthly, as we have explained at [21]-[22] above, the same approach as contained in the definition of "unit" was again part of the meaning of a unit trust in the functional definitions of a unit trust in the United Kingdom and New Zealand legislation to which the White Paper had referred. 70 Seventhly, to the extent that there is a general conception of a unit trust in commercial equity, this is not inconsistent with including as part of the consideration of its meaning the inclusive definition of "unit" in relation to a "prescribed trust estate". This seventh matter focuses upon an understanding of the context to the meaning of the undefined term "unit trust".

The functional basis of, and metaphor involved in, a "unit trust" 71 For the reasons explained in the previous section, the defined terms "unit" and "unitholder" are important factors to consider in determining the meaning of the undefined term "unit trust". A core concept in the meaning of that undefined term will be whether persons have a beneficial interest in any of the income or property of the trust which can be functionally characterised as units. 72 Consistently with the context and background to Division 6C, although the core concept of beneficial interests in any of the income or property of the trust estate capable of being described as units is a useful guide to the existence of a unit trust, it is necessary to understand that concept in light of the functional basis of a unit trust and the metaphor which is involved in the concept of a unit trust. It is therefore necessary to explain three matters further: (i) the development of the unit trust and its functional basis; (ii) the metaphor of a unit; and (iii) the notion of a "beneficial interest".

The development of the unit trust and its functional basis 73 The reason for the emergence of the modern unit trust in the late 19th century may have been, as Dr Sin argued, due to "a misconceived evil in the concept of limited liability": K Sin The Legal Nature of the Unit Trust (1997, Clarendon Press, Oxford) 23. The unit trust certainly emerged, in the shadow of Black Friday, 1866, as a collective investment vehicle, sometimes with a promise of extravagant returns. There were differences from the limited liability company including the limited term of the unit trust and the redemption of units. However, early cases reveal that units were treated as shares, and issued to the public through a prospectus in the same manner as shares: Sykes v Beadon (1879) 11 Ch D 170, 181 (reporter's note); Smith v Anderson (1880) 15 Ch D 247, 256 (reporter's note). 74 In the two cases mentioned above, Sir George Jessel, as Master of the Rolls, held that the unit trust was an illegal association of persons because it was not registered under the Companies Act 1862. Although the latter of those decisions was reversed when it reached the Court of Appeal, almost all the existing unit trusts had already been wound up or reorganised as companies as the shadow of Black Friday had passed: K Sin The Legal Nature of the Unit Trust (1997, Clarendon Press, Oxford) 26-27. 75 Dr Sin has traced the re-emergence of the unit trust to the United States in the 1920's, particularly post-Depression: K Sin The Legal Nature of the Unit Trust (1997, Clarendon Press, Oxford) 27-32. As the concept of a unit trust developed, different forms emerged. One form, which was described as a fixed unit trust involved a portfolio of investments which generally did not change. The portfolio was described as a unit and divided into sub-units which were sold to investors. New portfolios could be created and divided in the same way, although conceptually it may have been that each new portfolio constituted a new unit trust. 76 Another form of unit trust was described as a flexible unit trust. In the flexible unit trust, the manager and the trustee had the power to vary the nature and proportions of the investments which constituted the trust fund. Two different forms of flexible unit trust evolved. In one, which survived, the issue price of new units would be based upon the net assets divided by the existing units. In the other, which did not survive, the manager of the trust would purchase trust assets of a proportionate value to allow issue of new units to the manager to be sold to new investors. By 1956, the form of Trust Deed for the creation of fixed or flexible unit trusts was ubiquitous. A standard example, drafted by a Lincoln's Inn conveyancer, was published in a leading conveyancing journal: D Barker "Trust Deed for the creation of a Fixed or Flexible Unit Trust" (1956) 20 The Conveyance and Property Lawyer (NS) 765. 77 Modern commentary on a unit trust has focused upon functional descriptions based upon this history and practice rather than attempting any normative definition. For instance, in 1960, Ford wrote that "basically" a unit trust is an "arrangement whereby property is held on trust for a large number of investors. It is constituted by a deed regulating the rights, powers and duties of the parties to the arrangement". He emphasised that the unit trust was of one of two kinds: either fixed or flexible: H A J Ford "Unit Trusts" (1960) 23 Modern Law Review 129, 129. See also H Ford "Public Unit Trusts" in R P Austin and R Vann The Law of Public Company Finance (1986) 397, 400.

The metaphor of a "unit" 78 The concept of a "unit" in the undefined term, "unit trust", in Division 6C is not merely a functional description. It is also a metaphorical description. The metaphor supplies an image of the trust assets being divided into units which are owned by beneficiaries. This is perhaps an example of Lord Mansfield's aphorism that nothing in law is so apt to mislead as a metaphor. But the metaphor was applied literally by the Commissioner. 79 The private ruling of the Commissioner asserted that the concept of a "unit" involved a beneficiary's interest being "determined by the quantity of the parcels of choses in action held by the beneficiary" so that the unit holder is entitled to "a proportionate interest in the whole of the trust estate". This was said to contrast with the "interests of beneficiaries in fixed trusts" who were said to "have beneficial interests in particular property or rights to property belong to particular persons". 80 The same submission was made by senior counsel for the Commissioner on this appeal. He submitted that the difference between a fixed trust and a unit trust was that a fixed trust gives the beneficiary an interest in a "particular part … as compared with an interest in the trust property as a whole". He submitted that a unit trust was a species of fixed trust where there was no discretion involved and where the "unit" was measured as a percentage or proportion of the whole of the trust assets: ts 17-18, 20-21. 81 The Commissioner's approach to fixed trusts is not wholly without authority. A decision which supports the Commissioner's approach is the ex tempore decision of the English Court of Appeal in Hunter v Moss [1993] EWCA 11; [1994] 1 WLR 452. In that case, the Court of Appeal considered whether there was certainty of subject matter of a trust which, the trial judge had found to be created by a defendant's declaration that he held 50 of his 950 issued shares in a company on trust for the plaintiff. The Court of Appeal considered that the subject matter was sufficiently certain although the court accepted that the subject matter would not have been certain if the declaration had been of a trust over 50 out of 950 bottles of wine: see Re London Wine Company (Shippers) Ltd [1986] PCC 121. 82 The reasoning in the ex tempore decision in Hunter v Moss was very controversial. It was described by Heydon and Leeming as a "strongly criticised decision": Jacobs' Law of Trusts (7th ed, 2006) 68 [523]. It was the subject of withering criticism by Professor (now Justice) Hayton who described the decision as have been given "perilously close to the vacation". As Hayton argued, the trust could easily have been created by Moss declaring himself the trustee of one nineteenth (ie 50/950) of all his shares in favour of Hunter. But the obvious problem of creating a trust of 50 of the 950 shares was that there was "no certainty as to which 50 of the 950 shares the trust relates": D Hayton "Uncertainty of subject matter of trusts" (1994) 110 Law Quarterly Review 335, 336. 83 The reasoning in Hunter v Moss was rejected by Campbell J in White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650, 683 [190] where his Honour said that the reasoning "simply assumes, or asserts, that it is possible for a person to declare himself trustee of a particular number of the shares he holds in a particular company". An appeal from this decision was dismissed: Shortall v White [2007] NSWCA 372. And even before Hunter v Moss had been rejected in White, it was considered in England at first instance by Neuberger J who, although bound to apply it, recognised the force of the criticisms of the decision and acknowledged that English law had departed from Australian law: Re Harvard Securities [1997] EWHC Comm 371; [1997] 2 BCLC 369, 381, 385. 84 For these reasons, we reject the Commissioner's contrast between a fixed trust involving an interest in "particular property" and a unit trust which was said to be a fixed trust involving a proportionate share in the trust rights. However, there is no doubt that a fixed trust involving a proportionate share in the trust rights can be a unit trust. In Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598, 605, the High Court (Dixon CJ, Kitto and Taylor JJ) considered a trust where the trust fund was "divided into 1,700 units". Relying upon Baker v Archer-Shee [1927] AC 844, the court said that "a unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed". 85 A description of a fixed trust of intangible rights as involving a percentage interest of the beneficiaries in the trust rights also involves some imprecision. A beneficiary of a trust has an interest in the rights which are the subject of the trust but only in a derivative sense. The interest of the beneficiary derives through the interest of the trustee because it involves duties engrafted upon the trustee's rights. As Dr Whitley Stokes put it in 1882 on the Indian Trusts Act 1882 s 3, a trust "is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner…". Maitland made the same point in his Cambridge lectures when he said that equity "did not say that the cestui que trust was the owner of the land, it said that the trustee was the owner of the land, but added that he was bound to hold the land for the benefit of the cestui que trust": F W Maitland, Equity also the Forms of Action at Common Law (Cambridge University Press, 1910) 17-18. 86 The same point has been iterated and reiterated in Australia. In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510, 518-520, in a passage quoted in part by the High Court in Commissioner of Taxation v Linter Textiles Australia Ltd (In Liquidation) [2005] HCA 20; (2005) 220 CLR 592 [30], Hope JA explained that although the equitable estate is an interest in property, its essential character still bears the stamp which its origin placed upon it. Where the trustee is the owner of the legal fee simple, the right of the beneficiary, although annexed to the land, is a right to compel the legal owner to hold and use the rights which the law gives him in accordance with the obligations which equity has imposed upon him. 87 Similarly, in Re Transphere Pty Ltd (1986) 5 NSWLR 309, 311, McLelland J emphasised that a trustee who had legal ownership has all of the rights at law of the absolute owner but the beneficiary "has the right to compel him to hold and use those rights which the law gives him in accordance with the obligations which equity has imposed on him by virtue of the existence of the trust". His Honour continued, adding that the right of the beneficiary "is engrafted onto, not carved out of, the legal estate".

A "unit trust" and a "beneficial interest" 88 As we have explained, the approach of the primary judge was to focus upon a meaning of a "unit trust" by reference to a core concept of persons entitled to a beneficial interest, capable of being described as a unit, in any of the income or property of the trust estate. That approach is supported by the text of Division 6C. It is supported by its history. It is supported by its context. And, to the extent to which it is relevant, it is supported by the general functional approach to a unit trust at the time of the enactment of Division 6C. 89 However, three points should be made about this "core concept" of a beneficial interest in the income or property of the trust estate. 90 The first point is that it may be possible that a unit trust could exist even in the absence of this core concept. It might be possible, although it is not necessary to decide the point in this case, to conceive of "units" which do not involve beneficial interests. The limited definition of a "unit" in Division 6C is an inclusive definition. Further, the functional analogy upon which the concept of the unit trust is based - being a comparison with the shareholders in a company - is not one which requires a beneficial interest in any of the income or property of the trust estate. 91 The early treatment of shareholders, particularly in a line of 18th century cases concerning the New River Company, regarded them as having equitable rights in the company's assets: Child v Hudson's Bay Co (1723) 2 P Wms 207, 208-209; 24 ER 702, 702 (Lord Macclesfield LC). However, that view has long since become a heresy: Macaura v Northern Assurance Co Ltd [1925] AC 619, 626 (Lord Buckmaster); and see C Cooke Corporation, Trust and Company: An Essay in Legal History (1950, Manchester Uni Press) 69-71. As the High Court explained of the unit trust in Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598, 609, "a unit held under this trust deed is fundamentally different from a share in a company". This is because a "share confers upon the holder no legal or equitable interest in the assets of the company". 92 The second point is that that the concept of a beneficial interest in the income or property of the trust estate does not exclude the possibility of a unit trust where the interest of beneficiaries under the unit trust is contingent rather than vested. A contingent interest has been described as an "equitable proprietary interest": Caboche v Ramsay [1993] FCA 611; (1993) 119 ALR 215, 230 (Gummow J); Benson v Cook [2001] FCA 1684; (2001) 114 FCR 542, 551 (Beaumont J), 561 (Kiefel J). 93 The third point is the converse of the previous two. Just as it might be possible that the core concept of a beneficial interest might not be necessary for a "unit trust", a unit trust will not necessarily exist simply because it is possible to point to a single beneficiary with some interest in either income or property of the trust estate. The definition in Division 6C which incorporates the concept of a "beneficial interest" is a definition of a "unit" not a "unit trust". The defined concept of a "unit" as a beneficial interest in any of the income or property of the trust estate should not overshadow the most fundamental question of whether a trust fulfils the functional description of a "unit trust". 94 There are two further reasons why care must be taken in the application of the criterion concerning the existence of a beneficial interest in the income or property of the trust estate capable of description as a unit. Both reasons relate to the breadth and imprecision of the expression "beneficial interest in the income or property of the trust estate". The first reason is that, as we have explained, the concept of a beneficial interest in the income or property of the trust estate is ambiguous. The second is that the idea of a "beneficial" interest or beneficial right should also be applied with care. Mr Swadling has argued that although the law recognises legal and equitable rights, "there is no third category of 'beneficial rights'". The term "beneficial right" does not contrast with a right that is owned, held on trust, or held as security: W Swadling "Explaining Resulting Trusts" (2008) 124 Law Quarterly Review 72, 90-91. Instead, as Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ explained, the term "beneficial" is usually employed in the law of trusts merely as a cognate of "beneficiary" to identify those persons for whose benefit the trustee administers the trust property: Commissioner of Taxation v Linter Textiles Australia Ltd (In Liquidation) [2005] HCA 20; (2005) 220 CLR 592, 612 [52].

Conclusion on the meaning of "unit trust" in Division 6C 95 Ultimately, it is neither necessary nor appropriate to attempt a conclusive definition of a "unit trust" in this appeal for the purposes of Division 6C. It is sufficient to say that whether a trust is a "unit trust" within the undefined meaning of that term in Division 6C requires the text of that Division (including its definitions) to be construed in light of a functional and descriptive understanding of the nature of a unit trust. It also requires a close examination of the particular trust deed in order to determine whether the functional nature of the trust operates as a unit trust. The text, context, and purpose of Division 6C illustrates that this examination will be assisted by consideration of the core concept of whether persons have (i) a beneficial interest in the income or property of the trust estate, which is (ii) capable of being functionally described as involving units. But even the absence of (i) will not necessarily be determinative.

The EISS is not a unit trust 96 With this background to a "unit trust", we turn to the question of whether the EISS is a unit trust. 97 The first recital to the EISS explains that the Sponsors (the ETU and the NECA) had agreed to establish the Scheme to provide benefits to Workers who leave or change their employment in the circumstances set out in the Deed. 98 Clause 4 provides that the Members of the Scheme (employers under clause 3) shall make Contributions to the Scheme in respect of each of the Member's Workers of various amounts which become part of the Trust Fund. 99 Clause 14 is concerned with the application of the income of the Trust Fund. It was common ground that the income of the Trust Fund was not "unitised". Clause 14.1 confers upon the Trustee a discretion to make payments from the income of the Trust Fund, limited to ten different purposes. Those purposes include making investments (14.1(a)), paying the reasonable administrative expenses of the Trust Fund (14.1(f)), making payments to Members (ie employers) (14.1(i)), and capitalising the income payments and making payments of the capital to ETU beneficiaries and to the NECA (14.1A, 14.2). It was common ground that any units held by the Workers were in relation to capital, not income (ts 2). The provisions allowing for capitalisation of income present an immediate difficulty for Elecnet as a consequence of this concession. 100 Clause 11 then provides for the application of the Trust Fund: (1) clause 11.1 provides that, subject to the provisions of the Deed (which include the provisions concerning distribution of income described above), the Trust Fund shall be maintained exclusively for making Severance Payments to Workers under clause 6; (2) clause 11.2 requires a Worker's Account to be established in the Trust's books of account in respect of each worker and requires the Trustee to credit and debit the accounts in accordance with clauses 6, 7, and 8; and (3) clause 11.3 provides that where a Worker "becomes entitled" to a Severance Payment then the Trustee shall deal with such entitlement in accordance with Clause 8. As will be seen below, the use of the word "becomes" is significant. 101 The fundamental clauses concerned with the application of the Trust Fund are therefore clauses 6, 7, and 8. Those clauses establish a regime as follows. 102 Clause 6 is essentially concerned with accounting credits. It provides for the means by which the Trustee establishes an accounting system which credits a Worker's account in respect of Contributions made by Members in respect of that Worker and payments made from particular schemes. 103 Clause 7 is essentially concerned with accounting debits. It provides for the circumstances in which the Trustee can debit a Worker's account. 104 Clause 8 is concerned with the benefits that might become payable to Workers. It provides for circumstances in which the Trustee shall pay to a Worker a Severance Payment and it provides for the manner in which the Severance Payment is to be calculated. 105 Although this broad outline might suggest a scheme by which entitlements were created for Workers which might satisfy the Division 6C functional definition of a unit trust, the details of those clauses belie that conclusion. There are three factors which, in combination, have the effect that, whatever interest a Worker may have in the property of the trust, the trust does not fit the functional description of a "unit trust". 106 First, any contingent entitlement that a Worker might have to a payment upon a Severance Event is subject to cl 8.1. That subclause provides that cl 8 only applies to a Worker who is an Active Worker. An "Active Worker" is defined as having "the meaning determined by the Trustee for the purposes of this Deed". 107 Clause 17 provides that subject to express contrary provision "every discretion vested in the Trustee shall be absolute and uncontrolled … and every power vested in it shall be exercisable in its absolute discretion". It may be that, despite cl 17, the power that Elecnet has under cl 8.1 would remain a fiduciary power. Like the phrase "for the purpose of the corporation", the expression "for the purposes of this Deed" might constrain the exercise of Elecnet's power to be for proper purposes or in the interests of the Scheme: see Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285, 289 (Mason, Deane and Dawson JJ quoting from the Privy Council in Howard Smith Ltd v Ampol Ltd [1974] AC 821, 835). 108 Senior counsel for Elecnet relied upon the decision in Forrest v Commissioner of Taxation [2010] FCAFC 6; (2010) 78 ATR 417, where this Court held that a power given to a trustee to determine whether a receipt was income or capital did not give the trustee the power to classify a receipt as a capital gain, when the receipt was, in truth, income. But this constraint - requiring honest characterisation - falls short even of the characterisation of a power as fiduciary. 109 In this case, even if Elecnet's power in cl 8.1 were a fiduciary power, to be exercised honestly and in accordance with the purposes of the Trust Deed, it remains a power of appointment. Elecnet, as Trustee, has the power to determine a criterion which would entitle a Worker to a contingent distribution. As senior counsel for Elecnet quite properly conceded, there must be content to the concept of an "Inactive Worker" (which is a defined term, again based on the exercise of the Trustee's discretion) (ts 70-71). 110 Secondly, there is the discretion of the Trustee to vary the amount standing to the credit of a Worker's account. One of the powers of the Trustee to debit the account of a Worker is provided in cl 7.1(e) as a power to debit "such other amount(s) (if any) which the Trustee determines is appropriate or equitable to debit to the Worker's Account of the Worker". Clause 7.2(c) provides that these debits can be "determined by the Trustee from time to time". 111 When cl 7.1(e) is read together with the breadth of the discretion of the Trustee in cl 17, it provides a broad discretion to adjust the credit standing to the account of any Worker. 112 Thirdly, cl 8.3 broadly provides for the amount of a Severance Payment to be made. The amount is calculated according to whether the balance of the Worker's account is more or less than the Prescribed Amount ($4,000). But in either case, it is calculated as either (i) an amount "up to and including the amount standing to the credit of the relevant Worker's account", or (ii) an amount "up to and including the Prescribed Amount" plus an amount "up to and including the balance of the relevant Worker's account". 113 Senior counsel for Elecnet submitted that the possibility of a payment which was less than the amount in the relevant Worker's account entailed a discretion of the Trustee. He submitted that the purpose of the discretion may be to deal with the circumstance where the trust assets have devalued to a point where they are less than the aggregate of the Workers' balances (ts 35). On that approach, the Trustee's discretion might be limited only to adjusting the amount of the distribution by reference to the value of the remaining trust assets. 114 Senior counsel for Elecnet did not suggest that the discretion in cl 8.3 is confined only to such a circumstance. We do not consider that it is. It is not expressed as being so limited. Nor is it clear how it would operate if it were so limited. For instance, would all Workers' accounts have to be adjusted if the trust assets had devalued to the point that they were less than the aggregate of the Workers' balances? If so, by what power would all accounts be devalued proportionately and would this devaluation occur only when the particular Worker's Severance Payment was being calculated? Further, why would the trust assets need to equal the aggregate of all Workers' balances in circumstances in which it could hardly be expected that all Workers would be the subject of a Severance Event? Finally, why would it be the accounts of all Workers that are devalued rather than only Active Workers to which cl 8 applies? 115 These three discretions, when considered together, have the effect that any interest that a Worker has under the EISS Deed is not capable of being described functionally as a unitised interest under a unit trust. The terms of the EISS Deed therefore depart so far from the functional concept of a unit trust, as reflected in the context and background to Division 6C, that the trust cannot be described as a "unit trust" within Division 6C. The trust would not be a unit trust whether or not it is correct to describe the Worker's interest as a beneficial interest in the property of the trust estate. 116 Two further points should be made about this conclusion. 117 The first point is that there was a dispute between the parties concerning whether the Trustee has a further discretion under the EISS Deed, cl 8.7, to choose whether to make a payment not to a Worker (being an Active Worker) but to persons such as Dependants of the Worker in such a manner and in such proportions as the Trustee determines. 118 In light of the breadth of the three relevant Trustee discretions discussed above, it is unnecessary to resolve whether cl 8.7 should be read literally as conferring such a discretion on the Trustee or whether it should be read as providing protection for a Trustee who makes a distribution, in the event of death or incapacity of the Worker, to a different person for the benefit of the Worker or his or her estate. 119 The second point is to reiterate that it is not necessary in this case to reach a conclusion in relation to the core concept involved in the existence of a "unit" as defined in Division 6C. The EISS was not a unit trust whether or not any Workers, or Active Workers, could be accurately described as having a beneficial interest in the property of the trust fund. The extent of the discretions involved might, on one view, militate against a conclusion that they had such an interest. On the other hand, and separately from the scope of the three discretions discussed above, any conclusion that the Workers did not have a beneficial interest would need to engage, which the submissions did not, with the interest that Workers may have upon dissolution of the trust under cl 23.4(c). That subclause broadly provides for distribution to Workers or a Reciprocating Scheme an amount by reference to the Worker's Account (after (i) expenses of winding up, and (ii) payment of any unspecified debts to Sponsors, Members, and Apprentices). 120 For completeness, we reiterate that whatever interest a Worker may have as a result of cl 23.4(c), we do not consider that the terms of cl 23.4(c) could convert the character of the trust into one which is a unit trust. No submission to the contrary was made by Elecnet. In any event, such a submission would have needed to engage with the terms of cl 23.5 of the EISS Deed which permits the Trustee to provide any dissolution benefits "in such form and by way of such arrangements and subject to such conditions as the Trustee and the Sponsors shall agree" and the additional requirement that the benefits are provided "in lieu of, and in full satisfaction of, the benefits which would or might have been or become payable from the Scheme but for the operation of this Clause". The latter part of cl 23.4 might engage the same three Trustee discretions described above at [105]-[114].

Conclusion 121 We would allow the appeal. In place of the first and second orders by the primary judge there should be orders that the application be dismissed. 122 Prior to this appeal the parties reached agreement that the Commissioner would fund Elecnet's legal expenses for the appeal and that, whatever the outcome, there would be no order as to costs of this appeal and the costs orders of the primary judge would not be disturbed. For those reasons, there should be no order as to costs of this appeal. I certify that the preceding one hundred and sixteen (116) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Pagone and Edelman.