NAL's alternative submission: Wages paid from moneys held on trust for councils
69It follows that NAL's alternative submission that the wages were exempt because the moneys used by NAL to pay the wages were held on trust for the councils does not arise. Indeed, it is difficult to see how NAL could hold property on trust for the councils when everything it did in exercise of its delegated function, including its receipt of property, is taken to be done by the councils.
70Nonetheless, I should deal with NAL's alternative argument even though it only arises if my conclusion as to the application or effect of s 49(6) is wrong. What follows proceeds on that assumption.
71NAL argues that because the wages were paid from property held by NAL on trust for the councils, the wages were paid by the councils within the meaning of s 58 of the Payroll Tax Act. It relies on the dissenting judgment of Lee AJA in Glebe Administration Board v Commissioner of Pay-roll Tax (1987) 10 NSWLR 352. That case concerned the construction of s 10(b) of the Pay-roll Tax Act 1971 (NSW). Wages that were "paid or payable ... by a religious ... institution" were exempt from payroll tax. The wages were paid by the Glebe Administration Board, a body corporate constituted under the Church of England (Bodies Corporate) Act 1938 (NSW). It paid the wages out of moneys it received from managing commercial properties for the purposes of raising funds for the Church of England in New South Wales. The taxpayer submitted that whilst it was not a religious institution but paid the wages, in a realistic sense the wages were paid by a religious institution, namely the Church of England Diocese of Sydney. All of the property of the Board was held on trust for the Diocese. It was said that the money was "really" the money of the religious institution which was paying the wages of the Board's employees (at 365).
72At first instance Rogers J held that the exemption provided for by s 10(b) was only available to a contractual employer. That view was upheld in the Court of Appeal (per Priestley JA with whom McHugh JA agreed at 369). The Chief Commissioner made the same submission in the present case, namely, that whether or not the moneys used to pay the wages were moneys held on trust for the council, the exemption in respect of wages paid or payable by councils was only engaged if the councils were the employers of the employees to whom the wages were paid. NAL did not point to any changes to the structure of the Payroll Tax Act since the decision in Glebe Administration Board v Commissioner of Payroll Tax that should yield a different conclusion.
73In any event, I do not accept the premise of NAL's argument. The premise of the argument is that the moneys used to pay the wages were moneys of the two councils. If s 49(6) of the Interpretation Act does not have the effect that I have concluded it does have, the moneys used to pay the wages were moneys that were part of the property held on trust by NAL for the two councils. It does not follow, as NAL's argument assumed, that the moneys so used were beneficially owned by the councils. It is not in dispute that the liability of NAL to pay wages was a liability that it properly incurred in administering the trust. It had a right to be indemnified out of the trust property in respect of that liability. The right of indemnity was either a right of recoupment if it paid any money of its own or, more probably on the facts of this case, the right to be exonerated from its liability to pay wages to its employees out of the trust property. It had a preferred beneficial interest in the money used to pay the wages. The money used to pay the wages was its money by virtue of its legal ownership. The rights of councils as the beneficiaries were deferred to the right of NAL as legal owner to be exonerated out of the trust assets in respect of the liabilities properly incurred (Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 Qd R 576 at 586-587; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226 at [48]; CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98 at [51]; Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26; (2012) 16 BPR 30,397 at [41]).
74Counsel for NAL submitted that this was not correct because NAL's right of exoneration out of the trust property, which was an aspect of its right of indemnity, was properly characterised as a right of lien or charge over the trust property that did not affect the councils' beneficial ownership of the trust property that was used to pay the wages. Counsel cited Arjon Pty Ltd v Commissioner of State Revenue [2003] VSCA 213; (2003) 8 VR 502 at [62] where Phillips JA, with whom Buchanan and Eames JJA agreed, said:
"[62] Thus, having reviewed the cases to which we were referred, I can only conclude that what was said by the majority in Baker v Archer-Shee remains good law: namely, that the beneficial ownership by the beneficiary of an asset of the trust when vested in interest is unaffected by any right of recoupment that the trustee may have from time to time, even if that right entitles the trustee to have resort for a limited purpose to the assets in priority to the beneficiary. One cannot deny, since Octavo Investments, that the trustee has a 'beneficial interest' in the trust assets to enforce his 'charge or lien', but given the ambivalence attaching to the use of the term 'beneficial interest', I do not see that as denying equitable ownership to a beneficiary who is otherwise entitled, immediately and absolutely, to the trust assets - or in the case of the Broadmeadows land, to all of the units in the unit trust of which that land is an asset. That such ownership should be treated as subject to an uncertain right in the trustee, varying from time to time in amount and effect, is one thing; that that variable right should actually deny equitable ownership to the beneficiary in whom the trust fund is otherwise presently vested in interest and possession is an altogether different matter and one that, in my opinion, should be rejected."
75To similar effect, in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 Brereton J (at [16], 553) described the trustee's right of indemnity as a security interest in trust assets, albeit one that took priority over the claims of beneficiaries (at [16], 553). His Honour said (at [46], 560):
"[46] The starting point is that it is universally accepted that the nature of the trustee's interest is that of an equitable lien - that is, an equitable security interest arising not by agreement of the parties but by operation of law. It is also universally accepted that the only remedy of the trustee against the trust assets is judicial sale or appointment of a receiver. That is consistent with the nature of an equitable lien as a mere hypothecation. Such a security does not confer on the security holder any right of foreclosure, nor any right to possession of the property. It creates an interest which the security holder can enforce, as I have said, by judicial sale or appointment of a receiver, but such a security holder cannot bring an action for possession of the property the subject of the equitable lien. ..."
76In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 the High Court described the trustee's right of indemnity in the following terms (at 367):
"We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire, supra. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190.
In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trustent, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trustent are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied."
77Octavo Investments must be now understood in the light of what the High Court said in Chief Commissioner of Stamp Duties (NSW) v Buckle and CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic). In Buckle the High Court held that the trustee's right of indemnity out of trust assets was not an encumbrance upon the interests of the beneficiaries. The Court said (at [50], 246-247):
"[50] However, the starting point in the class of case under consideration is that the assets held by the trustee are 'no longer property held solely in the interests of the beneficiaries of the trust' (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 370). The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not 'encumbered' by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation' (Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335). A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the 'trust assets' which may be enforced in the same way as any other equitable charge (See Hewett v Court (1983) 149 CLR 639 at 663). However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded." (my emphasis)
78The characterisation of the trustee's right of indemnity as being in the nature of a lien or charge is apt where there has been a change of trustee so that the trustee with the right of indemnity no longer has ownership or possession of the trust assets and cannot satisfy itself out of the trust assets by exercising the rights of legal ownership. It is also an apt description of the right of a creditor entitled by subrogation to exercise the trustee's right, the creditor being entitled to the remedies of the appointment of a receiver and order for sale. Otherwise the description of the right of indemnity as a lien or charge is misleading. It suggests that the trustee's right of indemnity is a security interest in property belonging to others, that is, the beneficiaries. That is how it is described in Arjon in the passage quoted above on which NAL relied. But a trustee in office who has recourse to the trust assets to be exonerated or recouped for liabilities properly incurred does so by virtue of its legal ownership of the assets, not by enforcing a security against them. As Barrett JA (with whom Campbell JA and Sackville AJA agreed) said in Agusta Pty Ltd v Provident Capital Ltd (at [41]):
"It is anomalous to refer to a person having a charge or lien over property of which the person is the owner."
79In Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) McPherson J described the beneficiaries' entitlement as being confined to so much of the trust assets as were available after properly incurred liabilities had been discharged or provided for and that to the extent of the trustee's right to be indemnified the trustee was under no fiduciary obligation to the beneficiaries and the asset was not properly characterised as trust property (at 586-587). This view was upheld by the High Court in Buckle. There the High Court said (at [48], 246):
"[48] Until the right to reimbursement or exoneration has been satisfied, 'it is impossible to say what the trust fund is' (Dodds v Tuke (1884) 25 Ch D 617 at 619). The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them (Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576 at 587). To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 370)."
80In Arjon Phillips JA dismissed the reasoning in Kemtron Industries Pty Ltd v Commissioner of Stamp Duties and Chief Commissioner of Stamp Duties v Buckle in the following paragraph:
"[59] In Kemtron Industries Pty Ltd v Commissioner of Stamp Duties ([1984] 1 Qd R 576), the Full Court of the Supreme Court of Queensland held that the trustee's right of indemnity in respect of liabilities properly incurred was not properly regarded as an 'encumbrance' on the trust assets. This was for the particular purpose of deciding value for duty. The holder of a one-quarter share in a trust fund by writing transferred his interest to the appellant and the Commissioner of Stamp Duties assessed the transfer to ad valorem duty by reference to the amount of the current assets of the trust without taking account of its liabilities. Not surprisingly, the Full Court held that this was error; the value for duty purposes of the property transferred was to be fixed by the worth of the net assets of the trust, and not of the assets without regard to the liabilities. Although there are references in the judgments to the trustees' right of indemnity going to 'reduce' the estate or interest of the beneficiary in the assets, this was in the context that the immediate concern of the court was not so much to define the 'estate or interest' of the beneficiary as simply to value the subject matter of the transfer. And, as I read it, the later case of Buckle v Commissioner of Stamp Duties ((1998) 192 CLR 226 at 244-247) [sic], in respect of a discretionary trust under a deed of settlement, was to like effect."
81With respect, this reasoning does not address the particular point made by McPherson J in Kemtron, nor its endorsement in Buckle. It is right that in Buckle the High Court was concerned with the construction of a phrase in s 66(1) of the Stamp Duties Act 1920 (NSW) whereby ad valorem duty was imposed on "the unencumbered value of the property thereby conveyed". One of the issues was whether the trustee's right of indemnity was to be taken into account in ascertaining the unencumbered value of the property liable for duty on a resettlement. The High Court approached the construction of s 66(1) by recourse to a general law analysis of the nature of the trustee's right of indemnity that shows that that right is not properly characterised as a security interest over the beneficiaries' property.
82As appears from para [62] of the judgment in Arjon quoted at [74] above, Phillips JA found support for his conclusions from what was said by the majority of the House of Lords in Baker v Archer-Shee [1927] AC 844. In Baker v Archer-Shee the respondent was liable to pay income tax in respect of all of his wife's "property, profits or gains" whether situate in the United Kingdom or elsewhere (at 863). The respondent's wife was a beneficiary under the will of her late father. The will directed that the testator's real and personal estate be held in trust by his executors and trustees and that the whole of the income and profits therefrom should be applied to the use of his daughter during her life (at 864). The estate had been fully administered. It consisted of securities, stocks and shares in America. The trustees were in America. Income was paid to the respondent's wife in America. The amount paid was the amount determined by the trustees to be income after deduction of commission payable to the trustees and amounts payable by the trustees for income tax in the United States. Any other expenses were also allowed for before net income of the investments was paid to the beneficiary.
83As Phillips JA noted, the majority of the House of Lords held that the beneficiary (hence the respondent) was liable to pay income tax in England not merely on the net income paid to her in the United States, but on the whole of the income derived by the trustees from the investments.
84The Attorney-General argued that upon principles of income tax law, which applied to the chargeability of income subject to the trusts of a will as laid down in Williams v Singer [1921] 1 AC 65, the person owning the income and assessable to tax in respect of it was the person beneficially entitled thereto and not the trustee in whom the income was legally vested, except insofar as the trustee might be assessed on behalf of the beneficiary (at 845). Thus, Viscount Sumner (who dissented) said (at 851):
"... it is in the terms of the Income Tax Act or in some decided construction which binds your Lordships, that the inland revenue can alone find authority for the present contention, that the person 'entitled to' the income is the beneficiary, and a rule of 'income tax law', which so completely and uncompromisingly disregards the regular law of trusts and the ordinary law of property ..."
85Lord Carson held (at 870) that:
"... the respondent's wife was sole beneficial owner of the interest and dividends of all the securities, stocks and shares forming part of the trust fund therein settled and was entitled to receive and did receive such interest and dividends. This, I think, follows from the decision of this House in Williams v Singer, and in my opinion the Master of the Rolls correctly stated the law when he said 'that in considering sums which are placed in the hands of trustees for the purpose of paying income to beneficiaries, for the purposes of the Income Tax Acts, you may eliminate the trustees. The income is the income of the beneficiaries; the income does not belong to the trustees.'"
86Thus it appears that Lord Carson considered that the rule to be applied was a particular rule in relation to the application of the Income Tax Acts. If the principle is to be understood as applying more widely, it is clearly wrong because the beneficiary would be only entitled to so much of the income as was available after the trustees had exercised their right of exoneration or recoupment.
87Lord Atkinson (one of the majority) said (at 859) that:
"I think it is not an unreasonable inference ... that the life interest given to her by her father's will had become vested in her, and that the trust company which she had appointed were merely her agents to administer the fund for her and in her interest. If that be so, payments necessarily made properly in the administration of the fund are made in her interest and on her behalf, and, in my view, are made with her money."
88A trustee is not ordinarily the agent for his beneficiary. It is not clear why Lord Atkinson considered that it should be inferred from the fact that the beneficiary could appoint a replacement trustee and had done so, that the replacement trustee was the beneficiary's agent. No reason is given for that conclusion. Whether that was a conclusion based upon particular principles of income tax law thought to apply in England at the time, or whether it was based upon some other facts, or whether it was simply wrong, need not be decided. Clearly, if the trustee were the agent to the beneficiary, then the income derived by the trustee was derived by the beneficiary and the expenses paid by the trustee were paid by the beneficiary. Lord Atkinson's judgment provides no support to the conclusion reached by Phillips JA in Arjon.
89Phillips JA quoted part of the speech of Lord Wrenbury which does support the conclusion to which his Honour came. Lord Wrenbury said (at 865-866):
"The trustees, of course, have a first charge upon the trust funds for their costs, charges and expenses, and American income tax will be a tax which they would have to bear and which would fall upon the beneficiary. But this does not reduce the right of property of the beneficiary to a right only to a balance sum after deducting these. If an owner of shares deposits them with his banker by way of security for a loan he is not reduced to being the owner of a balance sum being the difference between the dividends on the shares and the interest on the loan. He is the owner of the equity of redemption of the whole fund. If a landowner employs an agent to collect his rents and authorizes him to deduct a commission he does not cease to be the owner of the rents."
90The conclusion that the trustees' entitlement to a "first charge" on the trust fund for their costs, charges and expenses and American income tax did not reduce the right of property of the beneficiary is inconsistent with the decision of the High Court in Octavo Investments that to the extent of the trustee's right of indemnity the trustee has a preferred beneficial interest in the trust funds. It is inconsistent with the reasoning and decision of the High Court in Buckle and CPT Custodian. Lord Wrenbury's reasoning is not advanced by the analogy with the owner of shares who makes an equitable mortgage of them as security for a loan, or the analogy of an agent entitled to deduct commission from rents collected as agent for his principal. Although a trustee can be an agent for his beneficiary, and hence have power to bind the beneficiary to dealings carried out within the scope of the authority conferred by the beneficiary as principal on the trustee as agent, the relationships of trust and agency are distinct. In the present case NAL disclaimed any argument based on agency.
91In Arjon, Phillips JA observed that the submissions of the taxpayers drew significantly on the views of the dissentients in Baker v Archer-Shee (at [55]). It is only the views of the dissentients that are consistent with the decisions of the High Court in Octavo Investments, Buckle and CPT Custodian.
92The reasoning in Arjon was applied by the Court of Appeal of Victoria in the related case of Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2003] VSCA 214; (2003) 8 VR 532 (at [19], [21], [25]). The reasoning in Arjon was applied to hold that a sole unit holder of a trust should properly be regarded as the beneficial owner of the trust asset and thus entitled in equity to an estate of freehold in possession. That conclusion in Karingal 2 was reversed on appeal to the High Court (CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic)). There was no appeal in Arjon itself, but its authority is undermined by the reasoning of the High Court in CPT Custodian and the upholding of the appeal in Karingal 2.
93In CPT Custodian the High Court held that on the terms of the trust deed in that case, even where there was only one unit holder of the trust, the unit holder did not have an interest amounting to ownership. It rejected the proposition that where property is held on trust, somebody other than the trustee must be the owner of the equitable estate (at [25], 112). One reason the High Court held that the sole unit holder of the unit trust did not have an interest amounting to equitable ownership in the trust property and was not entitled to bring the trust to an end by calling for a transfer of the trust property, was that the trustee had an unsatisfied right of indemnity out of the trust fund in respect of liabilities incurred in execution of the trust. The High Court said (at [50] and [51]):
"[50] The classic nineteenth century formulation by the English courts of the rule in Saunders v Vautier did not give consideration to the significance of the right of the trustee under the general law to reimbursement or exoneration for the discharge of liabilities incurred in administration of the trust. In Wharton v Masterman ([1895] AC 186), Lord Davey approached the rule in Saunders v Vautier from the viewpoint of the law respecting accumulations of income for an excessive period; if no person had any interest in the trust other than the legatee, the legatee might put an end to the accumulation which was exclusively for the benefit of that person and as a result there was no effective or enforceable direction for any accumulation ([1895] AC 186 at 198-200). However, his Lordship's discussion of the authorities ([1895] AC 186 at 200-201) does indicate that the rule in Saunders v Vautier could not apply if, by reason of the charging of legacies on the fund and accumulations, the persons seeking to put an end to the accumulations were 'only entitled to an undetermined and uncertain surplus (if any) which might be left of the fund after payment of the legacies' ([1895] AC 186 at 201).
[51] In the present case, the unsatisfied trustees' right of indemnity was expressed as an actual liability in each of the relevant accounts at each 31 December date and rendered applicable the sense of the above words of Lord Davey. Until satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was (Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 246 [48].)"
94Underlying the analyses in Buckle and CPT Custodian is a fundamental notion about the nature of trusts and the nature of beneficiaries' interest in a trust. It was explained by Hope JA in D K L R Holding Co (No. 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 518-521, [14]-[20] and by McLelland J (as his Honour then was) in Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311. Hope JA said:
"Where the trustee is the owner of the legal fee simple, the right of the beneficiary, although annexed to the land, is a right to compel the legal owner to hold and use the rights which the law gives him in accordance with the obligations which equity has imposed upon him. The trustee, in such a case, has at law all the rights of the absolute owner in fee simple, but is not free to use those rights for his own benefit in the way he could if no trust existed. Equitable obligations require him to use them in some particular way for the benefit of other persons."
95McLelland J said (at 311):
"Where a legal owner holds property on trust for another, he has at law all the rights of an absolute owner but a beneficiary has the right to compel him to hold and use those rights which the law gives him in accordance with the obligations which equity has imposed on him by virtue of the existence of the trust. Although this right of the beneficiary constitutes an equitable estate in the property, it is engrafted onto, not carved out of, the legal estate."
96Where a trustee has a right of indemnity in respect of debts properly incurred, the beneficiaries cannot compel the trustee to use its legal ownership for their benefit except if the right of indemnity is satisfied or provided for. In exercising its right of indemnity the trustee has a preferred beneficial interest in the assets held on trust. To characterise the trustee's right of indemnity as a security interest involves treating the beneficiaries as having an equitable estate carved out of the legal ownership over which the security, by way of lien or charge, can be exercised. That is not the right way of analysing the beneficiaries' interests. When the trustee in possession of the trust property has recourse to the trust property to satisfy its right of indemnity, the trustee is exercising its rights as legal owner and the beneficiaries do not have an equity to assert against the trustee to restrain a proper exercise of the right of indemnity by way of recoupment or exoneration. Where the trustee exercises the right of indemnity the trustee is realising its property. The beneficiaries' beneficial interest in the trust property is deferred to the beneficial interest of the trustee.
97Hence, I do not accept the premise in NAL's argument. In exercising its right to be recouped out of the trust assets in respect of the wages properly incurred by NAL, NAL was having recourse to its assets, not the councils' assets.
98However, for the reasons earlier given, by reason of s 49(6) of the Interpretation Act the wages are to be taken to have been payable by and to have been paid by the councils.