High Court of Australia|1991-12-12|Before: Hugh JJ

Harmer v Federal Commissioner of Taxation [1991] HCA 51; (1991) 173 CLR 264 (12 December 1991)

HARMER v. FEDERAL COMMISSIONER OF TAXATION [1991] HCA 51; (1991) 173 CLR 264

Mason C.J.(1), Deane(1), Dawson(1), Toohey(1) and McHugh(1) JJ.

MASON C.J., DEANE, DAWSON, TOOHEY AND McHUGH JJ. In 1978, In Residence Pty. Limited ("In Residence") agreed to lend $125,000 to Riverhall Pty. Limited ("Riverhall") to be used by Riverhall in a proposed home unit development. In consideration of the loan, Riverhall agreed to pay to In Residence an amount equal to a specified share of the profits of the development ("the share of profits"). The project was successfully completed and Riverhall became liable to pay $198,195 under the agreement, consisting of the $125,000 principal and $73,195 as the share of profits. It found that there were four claimants to the money.

2. First, there was In Residence itself. It had gone into liquidation on 18 March 1980 and claimed through its liquidators. Second, there was Mr. Raymond Sweeney. He was an architect who had designed homes for In Residence and who claimed to have contributed $25,000 of the capital of the loan to Riverhall. Third, there was MPP Pty. Limited ("MPP"). It claimed that In Residence had, before its liquidation, assigned to it $100,000 of the loan and four-fifths of the share of profits. Finally, there was Amberwood Pty. Limited ("Amberwood") to which MPP had, subsequent to In Residence's liquidation, assigned its interest in the loan. Upon analysis, the claims involved two separate areas of dispute, namely, a dispute between the liquidators of In Residence and Mr. Sweeney about entitlement to one-fifth of the principal of the loan and of the share of profits and a dispute between In Residence on the one side and MPP and Amberwood on the other about the balance of the principal of the loan and of the share of profits.

3. Faced with this array of claimants, Riverhall commenced interpleader proceedings in the Supreme Court of Western Australia against In Residence, MPP, Amberwood and Mr. Sweeney. In accordance with the requirements of the Supreme Court Rules, Rules of the Supreme Court (W.A.), O.17, rr. 1 and 2, the application for relief by way of interpleader was supported by affidavit evidence that Riverhall: (a) claimed no interest in the amount owing other than for charges and costs; (b) did not collude with any of the claimants to the benefit of the amount due; and (c) was willing to dispose of the amount of the debt in such manner as the Supreme Court or a judge thereof might direct. On 30 June 1981, it was ordered by a judge in Chambers that Riverhall pay the $198,195 into court and that the defendants to the interpleader proceedings (i.e. the four claimants) have liberty to apply for the purpose of having the moneys placed on interest bearing deposit pending the determination of the proceedings. Subsequently, and before the entitlement of any of the claimants had been determined, it was ordered by a judge in Chambers that the moneys paid into court be paid out to the solicitors for In Residence for investment with the Town and Country Building Society ("the Building Society"), that the investment be made in the names of the present appellants ("the appellants") "and that such moneys be held on trust by them pending the determination of these proceedings". The appellants were solicitors acting for one or other of the claimants. On 30 April 1982, the $198,195 was deposited with the Building Society on "a redeemable interest bearing investment deposit" in the names of the three appellants. Thereafter, and pending resolution of the issues between the claimants, interest accrued on the moneys held by the Building Society. During the financial years ended 30 June 1983 and 30 June 1984 ("the tax years"), interest in the amount of $39,883.30 and $30,665.90 respectively was derived.

4. In due course, the disputes between the claimants were resolved in the interpleader proceedings, either by the agreement of the parties directly concerned or by judicial decision. On 11 January 1985, declarations and orders to the following effect were made by the Supreme Court with the consent of In Residence and Mr. Sweeney for the resolution of the dispute between them:

"1. That Sweeney was entitled to $25,000 of the sum of

2. That In Residence was entitled to 20 per cent of the

3. That Sweeney receive from the money amounting to

Redeemable Investment Share Number 88672/2-153284 the

sum of $25,000 together with interest accrued thereon

from time to time calculated as and from the date of

deposit of such moneys until the date of payment of

4. In Residence do receive such sum as together with the

amount paid to Sweeney would equal 20 per cent of the

total moneys inclusive of interest thereon invested at

(the Building Society) in Redeemable Investment Share

5. (The Building Society) pay to Sweeney and In Residence

respectively from the account such sums to which each

6. In Residence pay Sweeney's costs fixed at the sum of

$3,500 to be paid by In Residence from its entitlement

in the moneys invested with the Building Society." See

Commissioner of Taxation v. Harmer (1990) 24 FCR 237,

dispute between In Residence, MPP and Amberwood by declarations and orders to the following effect:

"1. MPP and Amberwood are entitled to the sum of $100,000

and to a further sum equal to four-fifths share of the

profits of a home unit development payable by Riverhall

under the agreement dated 1978 between In Residence and

Riverhall.

2. Four-fifths of the amount including interest thereon if

any, standing to the credit of (the Building Society)

Redeemable Investment Certificate 088672/2-153284 be

paid to the solicitors for MPP and Amberwood with

liberty to apply." ibid., at p 240.

3. In Residence pay the costs of MPP and Amberwood to be

taxed as one set of costs on a sum applicable to an

amount in issue of $158,000.

Ignoring the orders for costs, the effect of the two sets of orders can be shortly summarized as follows. Mr. Sweeney was entitled to $25,000 of the $125,000 principal. In Residence was entitled to the share of profits attributable to that $25,000. MPP and Amberwood were entitled to the other $100,000 of the principal and the share of profits attributable to it. The interest already earned on the moneys deposited with the Building Society, including the interest derived during the tax years, became payable to the claimants in proportions corresponding to their proportionate entitlement to the funds.

5. It is plain that any interest which accrued on an amount which had been ordered to be paid to a particular claimant after the making of the relevant order constituted assessable income of that claimant. The interest derived during the tax years was, however, all derived before the making of any order and at a time when the conflicting claims of particular claimants had not been resolved by either agreement or decision. By notices of assessment dated 5 March 1986, the respondent, the Commissioner of Taxation, assessed the appellants, as trustees of an alleged "Court Trust", to income tax and penalty tax in respect of the whole of the interest derived during the tax years. The assessments purportedly issued pursuant to the provisions of Div.6 of Pt III of the Income Tax Assessment Act 1936 (Cth) ("the Act").

6. The appellants objected to the Commissioner against the assessments in respect of the tax years. Their objections were disallowed. They appealed from the disallowance to the Federal Court. At first instance, the appeals were heard by French J. who upheld the appeals and set the assessments aside on the ground that, under the provisions of Div.6, the relevant interest was assessable income of the claimants, not the appellants. Appeals by the Commissioner to the Full Court of the Federal Court (Northrop, Wilcox and Lee JJ.) were unanimously allowed and it was ordered that the judgment of French J. be set aside and that the matters be remitted to him for the determination of an outstanding issue about a claimed deduction. The present appeals to this Court are from the judgment of the Full Court.

7. It is now accepted, and rightly accepted, by the appellants that the interest which was earned during the tax years was payable to them as trustees of a trust. The appellants, by participating in the investment in their names of the deposit on the footing that the moneys were to be held on trust in accordance with the order made by the judge in Chambers, took and held the title to the investment as trustees. The only issue remaining in the case is whether the interest constituted income to which there was no beneficiary "presently entitled" for the purposes of s.97(1) of the Act. If some person or persons were, for the purposes of s.97(1), "presently entitled" to the interest earned on the moneys deposited with the Building Society, the effect of the interacting provisions of Div.6 of the Act in the circumstances of the case would be that that interest was included in the income of that claimant or those claimants and was not assessable pursuant to s.99A as income of the appellants as trustees. The appellants claim that, during the tax years, one or other of the claimants 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) which provides that, for the purposes of the Act, 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".

8. The parties are agreed that the cases, see, in particular, Federal Commissioner of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199, at pp 215-216, 219-220; Taylor v. Federal Commissioner of Taxation [1970] HCA 10; (1970) 119 CLR 444, at pp 450-452; establish that a beneficiary is "presently entitled" to a share of the income of a trust estate if, but only if:

(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.

That being so, the question on the appeal is whether any one or more of the claimants either were "presently entitled" in that sense to the interest earned on the funds deposited with the Building Society or had a "vested and indefeasible interest" in that interest. That question must be answered as at the time when the interest was derived, that is to say, during the tax years. The fact that orders were subsequently made for payment of the interest earned in the tax years to one or other of the claimants does not assist the appellants unless those orders represented a judicial recognition of a present or relevantly vested beneficial entitlement to the interest which existed at the time when the interest was derived, that is to say, which existed independently of the actual order.

9. There are many circumstances in which trust money can be paid into court by a trustee either pursuant to an order made on the application of a beneficiary or pursuant to an application made by the trustee himself or herself. See, e.g., Trustees Act 1962 (W.A.), s. 99; Meagher and Gummow, Jacobs' Law of Trusts in Australia, 5th ed. (1986), par. 2303. In such a case, the funds paid into court remain subject to any pre-existing trust notwithstanding the payment in. If 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. If the interest of a beneficiary in the moneys is vested and the beneficiary has a right to demand and receive payment of income, the fact that the interest and the right are disputed and await vindication by the order of the court will not make the interest contingent or negate the existence of the right. That being so, if a beneficiary is found by the court to have had a pre-existing interest in the income, the fact that the interest was not admitted or its extent was not ascertained at the time of payment in or until the making of the relevant order does not mean that the beneficiary was not presently entitled to it both at that time and during the period pending the court's determination.

10. The moneys paid into court by Riverhall were not, however, moneys which it held as trustee. The primary relationship between Riverhall and In Residence was that of debtor and creditor. Notwithstanding that the effect of what had occurred was that In Residence held some (but not all) of its contractual rights against Riverhall in trust for one or other of the other claimants, it has not been suggested on behalf of the appellants that Riverhall itself at any time held property as trustee for any of the claimants. In these circumstances, it is necessary to determine the effect of the payment of the moneys into court and the subsequent deposit of the moneys with the Building Society in the name of the three appellants.

11. Upon payment into court, the $198,195 owed by Riverhall became "trust moneys" in the broad sense that neither the Accountant of the Crown Law Department, See Rules of the Supreme Court (W.A.), Third Schedule, cl. 1, nor the court itself was beneficially entitled to them. They were received by the court (through the Accountant as the appropriate officer) pursuant to the statutory provisions or Rules of Court under which they were paid in. After payment in, the claimants acquired an interest in the moneys in the sense that they were entitled to insist that they be properly administered and applied for the purposes for which they were paid in. However, no claimant was beneficially entitled to either the whole or any part of the moneys paid into court or of the interest earned thereon, see, e.g., Official Receiver in Bankruptcy v. Schultz [1990] HCA 45; (1990) 170 CLR 306, at pp 312-314. The moneys were received and held by the Accountant to be applied in accordance with the orders ultimately made by the Supreme Court. The 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. A fortiori, none had a present legal right to demand or receive payment of either capital or income. It follows that none of the claimants was "presently entitled" to the income of the fund for the purposes of s.99A of the Act during the period between the time of the payment in of the moneys and the time when they were received by In Residence's solicitors to be deposited with the Building Society.

12. The payment of the moneys to In Residence's solicitor involved a payment out of court. The perceived basis of the power of the Supreme Court to order that payment out for investment was not investigated in argument. It may have been the power impliedly reserved to the Supreme Court by the liberty to apply for investment of the moneys which had been reserved by the order for payment in see above. The reason for the payment out was, presumably, that there were difficulties about investment on interest-bearing deposit if the moneys had remained in court, cf. Civil and Civic Pty. Ltd. v. St. Martins Centre Pty. Ltd. (1989) WAR 59; Fermanis v. Cheshire Holdings Pty. Ltd. (1990) 1 WAR 373. The payment to the solicitor and the subsequent lodging of the moneys with the Building Society did not, however, alter any trust upon which the moneys were held when held by the Supreme Court. It is true that the claimants had an interest in the debt then owing by the Building Society to the appellants in the sense that they were entitled to insist that the rights of the appellants as the legal creditors of the Building Society (and in any moneys received from the Building Society) be held, exercised or applied in accordance with the orders of the Supreme Court. As had been the case when the moneys were held by the court, however, any beneficial interest of an individual claimant was contingent upon an order being made in his or its favour. Unless and until such an order was made, no claimant had any vested interest in the moneys lodged with the Building Society, in the interest earned thereon or in the rights of the appellants as legal creditors of the Building Society. If, for example, the whole of the moneys had been exhausted by orders of the Supreme Court in relation to costs, none of the claimants would ever have obtained a vested beneficial interest in any of the moneys otherwise than to the extent of his or its entitlement under those orders as to costs.

13. The fact that no claimant had a vested interest in any of the moneys paid into court until an order in his or its favour was made by the Supreme Court does not mean that the Supreme Court was doing other than discharging its ordinary judicial function in determining the competing claims of the claimants to the moneys paid into court. No claimant asserted that the moneys paid into court by Riverhall had been held by Riverhall as trustee. Riverhall had paid the moneys into court to resolve its liability as a debtor. In contrast with a case where the moneys paid into court are subject to a pre-existing trust and the dispute is between claimants to a direct and vested interest in the actual moneys, the function of the court in the present case was not to resolve a dispute between the claimants about beneficial ownership of the moneys themselves. As the orders actually made demonstrate, the function of the court in the present case was to determine the conflicting claims and counterclaims of the claimants as against Riverhall as a debtor. The moneys paid into court were not themselves the subject matter of dispute but were held to satisfy any order, including any order for costs, made by the court consequent upon its determination of those conflicting claims and counterclaims. Once the moneys were deposited with the Building Society in the names of the appellants holding as trustees, the moneys were held by them in that capacity to be dealt with in accordance with the order of the court and not otherwise. It is unnecessary to consider whether the contingent interests of the claimants in the moneys paid into court could be aggregated into a totality of beneficial ownership or whether the powers of the Supreme Court to make orders affecting the moneys, including orders as to costs, meant that one of the elements of an ordinary non-purpose trust was lacking. It suffices to say that the trust upon which the moneys were held was a trust for statutory purposes, seeFouche v. The Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609, at p 640, and that the legislative provisions, including Rules of Court, applicable to govern the payment of the moneys into court and their subsequent application effectively overrode any need of that element.

14. It follows that the Full Court of the Federal Court was correct in concluding that, during the tax years, there was no beneficiary presently entitled to the interest earned on the moneys deposited with the Building Society. As has been said, it is now conceded by the appellants that that money was held by them as trustees. It follows that the appellants were assessable pursuant to s.99A in respect of the interest earned during the tax years.

Tax Assessment Act 1936

Harmer v Federal Commissioner of Taxation [1991] HCA 51;

At a glance

Court

Decision date

Before

Source

Judgment (40 paragraphs)

Harmer v Federal Commissioner of Taxation [1991] HCA 51; (1991) 173 CLR 264 (12 December 1991)

Parties

Legislation Cited (1)

Cases Cited (7)