Kafataris v The Deputy Commissioner of Taxation

Federal Court of Australia|2008-09-19|Before: Lindgren J

Introduction 1 The applicants in these two proceedings are husband and wife. Not intending any discourtesy, I will refer to them as "Helen" and "Peter" when it is necessary to distinguish between them. Each appeals to the Court against an appealable objection decision of the respondent (Commissioner) to disallow an objection to an assessment of income tax for the year of income ended 30 June 2002. 2 The facts of each case are, mutatis mutandis, identical. There is a statement of agreed facts. The appeals were heard together, the evidence in each being evidence in the other. 3 The appeals turn on the exception to the happening of CGT event E1 and the exception to CGT event E2 found, respectively, in s 104-55(5)(a) and s 104-60(5)(a) of the Income Tax Assessment Act 1997 (Cth) (the Act). The terms of those exceptions are, relevantly, identical. The relevant difference between ss 104-55 and 104-60 is in the primary provisions of those sections. Subsections 104-55(1) and (2) provide: (1) CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. (2) The time of the event is when the trust over the asset is created. Subsections 104-60(1) and (2) on the other hand, provide: (1) CGT event E2 happens if you transfer a CGT asset to an existing trust. (2) The time of the event is when the asset is transferred. 4 Importantly, in each section, subs (5) provides: CGT event E1[in s 104-60(5), the reference is to 'CGT event E2'] does not happen if: (a) you are the sole beneficiary of the trust and; (i) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); … Subsection (5) is in the nature of an exclusion, in common form, from the primary provisions of each section. 5 In each appeal the question is whether the applicant was: (1) the sole beneficiary of the trust concerned; and (2) absolutely entitled to the asset in question as against the trustee. As will appear, I have reached the conclusion in each case that the applicant was neither.

Facts 6 Sometimes, for convenience, I will refer to the facts relating to one of the applicants (Helen), but the facts relating to the other (Peter) are identical. 7 In May 1987 the applicants as joint tenants purchased a property at 22 Darlinghurst Road, Kings Cross NSW (folio identifier 13967/129) (the Property) for $612,000. For convenience, I will refer to the interest of each applicant in the Property as a half interest, although this is an oversimplified way of describing the interest of one of two joint tenants. 8 On 28 June 2002 the applicants executed two trust deeds in identical form (Deeds). Each was a deed poll executed by the applicants as a single party. In each Deed the applicants were called the "Trustees". Each Deed recited that the Trustees had decided to establish an indefinitely continuing superannuation fund (Fund) and to declare that one of the half interests in the Property would form trust property to be held on the terms of the Deed and Rules attached to the Deed (Trust) which were to have effect as if set out in the body of the Deed. The term "Deed" was stated to include a reference to the Rules. I will also use the term "Deed" as including a reference to the Rules. 9 The Deed relating to Helen's half interest established "the Helen Kafataris Superannuation Fund" and the Deed relating to Peter's half interest established "the Peter Kafataris Superannuation Fund". For brevity, I will call the respective Funds "Helen's Fund" and "Peter's Fund" without implying anything as to the questions I have to answer. 10 I will discuss the terms of the form of the Deed in detail below. It is not disputed that each Deed was effective to subject the half interest in the Property to the terms of the Deed relating to it. 11 On 4 July 2002, the applicants sold the Property to Marriott Restaurants Pty Ltd (Marriott) for $4,000,000. By that time each half interest had been held by the Trustees subject to the terms of the Deed relating to it for six days. 12 There is no evidence of the circumstances relating to receipt of the purchase money. For example, there is no evidence that one-half went into a bank account maintained in respect of one Trust, and the other half in respect of the other Trust. The evidence does not include evidence of the accounts, if any, maintained by the Trustees in respect of each Trust. In particular, there is no evidence within the records of each Trust of the crediting by the Trustees of half of the proceeds to an account for Helen or Peter, as the case may be.

Introduction to Legislation and Issues 13 Section 108-5(1) of the Act defines a "CGT asset" as, relevantly, "any kind of property", and subs (2) of s 108-5 provides that to avoid doubt, relevantly, "part of, or an interest in, an asset referred to in subsection (1)" is a CGT asset. The respective half interests of Helen and Peter in the Property were CGT assets. 14 Although it does not matter for the purposes of the exception in subs (5), it seems clear that it is s 104-55 rather than s 104-60 that applies in the circumstances of the case. Section 104-60 did not apply because there was no "existing trust" and no "transfer" to an existing trust. There could only be "an existing trust" if, prior to the transfer to which s 104-60(1) refers, there was already other property subject to the particular trust. But it is not disputed that the first property (and so far as the evidence reveals the only property) that was subjected to each Trust was the half interest in the Property of Helen or Peter, as the case may be. 15 Prior to execution of the Deeds, Helen and Peter owned their respective half interests in the Property beneficially. Although no document was executed by Helen or Peter as beneficial owner of a half interest, her or his execution as one of the Trustees of the Deed relating to her or his half interest was effective to subject that half interest to the relevant Trust, to sever the joint tenancy, and to attach trust obligations under the Deed to the half interest. Consistently with this analysis, there was not a "transfer" by Helen or Peter to an existing trust. 16 I need not characterise what happened as a "declaration" on the one hand or as a "settlement" on the other. 17 The expression "beneficiary" is not defined for the purposes of subs (5) of s 104-55 and of s 104-60. Nor is there a definition of the notion of absolute entitlement to an asset as against a trustee. However, s 106-50, which, like ss 104-55 and 104-60, is within Pt 3-1 of the Act, is relevant to this concept. It provides: If you are absolutely entitled to a CGT asset as against the trustee of a trust or (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. 18 This is a "see through" provision, and raises a fundamental question in relation to the applicants' appeals. 19 The applicants propound two inconsistent positions. First, they contend that the interposition of the Trusts had the effect that the sale to Marriott for $4,000,000 was not a sale by them as joint tenants and as beneficial owners of the entire interest in the Property as they had been prior to the establishment of the Trusts. They also contend that the sale was not two sales by them separately of their respective half interests. Rather, they contend that the sale was by the Trustees of the two half interests that were the subject of the respective Trusts. The CGT event that resulted from the sale of the Property to Marriott was treated as having arisen in respect of each Fund, not the applicants personally, in their assessable incomes for the 2002-2003 year. 20 On the other hand, in order to bring themselves within subs (5) of s 104-55 or of s 104-60, they must contend that they are each absolutely entitled as against the Trustees to the half interest in the Property the subject of the relevant Trust. But if this last contention is upheld, s 106-50 has the effect that Pts 3-1 and 3-3 of the Act apply to the Trustees' sales of the respective half interests to Marriott as if Helen and Peter respectively had sold them to Marriott - the very result that Helen and Peter have sought to avoid. 21 In sum, if, as the applicant's contend, the exception allowed by subs (5) of s 104-55 or of s 104-60 applies, s 106-50 also operates, and the applicants are taken to have sold their respective half interests in the Property to Marriott in the 2002-2003 year. If that subsection, and therefore s 106-50, does not apply, the applicants are caught by the primary provision of s 104-55 or s 104-60 in the 2001-2002 year.

The terms of each deed 22 It is clear that the object of each Deed was to ensure that each Fund was a "complying superannuation fund" within the meaning of s 42 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), with the consequence that it would be eligible for concessional tax treatment under Pt IX of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). 23 Clause 3 of each Deed provides: The assets of the Fund, including the initial real estate shall be vested in the Trustees upon trust to apply the same in the manner set forth in the Rules. I referred earlier to the recital in each Deed which made it clear that "the initial real estate" was a reference to the half interest in the Property of Helen in the one case and Peter in the other. 24 Clause 4 of each Deed provided that the Fund was to be managed and administered in all respects according to the Rules. 25 Clause 6.3 of the Deed provided that the Fund was to consist of all the cash, investments and other property for the time being held by or on account of the Trustees in accordance with the terms of the Deed and was to include, inter alia, "Contributions" by "Members" and contributions in respect of "Employer Supported Members" by "Employers" of those Members. As well, the Fund was to include moneys, investments, policies of insurance or assurance and other property transferred to the Fund from any other superannuation fund or arrangement. 26 Clause 6.4 provided that the purpose of the Fund was to provide superannuation benefits for Members and their "Dependants" after the retirement of a Member. 27 Clause 7.2 dealt with the appointment of trustees. As noted below, a question has arisen as to whether it can be said that Helen and Peter, the initial Trustees, were "appointed". Clause 7.2(b) provided that any person or combination of persons might be appointed or removed as trustees of the Fund only so long as: … (iv) Where the Trustees are individuals: (i) There shall be at least two Trustees; (ii) The Trustees shall comprise the persons required to be so appointed under the Act; and (iii) The Trustees shall be appointed by the Members by deed or other written instrument and the persons so appointed shall be the persons required to be appointed under the Act; … The expression "Act" was defined very broadly to include a wide range of Acts of the Parliament and regulations. I give the definition of "Act" below at [67]. 28 Clause 7.11 provided that the Fund was to be vested in the Trustees upon the terms and conditions and subject to the trusts, powers and authorities contained in the Deed, and was to be managed, administered and applied by the Trustees in accordance with the provisions of the Deed. 29 Clause 14 was headed "Membership of Fund". Sub-clauses 14.1 and 14.2 were as follows: 14.1 Eligibility Any person who is engaged in Gainful Employment or is appointed a Trustee or a director of a corporate Trustee and any Relative of a Member or a deceased Member may become a Member of the Fund. 14.2 Admission of Members Upon: (a) A contribution being made by or on behalf of a person to the Fund; (b) A person being appointed a Trustee or a director of a corporate Trustee; (c) The receipt by the Trustees from a Relative of a Member or a Deceased Member of a written application to join the Fund in the form of the Second Schedule to this Deed or in any other form as the Trustees may require; or (d) Any amount being credited to an account in the Fund in the name of a Relative of a member Then that person and / or relative shall become a Member of the Fund on the date in which the event occurred. It was not in contest that Helen made a contribution (of her half interest) to Helen's Fund, and that Peter made a contribution (of his half interest) to Peter's Fund. 30 The expressions "Dependant", "Member", "Relative", "Eligible Person" and "Gainful Employment" were defined in cl 4 of the Deed as follows: "Dependant" in relation to a Member or former Member means: (i) the Spouse of a former Member or the widow or widower of a deceased Member; or (ii) any child of a Member including any person who, in the opinion of the Trustee, is or was actually maintained by the Member as the child of the Member; or (iii) any other person who, in the opinion of the Trustee, was substantially dependent on the Member at the relevant time; "Member" means an Eligible Person that has been accepted as a Member of the Fund pursuant to sub-clause 14.2 of this Deed and who has not ceased to be a Member pursuant to sub-clause 14.11 and 'Membership' shall mean Membership of the Fund. "Relative" in relation to a member has the meaning given by the Income Tax Act. "Eligible Person" means any person who is engaged in Part-Time Gainful Employment or Full-Time Gainful Employment. "Gainful Employment" in relation to a Member means engagement in any business, trade, profession, vocation, calling, occupation or employment for gain to the extent required by the Relevant Requirements. I need not give the Deed's definitions of "Part-Time Gainful Employment" and "Full-Time Gainful Employment". I give the Deed's definition of "Income Tax Act" and "Relevant Requirements" below at [67]. 31 According to the statement of agreed facts, as at 28 June 2002, the date of execution of each Deed, at least the following persons fell within the definition of "Dependant" in cl 4: (a) in the case of Helen's Fund, Peter, (b) in the case of Peter's Fund, Helen; and (c) in the case of each Fund, the five children of Helen and Peter, whose first names are Con, George, Faye, Sandra and Christina. Further, according to the statement of agreed facts, as at 28 June 2002 the 15 grandchildren of Helen and Peter, not being Dependants as defined, nonetheless fell within the definition of "Relative" in cl 4. 32 Clause 16 required the Trustees to keep a complete record of all matters essential to the administration of the Fund. The clause provided that this might include an "Unallocated Contributions Account", a "Member's Non-Vested Accounts", "Member's Accounts [sic]" and a "Reserve Account". Clause 16.3, dealing with Members' Accounts described such accounts as follows: A Member's Account for each Member in which is to be recorded and credited or debited as the case requires: (a) … (b) … (c) Contributions to the Fund by the Member or by another person with written direction that the Contributions be allocated to the Member; … To take the case of Helen, she contributed her half interest to Helen's Fund, but in the absence of any evidence of the accounts maintained by the Trustees, it cannot be said that they credited that contribution to a Member's Account maintained for her. 33 Clause 17 regulated the making of contributions to the Fund. Clause 17.1 provided that each Member might contribute to the Fund in respect of that Member or the spouse of that Member, the amount the Member determines. Such contributions were to be credited to the "Member's account" (cl 17.6(a)) and might be in the form of cash or other property (cl 17.14). 34 Clause 23 provided for the winding up of the Fund and the distribution of any surplus. It suffices to say that the amount of any surplus to which Members, former Members and their Dependants are entitled is affected by the number of persons falling within that class at the time of the winding up and the manner in which the Trustees might exercise various discretions vested in them. 35 Clause 34 has assumed importance in the present appeals. It is headed "Benefits". It provides for the payment of "Benefits" to Members and other persons. Under cl 34.1(a)(i), upon the "Retirement" on or after the "Normal Retirement Age" of a Member, the Member is "entitled" inter alia, to a Benefit equal to the aggregate of the amount of the Member's Benefit and of that part of the balance of the Member's Non-Vested Account that the Trustees, in their absolute discretion, determine is to be included in the entitlement of and to be vested in the Member. 36 Clause 34.1(b) has the effect that the Benefit is payable at the option of the Member either as a "Lump Sum Benefit" or as a "Pension" Benefit. 37 Clause 34.12 deals with "Payments of Benefits by transfers in Specie". Paragraph (a) of cl 34.12 provides for the transfer of an interest in a policy on the life of the Member and is not of present relevance. Paragraphs (b) and (c) of cl 34.12 assume significance for present purposes. They provide: (b) Transfer of Investments The Trustee may with the consent of a Member of the Dependants of a Member to whom a Benefit is payable transfer investments of the Fund of equivalent value to such Member or Dependant in lieu of paying the whole or part of the amount otherwise payable pursuant to the provisions of the Deed PROVIDED HOWEVER that the Trustee is satisfied that such transfer is permitted by the Relevant Requirements. (c) No Beneficial Interest With the exception of the provisions of this clause no Member or Beneficiary shall have or acquire any beneficial or other interest in a specific asset of the Fund or the assets of the Fund as a whole whilst such asset or assets remain subject to the provisions of this Deed. As mentioned, I give the Deeds's definition of "Relevant Requirements" at [67] below. 38 It will be noted that para (c) begins with the words "With the exception of the provisions of this clause". This is a reference to para (a)'s reference to life policies. 39 Paragraph (b) (set out above), by its terms gives the Trustees a discretion, but the applicants submit that the word "may" in the paragraph means "must". I do not see why this should be so. There is no reason to give it that meaning rather than its usual permissive meaning. The reference to the "consent" of a Member or the Dependants of a Member, confirms that the provision is concerned with a grant of power to the trustee. The provision does not say: "The Trustee must, if so directed by a Member or the dependants of a Member to whom a Benefit is payable, transfer investments of the Fund of equivalent value to such Member or Dependant in lieu of paying ...". The Trustees have obligations to all Members and it may be that the Trustees would see it to be in the interests of the Members as a whole that the particular Member be paid money rather than receive a particular part of the Fund in specie.

Sole Beneficiary 40 The sole beneficiary requirement is distinct from the requirement of an absolute entitlement as against the trustee. 41 The expression "beneficiary" is not defined in the Act and bears its ordinary meaning. 42 According to the ordinary meaning of the word, a beneficiary is any person for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms. It is trite that for every trust there must be a "beneficiary" so understood (see, for example, Re Denley's Trust Deed; Holman v HH Martyn & Co Ltd [1969] 1 Ch 373 at 382-384). A beneficiary is not simply a person who as a matter of fact obtains some practical benefit from the existence of a trust: Sacks v Gridiger (1990) 22 NSWLR 502 at 508. 43 The word "beneficiary" reaches beyond a person who has a beneficial interest in the trust property. It is possible for the legal estate in land to be vested in "trustees" without equitable ownership being vested in someone else. The trustees must, however, owe fiduciary obligations in respect of the trust property to persons who, although they may have no interest in the trust property and may never have an interest in the trust property, are called "beneficiaries". In CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 224 CLR 98, the High Court rejected (at [25]): a "dogma" that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership. That is to say, there can be a trustee who owes fiduciary obligations in respect of trust property to "beneficiaries" without any of the latter having a beneficial interest in the property. 44 Although the discretionary objects do not have a beneficial interest in any property the subject of a "discretionary" trust prior to a distribution or appointment of income or capital, they are freely referred to as "beneficiaries"; see for example, Gartside v Inland Revenue Commissioners [1968] AC 553 at 617-618; R & I Bank of Western Australia Ltd v Anchorage Investments Pty Ltd (1993) 10 WAR 59 at 79; Australian Securities & Investments Commission v Carey (No 6) (2006) 152 FCR 509 at [25]-[28]. Provided it can be said with certainty that any particular person is or is not within the class of discretionary beneficiaries, there is a trust, due administration of which can be enforced by discretionary beneficiaries: see In re Gulbenkian's Settlements [1970] AC 508; McPhail v Doulton [1971] AC 424. 45 The terms of each Deed shows that each Member of the relevant Fund is properly considered a "beneficiary". Clause 14.2(a) of the Deed provides that a person being "appointed" a Trustee, or a director of a corporate Trustee, becomes a Member on the date of the appointment. (Clause 7.2, which deals with the appointment of trustees, was set out at [27] above.) Such a person is a "beneficiary" although not a "Beneficiary" as defined in cl 4 of the Deed. Clause 4 of the Deed defines "Beneficiary" to mean "a person presently and absolutely entitled to receive a Benefit at the relevant time and where the context so admits includes a member". 46 The applicants submit that neither of the original Trustees was "appointed". I need not resolve the issue whether, to take the case of the Helen's Fund, Peter was a Member by reason of his having been "appointed" a Trustee. It is not disputed that Helen was a Member of Helen's Fund. 47 The Deed confers a power upon the Trustees to pay Benefits to the Dependants and Relatives of Members. Clause 23.3 empowers the Trustees to pay Benefits in the circumstances and at the times there set out to the Dependants of Members or former Members. Accordingly, Helen's five children are beneficiaries of Helen's Fund. 48 Clause 34.4(d) of the Deed provides that after the death of a former Member who was at the time of death still in receipt of a Pension pursuant to the provisions of the Deed, the Trustees may, unless specifically requested to the contrary by the Spouse of the former Member, pay a Pension to the Spouse. The expression "Spouse" is defined in cl 4 of the Deed to mean a spouse as defined in the Income Tax Act (the definition of "Income Tax Act" is set out at [67] below). Being the Spouse of Helen, Peter is a beneficiary of Helen's Fund. 49 Clause 34.6 of the Deed states that where the Deed provides for the payment of a Benefit on the death of a Member or former Member leaving no Dependants, the Trustees must pay the Benefit to the legal personal representative of the Member or former Member, or if there is no legal personal representative they must pay or apply it to or for the benefit of "such Relatives of the former Member as appear to the Trustee to be entitled to share in the estate of the Member or former Member ...". 50 As noted at [30] above, "Relative" is defined in cl 4 of the Deed to have the meaning given by the "Income Tax Act" (which is defined to mean, relevantly, the Act - see [67] below) and s 995-1(1) of the Act defines "Relative" to mean: (a) the person's spouse; or (b) the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person, or of that person's spouse; or (c) the spouse of a person referred to in paragraph (b). There are, therefore, 21 persons within the definition of "Relative" for the purposes of Helen's Fund: Helen's spouse, her five children and her 15 grandchildren. 51 Accordingly, in addition to Helen's husband Peter, and her five children, her 15 grandchildren were "beneficiaries", although not "Beneficiaries" of Helen's Fund. Although it does not matter, it should be noted that it remained possible, as at 28 June 2002, that additional persons would, at a later date, fall within the definition of "Relative", for example, further lineal descendants of Helen. 52 The applicants submit that if attention is confined, as it should be, to the position at 28 June 2002, it will be seen that Helen was the sole beneficiary of Helen's Fund. I agree that 28 June 2002 is the relevant date. However, the applicants' submission wrongly assumes that in order to be a "beneficiary" according to the ordinary meaning of that term, a Relative must have become entitled to an interest in trust property. On the contrary, it is enough that the Relative has an expectancy and is entitled to compel the due administration of the trust by the Trustees. 53 It follows that at 28 June 2002, there was not a "sole beneficiary" in respect of each Trust. 54 The Commissioner argued that under other provisions of the Deed too, it can be seen that further persons were beneficiaries of Helen's Fund, but I need not refer to those provisions or to the Commissioner's submissions relating to them.

Absolute Entitlement as against the Trustee 55 The notion of a "sole beneficiary" who was "absolutely entitled" appeared in a different context in s 160APHH(6) of the 1936 Act (a dividend franking provision). That provision was introduced by the Taxation Laws Amendment Act (No 2) 2000 (Cth) (2000 Act) and provided as follows: 160APHH(6) Shares held by a bare trustee for a sole beneficiary. If: (a) a person (the trustee) holds shares in trust for another person (the beneficiary); and (b) the beneficiary: (i) is the sole beneficiary of the trust; and (ii) is absolutely entitled under the trust to the shares; the following provisions have effect: (c) this Division applies as if: (i) the shares were held by the beneficiary and not be the trustee; and (ii) the acts of the trustee in relation to the shares were acts of the beneficiary; (d) if the shares were acquired by the trustee as a result of a disposal by the beneficiary, that acquisition and disposal are to be disregarded; (e) if the shares are subsequently acquired by the beneficiary as a result of a disposal by the trustee, that acquisition and disposal are to be disregarded. This "see-through" provisions is similar to s 104-60 of the Act referred to at [17] above. 56 With respect to s 160APHH(6) set out in the preceding paragraph, the Explanatory Memorandum for the Taxation Laws Amendment Bill (No 8) 1999 referred to a trust of the kind described in the provision as a "bare trust", and stated (at p 35): Treatment of bare trusts under the 45 day rule 3.9 Under new subsection 160APHH(6), bare trustees and nominees holding shares (but not interests in shares) for a single beneficiary are to be ignored for the purposes of Division 1A; instead, the shares are to be treated as if they are held by the beneficiary. [Item 2, new subsection 160APHH(6)] 3.10 This will be an exception to the rule in subsection 160APHU(1), which otherwise requires trustees to be qualified persons before beneficiaries may be qualified persons. The object of this change is to reduce compliance costs for nominees and custodians. Item 4 amends subsection 160APHU(1) accordingly. [Item 4] 3.11 This exception will apply to a trust where there is a single beneficiary under the trust and that beneficiary is absolutely entitled to the shares held by the trustee. A person is absolutely entitled to trust property if he or she is able to direct the trustee how to deal with trust property and to give the trustee a good receipt for anything with which the trustee has parted; that is, the beneficiary must be sui juris, and have a vested, indefeasible, and absolute interest in the trust property so that the trustee may be compelled to convey the trust property to the beneficiary if so requested. In such a case, there is an identity of interest between the trust and the beneficiary; indeed, the trustee is effectively an agent of the beneficiary; and it is therefore unnecessary to apply the provisions in the new Division to the trustee. [my emphasis] 57 My attention was drawn to analogous provisions in the United Kingdom legislation dealing with capital gains. Section 46(1) of the Capital Gains Act 1979 (UK) provided: Nominee and bare trustees (1) In relation to assets held by a person as nominee for another person, or as trustee for another person absolutely entitled as against the trustee, or for any person who would be so entitled but for being an infant or other person under disability (or for two or more persons who are or would be jointly so entitled), this Act shall apply as if the property were vested in, and the acts of the nominee or trustee in relation to the assets were the acts of the person or persons for whom he is the nominee or trustee (acquisitions from or disposal to him by that person or persons being disregarded accordingly). [my emphasis] 58 In Stephenson (HM Inspector of Taxes) v Barclays Bank Trust Co Limited [1975] 1 All ER 625, Walton J considered the meaning of the expression "absolutely entitled as against the trustee" under the predecessor of s 46(1), namely, s 22(5) of the Finance Act 1965 (UK). His Lordship said (at 637): Now it is trite law that the persons who between them hold the entirety of the beneficial interests in any particular trust fund are as a body entitled to direct the trustees how that trust fund is to be dealt with, and this is obviously the legal territory from which that definition derives. Reference may also be made to Tomlinson (Inspector of Taxes) v Glyns Executor & Trustees Co [1969] 1 All ER 700 at 704 and [1970] 1 All ER 381 at 383-384 (per Lord Denning MR), and Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281. In Herdegen, Gummow J distinguished between "active" and "passive" trusts, and said of a "bare" trust: Today the usually accepted meaning of "bare" trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others ... 59 The concept of absolute entitlement against the Trustee is related to the well known case of Saunders v Vautier (1841) 4 Beav 115. In substance, it was held in that case that where a beneficiary is absolutely and indefeasibly entitled to a trust asset as against the trustee, the beneficiary is entitled to terminate the trust and require the trustee to transfer the asset to him or her or at his or her direction. In order to invoke the rule, multiple beneficiaries can come together so that their beneficial interests exhaust the beneficial entitlement to the asset. For example, the rule could be invoked by a life tenant and the remainder man: since their interests in combination exhaust the beneficial interest in the subject property, in combination they are entitled to direct the trustee to transfer the property as they will. 60 In Public Curator of Queensland v Union Trustee Company of Australia Ltd (1922) 31 CLR 66 at 74, Higgins J noted: Those who are solely and absolutely entitled to receive money from trustees are entitled to ignore the specific mode and time of payment directed by the testator, to "break the trust", as it is called, and to claim immediate payment without the delay and formalities prescribed by the will (Saunders v Vautier (1841) 4 Beav. 115; Cr & Ph., 240, Harbin v Masterman (1894) 2 Ch. 184; (1895) A.C. 186, and other cases). 61 I accept the Commissioner's submission that taking into account the Explanatory Memorandum to the 2000 Act and the authorities, the expression "absolutely entitled to the asset as against the trustee" in subs (5) of s 104-55 and s 104-60 of the Act is intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs. 62 It will be noted that unlike the position under the rule in Saunders v Vautier, subs (5) of s 104-55 and of s 104-60 applies only to trusts of which there is a "sole beneficiary". Moreover, the provision requires the sole beneficiary to be absolutely entitled "to the asset" over which the trust was created. In the present case, the asset over which the trust was created was Helen's half interest in the Property. 63 It is sufficient to say in relation to the absolute entitlement aspect that cll 34.12(b) and (c) are fatal to the applicants' cases. Those provisions were set out at [37] above. As mentioned, I do not agree with counsel for the applicants that the word "may" in cl 34.12(b) means "must". 64 There is no ground for saying that once Helen's Fund was established, Helen was absolutely entitled as against the Trustees to the half interest in the Property that she had owned prior to its establishment 65 Clause 8.3 is unfortunately only a heading: "Power to Sell and Vary Investments" without any associated text. However, cl 8.4 empowers the Trustees "to make or vary any of the investments authorised under [the] Deed …". The Trustees had power to sell the Property, as they did only six days after the Trusts were established. Even if Helen had an interest in the half interest the subject of Helen's Trust as at 28 June 2002, the Trustees' power of sale would have made it a defeasible interest: see Kent v SS "Maria Luisa" (No 2) (2003) 130 FCR 12 at [71]. It would cease to be defeasible only when the half interest ceased to be part of Helen's Fund and subject to the Trustees' power of sale. 66 Helen was not entitled to the half interest once it was subjected to the Trust. Her only entitlement was to require the Trustees to pay her money once the conditions of her entitlement were satisfied.

Clauses 5.4 and 26 of the Deed 67 Clause 5.4 of the Deed provided relevantly, as follows: Fund Subject to Relevant Requirements This Deed shall be read and construed on the basis that the provisions of the Relevant Requirements are incorporated in the Deed to the extent that they impose covenants or obligations on the Trustee in order for the Fund to qualify for concessional Taxation treatment and this Deed shall be further read and construed on the basis that where there is any inconsistency between a provision in this Deed and a provision under the Relevant Requirements the latter shall prevail… The expression "Relevant Requirements" was defined in cl 4 of the Deed as follows: 'Relevant Requirements' means any requirements under the Occupational Superannuation Standards Act 1987, the Occupational Superannuation Standards Regulations, the Superannuation Industry (Supervision) Act 1993 and any other Acts or Regulations which the Trustee must comply with in order for the Fund to qualify for concessional Taxation treatment as a Complying Superannuation Fund including the requirements under any other proposed requirements, rulings, announcements or obligations which the Trustee believes will have effect retrospectively. Clause 26 provided: COMPLIANCE WITH THE ACT The requirements contained in the Act with which the Fund must comply shall be deemed to be included in this deed and in the event of any inconsistency or conflict between the requirements of the Act and the provisions of this Deed the trustee shall act or refrain from acting notwithstanding anything to the contrary or otherwise contained in this Deed, in order to comply with the requirements of the Act and the relevant provisions of this Deed shall be deemed to be invalid. The expression "Act" was defined in cl 4 as follows: 'Act' means the Income Tax Act and the Superannuation Industry (Supervision) Act and any legislation amending or replacing those acts, the Regulations and any other law of the Commonwealth or any State or Territory of Australia (including where applicable any relevant determination ruling or guideline made or issued by any Responsible Authority pursuant to any powers vested in it) with which the Fund and / or the Trustees must comply in order to qualify for the maximum concessions in respect of the Taxation of the income of the Fund in order to obtain what the Trustees consider to be any other relevant concession or to avoid what the Trustees consider to be a relevant penalty or imposition; Finally, the expression "Income Tax Act" is defined in cl 4 to mean: 'Income Tax Act" means the Income Tax Assessment Act (1936) and the Income Tax Assessment Act (1997) and any act amending or replacing those acts and the Income Tax Regulations any regulations amending or replacing those acts; 68 The applicants refer to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) as falling within the expression "Act". The word "Regulation" in the definition of "Act" is capitalised, but it is not a defined term. However, I accept that the SIS Regulations fall within the word "Act". The contrary was not argued. 69 Invited to articulate how the terms of cll 5.4 and 26 had any operation in the circumstances of the present case, senior counsel for the applicants was not able to do so, other than to point in a general way to the SIS Act and the SIS Regulations. I discuss these below. Otherwise, I have ignored cll 5.4 and 26.

Regulated Superannuation Fund 70 Senior counsel for the applicants referred to various provisions within Pt 6 of the SIS Regulations, which is headed "Payment standards". The applicability of those provisions depended on each Fund's being a "regulated superannuation fund" as defined in s 19 of the SIS Act. Section 19(4) of the SIS Act provides: The trustee or trustees must have given to APRA, or such other body or person as is specified in the regulations, a written notice that is: (a) in the approved form; and (b) signed by the trustee or each trustee; electing that this Act is to apply in relation to the fund. Regulation 1.04A of the SIS Regulations specifies the Commissioner for the purpose of s 19(4) of the SIS Act. The Commissioner did not receive a notice from the Trustees pursuant to s 19(4) in respect of Helen's Fund until 11 November 2002, and in respect of Peter's Fund until 2 September 2002. 71 It seems clear that neither Fund was a regulated superannuation fund as at 28 June 2002 and that on the evidence before the Court, nothing had occurred to alter that position for that financial year. 72 The various provisions within Pt 6 of the SIS Regulations on which the applicants rely deal with the "cashing" of a member's unrestricted non-preserved benefits and are concerned with the existence or non-existence of "cashing restrictions". The regulations relied on, even if the applied to Helen's Fund or Peter's Fund, are remote from a provision giving an absolute entitlement to a particular asset of a superannuation fund. 73 Resolution of the issue of absolute entitlement to a half interest as against the Trustees as at 28 June 2002 depends on the terms of the Deed and on general law principles. The SIS Regulations do not assist the applicants.

Conclusion 74 For the above reasons both appeals should be dismissed with costs. I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 24 September 2008 In each proceeding: Counsel for the Applicant: Mr R Hamilton SC and Mr I Young

Solicitors for the Applicant: Bonnell Rowntree LP Solicitors

Counsel for the Respondent: Mr BJ Sullivan SC and Mr DFC Thomas

Solicitors for the Respondent: Australian Government Solicitor

Income Tax Assessment Act 1997(Cth)ss 104-55, 104-60, 106-50

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