Glenn v Federal Commissioner of Land Tax

BEAUMONT and SACKVILLE JJ. INTRODUCTION This is an appeal from orders made by a Judge of the Court (Foster J.) in proceedings by way of appeal to the Court against decisions made by the Commissioner disallowing objections against assessments made under the Income Tax Assessment Act 1936 ("the Act") in respect of the year ended 30 June 1989. The assessments proceeded upon two bases: (1) that income earned from the deposit of monies with a bank pursuant to arrangements with respect to a major development project was income of a "trust estate" for the purposes of Division 6 of Part III of the Act; and (2) that the income was assessable at the special rate provided by s.99A of the Act where there is no beneficiary "presently entitled" to it.

There were two separate appeals before his Honour. In the first, Walsh Bay Developments Pty Ltd ("Walsh Bay") appealed against the Commissioner's decision to disallow Walsh Bay's objection to an assessment for the year ended 30 June 1989. In the second, Walsh Bay and the Maritime Services Board of New South Wales ("the Board") appealed against the Commissioner's decision to disallow their objection to an assessment for the same year. In both matters his Honour made orders answering two questions of law, as follows: "1. The question "was the income arising from the deposit with the Hong Kong Bank of Australia income of a 'trust estate' within the meaning of Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth)?" should be answered "yes". 2. The questions "was there a part of the net income of that trust estate, which was not included in the assessable income of a beneficiary of the trust estate in pursuance of s.97 in respect of which the trustee was liable to assessment pursuant to s.99A of the Income Tax Assessment Act? If so, what part?" should be answered "yes; the whole".

(See Walsh Bay Developments Pty Ltd v F.C. of T. (1994) 94 ATC 4682.) Walsh Bay and the Board now appeal from the determinations made by his Honour. Although his Honour's orders were, in strictness, interlocutory, the legal questions are sufficient to justify the grant of leave to appeal. We note, in this connection, that the Commissioner raised no objection to the competency of this appeal. THE BACKGROUND There is no dispute about the background to the assessments. The second appellant owned land at Walsh Bay, Sydney, which it proposed to redevelop. By a "Deed of Agreement, Walsh Bay", dated 12 January 1909 ("The Deed of Agreement") between Walsh Bay and the Board, the joint objective of the parties was stated to be "to ensure that the Development Area is redeveloped in accordance with t`e Total Development Objective" (cl.2.1). The first appellant was granted "the exclusive right to develop and manage the project in accordance with the Total Development Objective" (cl.3.2). That Objective was defined (cl.1.1) as: "...the development of the Development Area and the implementation of the Works, to achieve an integrated development comprising residential, hotel, serviced apartments, commercial office, retail, restaurant, tourist facilities, marina berths, with associated car parking which retains the historical integrity of the Development Area such development to be in accordance with the Works, the Development Programme, the Master Plan of the Development Area, the Concept Plans and Specifications and this Agreement."

Provision was made by the Deed of Agreement for application to be made by Walsh Bay to several authorities for development consent (cl.4.2). Walsh Bay was to confirm promptly in writing to the Board that all development approvals had been obtained upon conditions acceptable to Walsh Bay (cl.4.4(a)). If the notice was not received by the Board within 18 months of the date of the Deed of Agreement, either party could terminate the agreement (cl.4.4(b)). In the meantime, Walsh Bay was to make a substantial "up-front" payment upon conditions which are critical for present purposes and which will be described shortly. The learned primary Judge (at 4683), described this payment (of $74,566,000) as being "[i]n effect, ... a prepayment of rent in relation to property to be developed in the project". It appears that the basis for this inference was the circumstance that, if the arrangement proceeded to a satisfactory conclusion, the Board was to grant to Walsh Bay a lease of the premises at a nominal rent, in accordance with the provisions of the form of lease annexed to the Deed of Agreement (cl.5.6; Annexure "A", cl.2.1). The payment to the Board was dealt with by cl.8.1 of the instrument as follows: "8.1Payment to Board (a) The Developer [the first appellant] shall pay to the Board [the second appellant] no later than 3 business days after the date of this Agreement (and time shall be of the essence in this regard) by way of unendorsed bank cheque the sum of $74,566,000 (seventy four million five hundred and sixty six thousand dollars) together with the amount calculated pursuant to paragraph (e) of this clause ('the Sum'). (b) The Board shall at the date it receives the Sum deposit the Sum with the Hongkong Bank of Australia Limited ('the Bank') at the deposit rate being the average of the offer side of the banks quoting for the 30 day bank bill rate as displayed on Reuter B.B.S.W. page ('the Deposit Rate') at approximately 10.15 am on that date. The Sum shall initially be invested for a term of 30 days and thereafter shall be reinvested on a monthly basis at the Deposit Rate on the date that the Sum is reinvested. (c) The Board shall invest the Sum with the bank in the joint names of the Board and the Developer to be held on trust pending the receipt of the notice referred to in Clause 8.3 or the return of the Sum to the Developer in accordance with Clause 8.2. (Emphasis added) (d) The interest earned on the Sum shall be capitalised to the account. (Emphasis added) (e) The Developer agrees that the Board shall be entitled to interest on the amount of $74,566,000 calculated on and from 28 December 1988 up to the date of the payment of the $74,566,000 in accordance with paragraph (a) as if that amount had been invested during that period at the rate of interest described in paragraph (b) hereof." Pursuant to this provision, (para.(c) of which is central to the questions which now arise) an account was opened with the nominated bank in the joint names of the appellants and "the Sum" was paid into it. Provision was also made in the Deed of Agreement for the contingency that development approval might not be obtained: "8.2 Refusal of consents Subject to clause 13.2, if the Developer has paid the Sum and if the Project cannot proceed because Development Approval cannot be obtained or can be obtained only subject to the imposition of conditions which materially and adversely affect the commercial viability of the Project to the Developer or if this Agreement is otherwise terminated before the receipt of the notice referred to in clause 4.4(a) by the Developer or the Board in accordance with its terms then the Sum (together with interest as hereinafter defined) shall become the absolute property of the Developer and the Board acknowledges that thereafter the Board shall have no interest or claim whatsoever under any circumstances in respect of the Sum or the interest and the Developer shall immediately upon receipt of the Sum and the interest vacate such parts of the Land (if any) of which it is then in occupation and the Developer and the Board shall thereafter be released from any further obligations under this Agreement (except in respect of any antecedent breaches). The Board will forthwith do all things necessary on its behalf to ensure that the Sum and the interest is returned to the Developer in accordance with the terms of this clause. The Board shall deliver to the Developer any necessary direction to the Bank authorising the release of the Sum and the interest. In the event of the Sum being returned to the Developer in accordance with the provisions of this clause 8.2 all interest earned thereon shall be shared equally between the Developer and the Board provided that the Board's entitlement to such interest shall not exceed $1,000,000 (the quantum of interest to which the Developer is entitled being herein called 'the interest')." Provision was further made for the event that consents were obtained: "8.3 Issue of Development Approval Upon receipt by the Board of the notice referred to in clause 4.4(a) the Sum (together with all interest earned thereon) shall forthwith become the absolute property of the Board and the Developer acknowledges that thereafter the Developer shall have no interest or claim whatsoever under any circumstances in respect of the Sum. The Developer shall deliver with the notice referred to in clause 4.4(a) a direction to the bank authorising the release of the Sum (together with all interest earned thereon) to the Board." Part 13 of the Deed of Agreement dealt with "Performance Bond and Termination". Clause 13.1 provided for the Developer to deposit with the Board a bank guarantee in the sum of $10 million by way of "Project Performance Bond". Clause 13.1(c) provided: "(c)Subject to clause 11.2 the Project Performance Bond shall be immediately payable to the Board upon the Board notifying the Bank in writing that an event has occurred which entitles the Board to require payment to it of the Project Performance Bond. The Board shall not exercise this right unless the Developer is in default under this Agreement and has failed to rectify the default within the tame periods set out in clause 11.2. The Board shall only be entitled to apply such part of the Project Performance Bond as is necessary to rectify such default." By cl.13.2(c), it was provided: "(c)if the Agreement is terminated as a result of the Developer's breach hereunder the whole of the moneys payable under the Project Performance Bond (subject to the provisions of clause 13.1(c)) and the whole of the moneys referred to in clause 8.1 (subject to clause 13.7) shall become the absolute property of the Board and the Developer acknowledges that it shall have no interest or claim whatsoever in respect of such amount". Clause 13.7 made this "general provision":

"Notwithstanding the provision of clause 13.2(c), in the event that this Agreement is terminated as a result of the Developer's breach hereunder prior to the giving of the notice and direction referred to in clause 8.3, then the sum referred to in clause 8.1 (including all interest earned thereon) less an amount of ten million dollars (`the retention sum') shall be returned to the Developer. The retention sum shall continue to be held in trust on the terms of deposit referred to in clause 8.1 pending the resolution either by agreement of the parties, or in default of agreement by a court of competent jurisdiction, of any claim that the Board may have in relation to the whole or part of the sum arising as a consequence of the Developer's default. Upon resolution of the dispute such part of the retention sum (together with the interest earned thereon) as is payable to the Board shall be paid to the Board and the balance shall be immediately refunded to the Developer and each party agrees to do all things reasonably necessary (including the giving of appropriate directions to the Bank referred to in clause 8.1) to give effect to this clause. Nothing in this clause shall affect the operation of clause 13.1. Notwithstanding the foregoing provisions of this clause 13.7, the Board shall first apply the Project Performance Bond to satisfy any claim for damage or loss suffered by it." As at 30 June 1989, an amount of $5,268,240 had accrued by way of interest on "the Sum". However, the development of the project did not, ultimately, proceed. On 13 July 1990, Walsh Bay gave the Board written notice of termination. The notice was given on the ground, inter alia, that the Board had not received the confirmation that Development Approvals had been obtained within 18 months of the execution of the deed as contemplated by cl.4.4(b). But, as at 30 June 1989, no payments had been made out of the bank account. The assessments, as has been noted, proceeded upon the footing that the interest was income of a "trust estate" to which no beneficiary was "presently entitled" For the sake of completeness, we should record that, on 16 July 1990, the parties entered into a Deed of Termination and Release. Under this deed, the Board agreed to pay to Walsh Bay the whole of the sum deposited with the Hongkong Bank and interest thereon, except for the sum of $1 million which was to be released to it. Walsh Bay agreed to indemnify the Board against any liability to pay tax assessed on the interest earned on the investment of the Sum, as set out in cl.8.1 of the Deed of Agreement. THE RELEVANT PROVISIONS OF DIVISION 6 By s.97 of the Act it is relevantly provided: "97. (1) Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate - [Emphasis added] (a) the assessable income of the beneficiary shall include - (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; ... (2) A reference in this section to income of a trust estate to which a beneficiary is presently entitled shall be read as not including a reference to income of a trust estate - (a) to which a beneficiary is deemed to be presently entitled by virtue of the operation of sub-section 95A(2) where the beneficiary - (i) is a natural person; (ii) is a resident at the end of the year of income; (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and (iv) is not a beneficiary to whom sub-section 97A(1) or (1A) applies in relation to the year of income; ..."

"95A (1) For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary. (2) For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate." [Emphasis added] By s.99A(4) it is relevantly provided: "(4) Where there is no part of the net income of a resident trust estate - (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; ... the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section." Section 99A(2) provides for certain exceptions to the application of s.99A(4), but none of the exceptions are material here: "99A. ... (2) This section does not apply in relation to a trust estate in relation to a year of income, being a trust estate -

(a) that resulted from - (i) a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil; or (ii)an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate; (b) that consists of the property of a person who has become bankrupt, being property that has vested in The Official Receiver in Bankruptcy under the Bankruptcy Act 1966; (c) that is administered under Part XI of the Bankruptcy Act 1966; or (d) that consists of property of a kind referred to in paragraph 102AG(2)(c), if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income." The issue between the parties is whether, in the particular circumstances of the present case, there was income of a trust estate, and, if so, whether the provisions of s.99A(4)(a) were inapplicable for the reason that the relevant net income was, within the words of the sub-section, "included in the assessable income of a beneficiary in pursuance of s.97" (cf. Federal Commissioner of Taxation v Totledge (1982) 40 ALR 385 at 390). Put differently, the issues were (1) whether there was a trust of the interest; and (2) whether, during the tax year, one, or both, of the appellants was "presently entitled to the interest earned, either within the primary meaning of that phrase, or by reason of the deeming provision of s.95A(2) (that a beneficiary shall be deemed to be presently entitled to income of a trust estate in which he or she "has a vested and indefeasible interest ... but (to which the beneficiary) is not presently entitled") (cf. Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271). THE REASONING AT FIRST INSTANCE As has been mentioned, his Honour dealt with two separate questions. (1) Was there a "trust estate"? Foster J. was prepared to accept that the use of the words "on trust" in cl.8.1(c) of the Deed of Agreement were not conclusive of this question. However, his Honour remarked (at 4,687): "... in contrast to the informal use of the terms in the trustee bank account cases, the words, as they are used in the Deed of Agreement, have all the appearance of having been carefully chosen by the draftsman as reflecting the result of agreement between the parties reached after protracted and careful negotiation." The learned primary Judge concluded (at 4,687) that the parties intended to, and did in fact, create an express trust of the moneys invested: "It was their intention to constitute themselves trustees of the fund, retaining for that purpose only the bare legal title to it. The beneficial ownership of the moneys was to be determined in accordance with the contingencies provided by [cl.] 8 and [cl.] 13 ..."

His Honour held that all the requirements of a trust were present. (2) Was the income by way of interest assessable under s.97 or s.99A? Foster J. held that, within the meaning of s.99A, no beneficiary was "presently entitled" to the interest. His Honour said (at 4,691): "Until the occurrence of one or other of the contingencies, either the giving of the requisite notice or the termination of the project, neither Walsh Bay nor MSB were in a position to demand payment of the whole or portion of the income. The fact that they could, in theory, by mutual agreement, in circumstances where no third party interest was involved, have altered or extinguished the trusts is not to the point. No such thing occurred in the relevant year of income. The trusts which they had set up governed their relationship and also the question of entitlement to the corpus and income of the fund they had established. In the relevant year there was no 'amount of income that (was) legally ready for distribution'. Distribution awaited the occurrence of a relevant contingency." Foster J. was of the opinion that the present case was analogous to Harmer's Case where money was paid into court by way of interpleader and it was held that no person was presently entitled to the income. Foster J. went on to say (at 4,692): "... s.95A(2) does not assist Walsh Bay. In the relevant income year neither Walsh Bay nor MSB, in my view, had a vested and indefeasible interest in any of the income from the deposited funds. Neither had a vested interest until such time as occurrence of a relevant contingency caused such vesting. Even if there were an interest which could be described as 'vested' it was clearly not 'indefeasible' as it could be brought to an end by the occurrence of a relevant contingency." THE APPELLANTS' GROUNDS OF APPEAL By their grounds of appeal, the appellants contend that it should have been held (1) that the interest was not income of a "trust estate" for the purposes of Division 6; and (2) that, in any event, the income should not have been assessed under s.99A. CONCLUSIONS ON THE APPEAL Was There a Trust Estate? Mr Bloom QC, who appeared with Mr Sullivan for the appellants, accepted that the test of whether a trust has been created is, to use the language of Megarry V.-C. in Tito v Waddell (No.2) [1977] Ch 106, at 111:

"whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a true trust has been manifested". For his part, Mr Slater QC, who appeared with Mr Sharp for the respondent, did not dispute that the use of the words such as "in trust for" in a deed do not necessarily create a trust, since the circumstances may displace the inference that a trust was intended. In Kauter v Hilton (1953) 90 CLR 86, Dixon C.J., Williams and Fullagar JJ. accepted that this was the position in relation to a passbook account designated as a trust account (at 100):

"The effect of Joliffe's case [Commissioner of Stamp Duties (Qld) v Joliffe (1920) 28 CLR 178] is that the mere opening of an account under the section [of the Commonwealth Bank Act 1945] by one person in trust for another is not necessarily sufficient to make that person a trustee for the other person. All the relevant circumstances must be examined in order to determine whether the depositor really intended to create a trust. Even where it is held that a trust is intended it is still material to ascertain its terms". The question must always be the intention of the parties having regard to the circumstances and the language used by them. Some authorities have cautioned against introducing the "intricacies and doctrines connected with trusts" into commercial transactions: New Zealand and Australian Land Co v Watson (1881) 7 QBD 374, at 382, per Bramwell L.J., cited by Meagher J.A. in Walker v Corboy (1990) 19 NSWLR 382, at 398. But observations of this kind have usually been made in cases where the parties have not expressly stated whether they intended to create a trust. Walker v Corboy itself was an agency case, in which the parties had not specified whether the agent was to hold the proceeds of sale of farm produce in trust for the principals. Nonetheless, the observations of Priestley and Clarke JJA. in that case suggest that, if the parties to commercial transactions expressly agree that a trust relationship should be created between them, there is no reason not to give effect to the intention so expressed. Priestley JA (at 386) said this: "It seems to me to be prudent not to approach the question whether equitable doctrines are applicable in a commercial situation with the thought in mind that one should be disinclined to give a positive answer to the question. The question simply is, do the particular circumstances attract equitable rules. There is no reason to regret one answer rather than the other. If there are express agreements between parties to a commercial transaction, or a series of commercial transactions, requiring the application of equitable rules for their working out, then it is difficult to see that commercial life will be any the worse for those rules, which in one very real sense are as much legal rules as are common law rules, being applied. In situations where there is no express agreement, then ultimately whether a court will apply equitable rules will depend upon the court's understanding of the expectations of the parties implicit in their dealings with one another in the commercial milieu in which the particular dispute has arisen. It is to these areas that the court's factual and evaluative attention should be directed and upon which decision should be based."

(See also at 390, per Clarke JA.) The most striking feature of the present case is that the parties expressly agreed that the sum of $74,566,000 would be held in their joint names:

"on trust pending the receipt of the notice referred to in Clause 8.3 [that Development Approvals had been obtained] or the return of the Sum to the Developer in accordance with Clause 8.2 [because the Project cannot proceed]" (cl.8.1(c)). (Emphasis added.) That this was no casual or incidental reference to a trust is shown by cl.13.7, which provides for the retention sum to "continue to be held in trust on the terms of deposit referred to in clause 8.1". As Mr Slater pointed out, if ever there was a case of an agreement being drafted after careful consideration and with the benefit of legal advice, this was it. Because the judgment of the High Court in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264, affirming (1989) 24 FCR 237, was not delivered until after the Deed of Agreement was executed, the parties may not have appreciated the possible taxation consequences of creating a trust pending the events specified in cl.8.1(c). But that does not alter the fact that they used language unequivocally expressing an intention to create a trust. This is hardly a case where the parties did not mean what they said: cf. Winter v Grady (1921) 21 SR (NSW) 686 per Street CJ., at 690-691. Nor is this a case where the language employed by the parties loses its force by reference to the objective circumstances. In the absence of an express intention to create a trust, the fact that a person receives money which he or she is bound to keep in a separate fund, on terms contemplating that the fund will or may be paid to another person, is a powerful indicator that money is to be held in trust: Henry v Hammond [1913] 2 KB 515, at 521, per Channell J.; Walker v Corboy, at 385, 389, 397-398. In this case the deed contemplated specifically (as in fact occurred) that the "Sum" would be placed in a separate account, to be held in trust pending the occurrence of specified events. That circumstance adds weight to the conclusion that the parties clearly intended that the fund so constituted should be held in trust. Moreover, the terms of the Deed of Agreement make it clear that there was to be a separation between the legal title to the fund and the beneficial interest in the fund and interest thereon. The fund was to be invested in the joint names of the Board and the developer. If notice was given that the development approvals had been obtained, the whole of the fund, including interest, was to be paid to the Board. If the project could not proceed, the whole of the Fund, and interest, except for a share of interest not to exceed $1 million, was to be paid to the developer. If the agreement was terminated as a result of the developer's breach, the whole of the fund and interest, except for the "retention sum" of $10 million, was to be returned to the developer. The retention sum was to be held in trust pending the resolution of any dispute between the parties. Depending on whether the Board could establish a claim to damages greater than the value of the Project Performance Bond, the whole of the retention sum might ultimately be repaid to the developer. As Foster J. said, all the requirements of a trust - trustees, trust property, trust terms and cestuis que trust - existed.

Mr Bloom sought to overcome these indicia of a trust by contending that the relationship of the parties was intended to be governed by contract alone, at least until the conditions precedent to the entitlement to the fund or the interest thereon had been fulfilled. Until that point, no fiduciary duties were needed to enforce the parties' contractual obligations. In other words, until the time arrived at which the various contingencies did or did not come about, there was no occasion to invoke equitable principles. Mr Bloom pointed out that in Commissioner of Stamp Duties (Q.) v Livingston (1964) 112 CLR 12, at 22, the Privy Council had said, in the context of determining the nature of the interest of a residuary legatee in an unadministered estate, that: "[w]hen the whole right of property is in a person, as it is in an executor, there is no need to distinguish between the legal and equitable interest in that property, any more than there is for the property of a full beneficial owner.... Equity in fact calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines."

In our opinion, this submission pays insufficient attention to the principle that the one transaction may give rise from the outset both to contractual rights and to a trust relationship, depending on the intentions of the parties. In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, at 581, Lord Wilberforce rejected the "unattractive" argument that the loan from Quistclose to Rolls Razer, for the purpose of paying a dividend to the latter's shareholders, could give rise only to an action of debt and not to a trust enforceable in equity in favour of Quistclose:

"[The argument] means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower's creditors for whom he has not the slightest desire to provide. I should be surprised if an argument of this kind - so conceptualist in character - had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose...when the purpose has been carried out (i.e. the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it...". As Gummow J. observed in Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491, at 500, Lord Wilberforce's approach suggests that there was an express trust in Quistclose with two limbs, viz, a "primary" trust in favour of those entitled to the dividend and a "secondary" trust if the primary purpose failed. There is room for debate as to the precise beneficiary under the "primary" trust and as to when and why the so-called "purpose" fails (see P.J. Millett, "The Quistclose Trust: Who Enforces It?" (1985) 101 LQR 269, esp. at 290; C.E.F. Rickett, "Different Views on the Scope of the Quistclose Analysis": English and Antipodean Insights" (1991) 107 LQR 608). But it is clear from the analysis of Lord Wilberforce that Rolls Razer never acquired a beneficial interest in the moneys advanced by Quistclose; it acquired no more than a bare legal interest as trustee: Re Elizabethan Trust, at 501. In the end, the existence of an express trust must always be a matter of intention: Re Elizabethan Trust, at 502. In the present case, the parties clearly intended from the outset that they would jointly hold the legal title to the fund on trust to await the events specified in cl.8.1(c) and cl.13.7. It is true that the ultimate disposition of the beneficial interest in the fund would not be known until it was clear which of the contingencies provided for in the Deed of Agreement had occurred. But that is the case whenever a contingent interest in a fund is held in trust. There has never been thought to be any difficulty about a contingent interest being the subject matter of a trust. As H.A.J. Ford and W.A. Lee have pointed out, equitable contingent interests may be created by way of trust and are assignable: see Ford and Lee, Principles of the Law of Trusts (2nd ed 1990 para.404). Whatever may be the position in relation to the unadministered estate of a testator (see Official Receiver in Bankruptcy v Shultz (1990) 170 CLR 306 at 312-314), the fact that there are contingent interests in a fund is not incompatible with the existence of a trust: compare New Zealand Insurance Company Ltd v Commissioner of Probate Duties [1973] VR 659, at 664. Mr Bloom also contended that there was no need for the parties to have created a trust until the contingencies arose, because they were merely providing for the failure of the special purpose for which the fund had been created. The failure of the purpose would have attracted, in any event, a trust on the principles of Quistclose. Thus the parties' rights should be regarded as based on contract only until the contingencies occurred. In our view, this submission misstates the question that must be asked. It is not whether there was any "need" for a trust; it is whether the parties intended to create a trust. Since they have chosen to express their intention in unequivocal terms, it is not to the point that they might have achieved their objectives in another way, nor that a trust may have arisen in any event upon the happening of certain events. Nor is it necessary for us to consider the question, under the general law, of the entitlement to interest on a deposit held by a stakeholder (see P.J. Butt, Standard Contract for Sale of Land in New South Wales, (1985) 1st ed. at 219). Under the general law, a stakeholder may be said to hold a deposit: "as trustee for both [parties] to await the event .... Until the event is known, it is his duty to keep it in his own hands: or to put it on deposit at the bank: in which case he is entitled to keep for himself any interest that accrues ..."

(Burt v Claude Cousins & Co. Ltd. [1971] 2 QB 426 at 435-6).

But the language of the Deed of Agreement is inconsistent with any suggestion that the trustees could keep the interest for themselves. In any event, the creation of a trust in this case had consequences that the parties may well have considered important. As was pointed out in argument, the creation of a trust may have been thought necessary to avoid what otherwise could have been a statutory requirement that the MSB pay all moneys received by it, or on its behalf, into the Maritime Services Board Fund: see Maritime Services Act 1935 (NSW), ss.22, 23. (Whether the trust was effective for this purpose is not a matter that need be considered). The conclusion that a trust relationship was constituted is supported by the reasoning of the Court of Appeal of the Supreme Court of New South Wales in Stephens Travel Service International Pty. Ltd. (Receivers and Managers Appointed) v Qantas Airways Ltd. [1988] 13 NSWLR 331. There, an agreement between Qantas and a travel agent provided (para.1D(b)) that all moneys collected by the agent under the agreement were to be the property of Qantas and "shall be held by the agent in trust for the carrier ...". It was held that, notwithstanding that there was no requirement that the moneys be paid into a separate account, Qantas had a beneficial interest in them, and not merely a charge. After referring to Quistclose, Hope JA said (at 341): "The co-existence of legal and equitable remedies in respect of the same factual position is not a proposition of recent invention. Thus, in Re Hallett's Estate; Knatchbull v Hallett ... Sir George Jessel MR described the position at law and in equity concerning bailees who sell goods which have been bailed to them. The bailor could trace his property both at law and in equity. However his legal remedy stopped when the proceeds of the sale became part of a mixed fund, an undistinguishable mass. His equitable remedies went further and could be applied to the indistinguishable mass. But until that time, the bailor had a remedy both at law and in equity. This was the position without the support of any express agreement. If a deed of trust gave the trustee legal as well as equitable remedies, I know of no principle which would preclude a court from giving effect to either remedy. Undoubtedly Barclays Bank Ltd v Quistclose Investments Ltd was a different case to the present one but I see no reason why the generality of this language should be given a limited application which would make it irrelevant to the issue to be resolved in the present case. It is perhaps important to emphasise that in this case the Court does not have to infer what the parties intended to be the result of the agreement, or to imply a trust from the language which was used. There was an express agreement for a trust, the effect of which, subject to what is submitted to be the effect of other provisions in the agreement, would be clear. As I understand Barclays Bank Ltd v Quistclose Investments Ltd if the parties have agreed that legal and equitable rights and remedies should co-exist in the one transaction, the Court will give effect to that agreement. That is what par 10(a) and par 10(b) purport to do in the subject agreement. Undoubtedly the construction of apparently unambiguous words may be affected by the terms of an agreement when looked at as a whole, even though the construction may appear to do violence to some of the language which the agreement uses: Clough Mill Ltd v Martin ..., but the language of par 10(b) is so explicit that the case to alter its plain meaning would have to be a strong one." For these reasons we think that Foster J. was correct in concluding that a trust was intended to be created by the Deed of Agreement. The actions contemplated by the Deed of Agreement in fact took place. Walsh Bay paid the "Sum" to the Board and the Board invested the Sum with the Bank in the joint names of the parties. They thereupon became trustees of the fund on the terms of the trust specified in the Deed of Agreement. The fund in the bank account therefore constituted a "trust estate" for the purposes of s.99A(4) of the Act. WAS THERE A PRESENT ENTITLEMENT TO THE INCOME? Vested and Contingent Interests In order for a beneficiary of a trust to be "presently entitled" to a share of the income of a trust, within s.97(1) of the Act, it is necessary to show, as the High Court held in Harmer's Case, (at 271), that: "(a)the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b)the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment."

The condition specified in paragraph (b) may require some qualification to accommodate the case where the trustee may re-invest, accumulate, or otherwise deal with the income as the beneficiary directs, or on his behalf: Dwight v Commissioner of Taxation (1992) 37 FCR 178 per Hill J. at 189, referring to Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 per Latham C.J., Williams J. at 216. However, any such qualification does not affect this case. As we have noted, s.95A(2) of the Act deems a beneficiary to be presently entitled to income of a trust estate, if the beneficiary "has a vested and indefeasible interest in any income" of the estate. In this Court, Wilcox and Lee JJ. have said that the words "vested and indefeasible interest" are to be given their ordinary meaning: Federal Commissioner of Taxation v Harmer (1990) 24 FCR 237, at 252. The High Court did not need to address this issue in Harmer v FCT, but in Dwight v FCT, at 192, Hill J. adopted the approach of Wilcox and Lee JJ. Mr Slater submitted that neither of the appellants was presently entitled to any share of the trust income as at 30 June 1989, in the sense required by Harmer v FCT. Nor did either appellant have a "vested and indefeasible" interest in the income. Each of the appellants, at 30 June 1989, had only a contingent interest in the income earned by the fund. As Foster J. held, until the occurrence of one or other of the contingencies specified in cl.8.2, cl.8.3 and cl.13.7, neither of the appellants was in a position to demand payment of any portion of the income (cf. Federal Commissioner of Taxation v Totledge Pty. Ltd. at 393-8). It is helpful to deal with the matter from the standpoint of principle before turning to specific arguments put by Mr Bloom. A vested interest is one where the holder has an "immediate fixed right of present or future enjoyment": Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490, at 496, per Griffith C.J. In relation to land, an estate is vested in possession where there is a right of present enjoyment, as where A has a life estate or fee simple estate in the land. An estate is vested in interest where there is a present right of future enjoyment. Thus where T. holds in trust for A. for life and then in trust for B. in fee simple, B.'s equitable fee simple estate is vested in interest during A.'s lifetime. The estate will vest in possession on A.'s death: Glenn v Commissioner, at 496, Dwight v FCT, at 192. An estate is contingent if the title of the holder depends upon the occurrence of an event which may or may not take place: E. H. Barr, Cheshire's Modern Law of Real Property (11th ed 1972), 241. However, the mere fact that an estate will not fall into possession until the regular determination of a prior estate does not make the first estate contingent. As stated in C. Fearne, Contingent Remainders and Executory Devises (10th ed, 1844), vol.1, 216: "It is not the uncertainty of ever taking effect in possession that makes a remainder contingent; for to that, every remainder for life...is and must be liable; as the remainder-man may die...before the death of the tenant for life. The present capacity of taking effect in possession, if the possession were to become vacant, and not the certainty that the possession will become vacant before the estate limited in remainder determines, universally distinguishes a vested remainder from one that is contingent." For these reasons it is said that before a beneficiary is entitled to a vested interest two things must occur: "(a)his identity must be established; (b)his right to the interest (as distinguished from his right to possession) must not depend upon the occurrence of some event". (See Cheshire's Modern Law of Real Property, 242.) The distinction between a vested but defeasible interest and an indefeasible interest is stated by Fearne (vol. 2, 30) as follows: "A defeasible interest is an interest that is subject to be defeated by the operation of a subsequent or mixed condition.

An indefeasible interest, or an absolute interest as opposed to a defeasible interest, is one that is not subject to any condition." There is also a distinction between a contingent interest and a defeasible interest. The latter is a vested interest, which is liable to be divested by a supervening event. This distinction is not always easy to apply. For example, the rule of construction in Phipps v Ackers (1842) 9 Cl. & Fin 583; 8 ER 539, is that - "where a settlor makes a gift to A if A fulfils in the future some condition, and to B if A does not fulfil that condition, his intention is to make to A an immediate gift of the property including its income, of which, however, A is liable to be divested if and when the condition becomes impossible of fulfilment": In re Kilpatrick's Policies Trusts [1966] Ch 730, at 764, per Diplock L.J. The Effect of the Deed of Agreement In the light of these principles, it is difficult to see how, at 30 June 1989, either of the appellants could be said to have had a vested interest in the income then earned from the fund. The entitlement of Walsh Bay to any portion of the income was dependent on the occurrence of events which, considered as at 30 June 1989, might or might not have taken place. One of those events was that the project would not proceed by reason of development approvals being unobtainable or available only on unacceptable conditions. Another was the termination of the agreement before approvals were obtained (cl.8.2). Walsh Bay might also have received the whole or a portion of the retention sum pursuant to cl.13.7, depending on the outcome of any claim by the Board in consequence of Walsh Bay's default under the Deed of Agreement. But this, too, was an event which, considered as at 30 June 1989, might or might not ultimately have occurred. Subject to an argument made by Mr Bloom, that the Board was bound, whatever the course of events, to receive at least $1 million from the income earned by 30 June 1989, the Board's entitlement to that income at that date also depended on the occurrence of certain future events. If cl.8.2 ultimately came into operation, the Board would receive no more than $1 million of the interest. If cl.8.3 was triggered, the Board would receive the whole of the interest. Until the relevant events occurred, the income derived from the fund was to be capitalised to the account (cl.8.1(d)). Mr Bloom submitted that the effect of cl.8.2 and cl.8.3 of the Deed of Agreement was, at the very least, that the Board had an indefeasible entitlement to $1 million at 30 June 1989. But that argument overlooks cl.13.7. In the event of the breach by Walsh Bay, the whole of the "Sum" and interest thereon was to be returned to it, except for the retention sum of $10 million. On the surface, it may seem curious that Walsh Bay could have been better off if it breached the agreement than if it terminated the agreement because of the inability to obtain development approvals. However, the effect of cl.13.7 is that, where Walsh Bay was in breach, the Board was not necessarily to receive any portion of the income from the fund (although it was entitled to claim against the Project Performance Bond of $10 million, pursuant to cl.13.2). It follows that Mr Bloom's contention that, at the very least, the Board had an indefeasible entitlement to $1 million at 30 June 1989, cannot be accepted. For the reasons we have given, it would seem difficult to avoid the conclusion that the interest of the Board, and of Walsh Bay, in the income derived from the fund at 30 June 1989 was to have been contingent and not vested. However, Mr Bloom relied on three arguments to rebut this conclusion. The Timing Question First, Mr Bloom submitted that, at 30 June 1989, the Deed of Agreement stipulated precisely what was to happen with the interest earned to that point. Although the notice of termination was not served until July 1990, at the time of the assessment the fact that the agreement had been terminated was known. The division of the interest earned at 30 June 1989 was also known. Mr Bloom submitted that, in determining whether either appellant had a present entitlement to the interest at 30 June 1989, the facts known at the date of the assessment had to be taken into account.

In support of this argument Mr Bloom relied on the decision of Burchett J. in Zobory v Commissioner of Taxation, unreported, 1 May 1995. In that case the applicant stole $1 million from his employer, which he invested in various deposits in his own name. He was ultimately convicted and orders were made against him for return of the money and the interest earned. The question was whether the interest earned in particular years by the applicant on the stolen moneys was taxable as his income. Burchett J. held that the interest was not taxable, on the basis that the stolen funds were held on constructive trust for the employer. The employer was therefore entitled to the interest in the year the income was derived . This conclusion was not affected by the fact that the true position did not become known to the employer until after the end of the relevant year of income. See also R.A.C.V. Insurance Pty Ltd v Commissioner of Taxation [1975] VR 1. Zobory v Commissioner of Taxation is, however, very different from the present case. In Zobory all significant events had occurred by the end of the relevant financial year. It was only the knowledge of those events, at least as far as the employer was concerned, that had not come to light, at that time. The employer's entitlement to the interest earned during the financial year was established by events that had already taken place in that year. In the present case, the contingencies identified in the Deed of Agreement had simply not occurred by 30 June 1989 and in fact they did not occur until some 13 months later. In other words, at 30 June 1989, the entitlement of each of the appellants to interest earned at that time depended on uncertain future events and was therefore contingent. In Zobory the employer's entitlement to interest was indefeasible, albeit unappreciated. A Joint Entitlement? Mr Bloom's second contention, albeit one faintly argued, was that the interest in the fund was derived by the appellants jointly and therefore they were presently entitled to half the income earned at 30 June 1989. Once it is accepted, as we think it must be, that the appellants constituted themselves trustees of the fund, on the terms specified in the deed, there is no basis for concluding that they were entitled to the income jointly. Such a conclusion would fly in the face of the terms of the trust. For the reasons given by Foster J., there can be no merger of the legal and equitable interests in the fund: see In re Selous; Thomson v Selous [1901] 1 Ch 921, at 922, per Farwell J. Mr Bloom did suggest that the parties to the Deed of Agreement could be regarded as equally entitled to the income because, between them, they held the whole beneficial interest in the fund. They could therefore require the trustees (themselves) to hand over the fund. But the rule in Saunders v Vautier (1841) 2 Cr. and Ph. 240; 49 ER 282 entitles the beneficiaries under a trust to terminate the trust only if all who have any present or contingent interest in the property are ascertained, sui juris and consent to the termination: Meagher and Gummow, Jacobs' Law of Trusts in Australia, (5th Edition), 1986, para.2312. No such consent had been given by 30 June 1989 and the parties' respective beneficial interests in the fund were defined by the Deed of Agreement. Had the mere possibility of agreement between beneficiaries otherwise having contingent interests been enough to establish a present entitlement to income, Harmer's Case itself would have been decided differently. A Security Interest? Mr Bloom's third contention underwent some modification in the course of argument. Initially Mr Bloom argued that, under the terms of the Deed of Agreement, the Board had a vested and indefeasible interest in at least $1 million of the income from the fund. We have already rejected this argument. When the difficulties confronting this argument became apparent, Mr Bloom contended that Dwight v FCT supported the conclusion that the Board had a vested and indefeasible interest in the whole of the income from the fund, independently of any argument referable to the $1 million. In Dwight, funds were paid by a company, United States Surgical, into a bank account in the name of solicitors pursuant to orders made by this Court and the Supreme Court of New South Wales. These orders required United States Surgical to provide security for costs that might be awarded against it in the proceedings. Some additional amounts were paid into the security account by the company, in consequence of agreements between the parties to the litigation. The question was whether the solicitors, as trustees of the security account, were liable to taxation on the income on the basis that no person was presently entitled to the income until the resolution of the dispute and the making of a costs order. Hill J. held that United States Surgical had a vested and indefeasible interest in the income from the security account and was therefore deemed, by s.95A(2) of the Act, to be presently entitled to that income. The key to Hill J's reasoning is his assessment of the effect of an order to provide security for costs. His Honour took the view (at 186) that, where the security takes the form of an order that moneys be deposited in the names of solicitors pending the making of a costs order, the fund is held in trust for the party paying in the money. However, the other party to the litigation has rights in the nature of a lien or charge over the fund, to secure reimbursement out of the fund should an order for costs be made in favour of that party. Hill J. considered that an interest in a fund may be vested and indefeasible, notwithstanding that the fund is subject to a security interest in another party. His Honour said (at 192): "The mere existence of a lien or charge over the property does not convert an interest otherwise vested and indefeasible into one that is vested but defeasible, or not vested at all. When United States Surgical paid the moneys into the security account, the moneys remained its property, but became subject to a trust in that they were to be held by the trustees until a cost order had been made, and as security for the payment of costs ordered against it. The income on investments was to be retained by the trustee and held on the same trusts. It never ceased to be the income of United States Surgical, albeit that it could be dealt with by the trustee in the event of a court order for costs being made against United States Surgical, by the trustee paying the moneys to the successful defendants." Mr Bloom contended that the position in the present case was analogous to that in Dwight v FCT. The Board received the sum of $74,556,000 from Walsh Bay in accordance with cl.8.1(a) of the Deed of Agreement. The Board then deposited that sum, as its own money, with the Bank on the terms specified in the Deed of Agreement. In the event that the development approvals were obtained, the Board was entitled to a refund of the whole amount, including interest. If, however, the approvals were not forthcoming (as turned out to be the case), Walsh Bay was entitled to the whole amount, less $1 million. Walsh Bay's interest in the fund was thus in the nature of a security and the Board had a vested and indefeasible interest in the whole of the income. Mr Bloom's argument seems to depend on the Board having the beneficial interest in the moneys paid to the Bank immediately prior to the payment. Mr Slater contended that the Board was merely a trustee of the moneys received by it from Walsh Bay, because it was obliged to pay the sum to the Bank "at the date" of its receipt from Walsh Bay. The deed, if anything, appears to contemplate that, prior to the Board's payment of $74,560,000 to the Bank, that sum was beneficially held by the developer. For example, cl.8.2 refers to the Sum (less $1 million) being "returned to the Developer" if the appropriate approvals could not be obtained. Clause 13.7 uses similar language. However, even if it is assumed that the Board held the sum beneficially, if only for a portion of a day before payment to the Bank, this case is clearly distinguishable from Dwight. The sum paid to the Bank by the Board was not designated as security, either in the Deed of Agreement or in any subsequent documentation. The Deed of Agreement did not purport simply to recognise the pre-existing interest of the Board (if there was one) in the fund. Rather, as an independent matter, it created, prospectively, beneficial interests in the fund, the entitlement to which depended on the occurrence of contingencies specified in the Deed of Agreement. This is demonstrated by the language used in the Deed of Agreement. For example, cl.8.3 provided for payment of the whole fund, including income, to the Board if the required development approvals were not obtained. The clause stated that, upon receipt of the notice, the "Sum [plus interest] shall forthwith become the absolute property of the Board and the Developer acknowledges that thereafter the Developer shall have no interest...in respect of the Sum" (emphasis added). Clause 8.2 used similar language to prescribe what was to occur if the development approvals were not obtained, although it later spoke of the Sum and interest being "returned" to Walsh Bay. In Dwight, the party opposed to United States Surgical in the litigation acquired no interest in the security account, other than by way of charge or lien giving it recourse to the fund to satisfy the terms of a court order (37 FCR at 186). By contrast, the present Deed of Agreement conferred on Walsh Bay, depending on the circumstances, the beneficial interest in the whole of the fund, with or without a deduction of $1 million in favour of the Board. In different circumstances, the Deed of Agreement conferred on the Board the beneficial interest in the whole of the fund. In short, the parties were not concerned to establish a charge or lien or other security over the fund, but to provide for the disposition of the beneficial interests in the fund, according to which of the specified contingencies ultimately occurred. The differences between this case and Dwight do not mean that the present case is identical to Harmer's Case. In Harmer's Case, a company which was faced with competing claims to moneys it held, but in which it had no interest, paid the money into court in interpleader proceedings. The court subsequently ordered that the money should be paid into an interest bearing account in the names of the claimants' solicitors as trustees, pending resolution of the dispute. The joint judgment of the High Court identified two situations. In the first, trust moneys were paid into court, in circumstances where the funds remained subject to a pre-existing trust. The Court said (at 272) that: "[i]f some person or persons were presently entitled to the corpus or income before payment in, the fact of payment in to await the orders of the court will not, of itself, displace that present entitlement. If entitlement is disputed, the function of the court will be to identify existing interests in the money paid into court rather than to create new ones." The second situation was where the beneficial interest of the claimants was contingent upon an order being made by the Court. In those circumstances, it was said (at 273): "[u]nless and until such an order was made, no claimant had any vested interest in the moneys [invested]" In Dwight, Hill J. pointed out that the facts in Harmer differed from the case before him in two respects (at 188): "The first is that there was no suggestion in Harmer, nor could there have been, that the income was income of the party paying the money into court, or formed part of the general property of that person....The second is that the moneys in Harmer were held not as security for costs which a party may ultimately be entitled to, but to be dealt with in accordance with the order of the court consequent upon its determination of the conflicting claims to the moneys." In the present case, it may be accepted for the purposes of argument that the moneys paid to the Bank were those of the Board or, alternatively, of Walsh Bay. In that respect, at least arguably, the case is similar to Dwight. But, as with the court order in Harmer, the Deed of Agreement in the present case provided that the moneys were to be dealt with, not as security for any obligation that might be incurred by the Board (or Walsh Bay), but in accordance with the beneficial interests created by the deed. The interests so created were contingent in nature. This brings the case within the principles applied in Harmer. As the High Court there held (at 273),: "[t]he respective interests of the individual claimants were, at best, contingent. None had an entitlement to the capital or the income of the fund which was vested either in interest or in possession".

It follows that Mr Bloom's third argument fails. The Board was not presently entitled to the income from the fund at 30 June 1989, nor did it have a vested and indefeasible title to the income. Its entitlement was contingent upon the occurrences specified in the deed.

Conclusion It follows that the appeal in each matter should be dismissed, with costs.

I certify that this and the 40 preceding pages are a true copy of the reasons for judgment herein Date: 27 June, 1995 Associate:

Appearances: Mr D.H. Bloom QC, with Mr B.J. Sullivan, instructed by Mr Frank J. Giordano, Solicitor, appeared for the appellant. Mr A.J. Slater QC, with Mr P.A. Sharp, instructed by Australian Government Solicitor, appeared for the respondent.

Date of hearing: 19 May, 1995 Date of judgment: 27 June, 1995 Place: Sydney