ENTITLEMENT OF JANCY TO THE CFGUT TRUST INCOME IN THE 1992 TAX YEAR
42 The position in relation to the CFGUT trust is more complex. The question of whether Jancy was presently entitled to the net trust income of the CFGUT trust is only of application for the 1992 tax year.
43 The CFGUT trust relevantly provided:
(i) by Recital A:
'It is intended by this Deed to establish a Trust to be called THE CORPLAN FINANCIAL GROUP UNIT TRUST which trust shall be administered for the benefit of the parties and the holders of units as provided in this Deed.'
(ii) by Recital C:
'All such cash and investments are to be held by the Trustee upon the trusts and subject to the terms and conditions declared and contained in this Deed.'
(iii) by clause 1, the following terms are defined:
' "Accrual period" means the year ending on the thirtieth day of June referred to in sub-clause (1) of Clause 22 hereof. The first accrual period shall be from the date of this Deed to the thirtieth day of June 1985.
"Reserve" means the reserve established pursuant to Clause 23.
"The Trust" means the Trust hereby constituted and to be called THE CORPLAN FINANCIAL GROUP UNIT TRUST.
"Units" means the units created under Clause 8 of this Deed and for the time being outstanding in the hands of registered holders.'
(iv) by clause 3(1):
'The Trustee shall hold the Fund upon trust for the registered holders of units therein upon the terms of this Deed.'
(v) by clause 8:
'(1) The beneficial interest in the Fund as originally constituted by the payment of TEN DOLLARS by the Settlor to the Trustee shall be divided into 100 units which shall be capable of being transferred, mortaged [sic] or otherwise dealt with as hereinafter provided.
(2) The beneficial interest in the initial units is as follows:-
NAME OF BENEFICIARY UNIT ENTITLEMENT
JANCY PTY LTD as Trustee for
the JANCY TRUST 100 UNITS'
(vi) by clause 22:
'(1) During the month of June in the year 1985 and in the month of June in every following year until the termination of the trust, the trustee shall decide the amount (if any) of the net income of the Fund which shall be distributed to the registered holders in respect of the accrual period which shall be such amount, not exceeding the amount available for distribution, as the Trustee shall in its absolute discretion decide.
(2) Forthwith after the Trustee shall have decided the amount (if any) of the net income to be distributed the Trustee shall subject to the provision to this sub-clause distribute amongst the registered holders of units the amounts decided to be distributed in respect of the accrual period. Provided however that in making such distribution of income to the said registered holders the Trustee may issue to the said registered holders of units additional or further units either in whole or part satisfaction of the said distribution of income.
(3) Income shall be distributed among such registered holders in proportions to the number of units of which they were respectively registered as the holders.
(4) The Trustee shall be entitled to make any interim distribution of income at such time or times as the Trustee shall decide during any accrual period.
(5) Any income not distributed shall be added to the General Reserve established under Clause 23 and shall become part of the Fund.'
(vii) by clause 23(1):
'The Trustee may in its absolute discretion establish a reserve and the Trustee may before making any payment of income under Clause 22 set aside out of the income of the Fund such sums as in its discretion the Trustee thinks proper as such reserve (to be known as "The General Reserve").'
44 There are no resolutions of the trustee of the CFGUT trust under clause 22 in respect of the accounting period ending 30 June 1992 which purport to distribute the income of the CFGUT trust. There is no evidence of a resolution or any document to show that a General Reserve had been established under clause 23.
45 The appellant submitted that, in those circumstances, the income was "income not distributed", and went to a reserve which was automatically erected by reason of non-distribution under clause 22 of the trust deed, even if not otherwise previously established.
46 For the Commissioner it was submitted that there were three possibilities as to the income of the CFGUT trust for the accounting period ending 30 June 1992:
'(a) clause 22(3) operates to effect an automatic distribution to Jancy Pty Ltd in the absence of any other applicable provision; or
(b) Jancy Pty Ltd, as the sole beneficial owner of the trust fund. Jancy Pty Ltd has an accrued entitlement to payment of the income by the trustee of CFGUT, because it holds them as a bare trustee not having dealt with them under the terms of the trust; or
(c) if it be correct to say that clause 23 does operate to take the income into the reserve established thereunder (and notwithstanding that it was not established), Jancy Pty Ltd was presently entitled to the income of the CFGUT trust because Jancy Pty Ltd was entitled to call for the income by reason of the rule in Saunders v Vautier. Income added to the Fund is, in this way, income to which the 100% unit holder [Jancy] is beneficially entitled. No order of the Court or exercise of discretion by the trustee is necessary to establish this entitlement. …'
47 In the view I take of the matter, clause 22(3) does not operate to effect an automatic distribution to Jancy. Clause 22(3) is directed to the manner of distribution, and requires a decision by the trustee pursuant to clause 22(1) to distribute an amount to the registered holders.
48 In my opinion, clause 23 does not operate to take the income into a General Reserve, in the absence of the trustee, in the exercise of its discretion, establishing a reserve. In my opinion, in the absence of any distribution by the trustee pursuant to clause 22(1) and in the absence of the establishment of any reserve pursuant to clause 23, the question is whether Jancy, as the sole beneficial owner of the trust fund, has a present entitlement to the net income of the CFGUT fund for the 1992 tax year.
49 The contentions by the parties are easily stated. For the appellant, Mr Bain QC submitted:
'… It is simply incorrect to say that even a sole holder of all the units … [is] presently entitled … It may be … that the person is the owner of the income in equity. But that doesn't necessarily determine whether the person is presently entitled.'
50 Mr Bain agreed that the principle for which he contended was that the equitable owner of property is not presently entitled to that property. It is only when the legal title is in it that it is presently entitled to the money.
51 In support of his position, Mr Bain referred to s 95A of the Tax Act which provides:
'(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.'
52 Section 95A(1) was inserted as a consequence of the judgment of Barwick CJ in The Union-Fidelity Trustee Company of Australia Ltd and Another v The Commissioner of Taxation of the Commonwealth of Australia (1969) 119 CLR 177, where his Honour had held that if the income of the trust is actually distributed, then it is not income to which the beneficiary is presently entitled. Mr Bain, however, draws attention to s 95A(2) in support of his contention that a vested and indefeasible interest in the income of a trust estate does not mean that the beneficiary is presently entitled to that income.
53 It was submitted for the Commissioner that the question is whether, as between trustee and beneficiary, the beneficiary was presently entitled to be paid the income, and in the circumstances of this case, Jancy was presently entitled to the 1992 CFGUT trust income.
54 Reliance was placed on the judgment of Starke J in Federal Commissioner of Taxation v Whiting and Others (1942-43) 68 CLR 199 ("Whiting"), at 219:
'My brother Rich thought it "reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee, is that he should be presently entitled to income of the estate. By this … is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of the income." The last-mentioned proposition is true enough, but a beneficiary is not, I think, presently entitled to income unless it can be established that there is income which he is presently entitled to receive: that he is entitled to obtain payment thereof from the trustee.
The sections do not look to the nature of the beneficiaries' title to shares of the income whether they be vested or contingent, but to the right to receive income which is available in the hands of trustees for payment to the beneficiaries. So far as cases throw any light upon the construction of the Act they are, I think, all in favour of this view, from Lord Sudeley v. Attorney-General (1897) A.C. 11 down to the case in this Court of Robertson v. Deputy Federal Commissioner of Land Tax (1941) 65 CLR 338. And if this view is right, it is clear that the beneficiaries are not so entitled in the present case.'
55 The observations of Rich J make it clear that interest in expectancy would not be a present entitlement.
56 The contention for the Commissioner was that, in this case, the beneficiary was entitled to obtain payment from the trustee, with the consequence that s 97 imposes the obligation to pay tax on the beneficiary rather than the trustee. It was submitted that:
'Just as Mrs Pearson's entitlement as against Jancy didn't depend on her making demand to be paid the moneys that had been appointed to her, so the moneys here were moneys which as between trustee and beneficiary the beneficiary was entitled.
57 It was submitted that the judgment in Arjon Pty Ltd v Commissioner of State Revenue [2003] VSCA 213 (16 December 2003) ("Arjon") and Commissioner of State Revenue v Karingal No. 2 Holdings Pty Ltd [2003] VSCA 214 ("Karingal") support the contention that Jancy, as the sole unit holder, was entitled to the income vis-ŕ-vis the trustee of CFGUT. The decision of the Full Court of the Federal Court in Kent v The Vessel "Maria Luisa" (No 2) (2003) 130 FCR 12 ("Kent"), it was submitted, was not contrary to that conclusion, particularly since the reasoning in that case accepted the correctness of the judgment of Nettle J in Karingal.
58 The question of "present entitlement" was considered by Hill J in Trustees of Estate Mortgage Fighting Fund Trust v Commissioner of Taxation (2000) 102 FCR 15 ("Estate Mortgage"). The Commissioner of Taxation had assessed the trustee to tax on the income of the trust estate on the basis that the beneficiaries were not presently entitled to that income. The trustee argued that the beneficiaries were deemed to be presently entitled under s 95A(2) of the Assessment Act. Hill J held that the interest of the beneficiaries in the trust income was vested and indefeasible, and was accordingly a "deemed" present entitlement within s 95A(2) of the Assessment Act, and the aliquot share of the net income of the trust should be included in their assessable income.
59 Hill J said at par 33:
'No doubt where there is a trust to accumulate income during the year of income it will ordinarily be true that there could be no present entitlement, and thus an assessment for tax of the trustee under s 95A(4) is required.'
60 His Honour said at par 35:
'It is elementary trust law that a sole beneficiary of a trust entitled to an absolute and indefeasible interest may call for the trust assets and thus put an end to a trust for accumulation in the trust deed, notwithstanding that to do so may be contrary to the intentions of the settlor as found in the trust deed: Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. That beneficiary is not bound to wait until a trust for accumulation comes to an end.
The principle is stated by the learned authors of R P Meagher, Jacobs' Law of Trusts in Australia (6th ed, 1997), par 2308 as follows:
"Where a sole beneficiary's interest in the trust property is vested and he is sui juris, he may put an end to the trust by directing the trustees to transfer the trust property to him or his nominee, notwithstanding any directions to the contrary in the trust instrument. This is the celebrated rule in Saunders v Vautier … The same rule applies where there is more than one beneficiary, even although their several interests are not all immediate but successive, provided they are unanimous in wishing to end the trust. Thus, where A is entitled for his life with remainder to B and C, and all are sui juris, all may combine during A's lifetime to put an end to the trust."'
61 Hill J said, in par 38:
'… At the heart of the concept of present entitlement lies the immediate present right of a beneficiary to demand and receive payment of the income of the trust estate or a share of it. The leading High Court authority, Harmer, expressed the tests as follows (at 271):
"The parties are agreed that the cases 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."
Present entitlement to the income must arise, if at all, at the latest by the end of the year of income.'
62 At par 41:
'It is clear that where there are successive beneficiaries in a trust estate so that, as the authors of Jacobs Law of Trusts in Australia observe, the consent of all would be necessary to bring the trust to an end, it could not be said of any beneficiary that he or she had a present entitlement to the income. An argument that present entitlement existed because all the beneficiaries could bring the trust to an end (although none had attempted to do so) was summarily dismissed by a Full Court of this Court in Walsh Bay Developments Pty Ltd v Commissioner of Taxation (Cth) (1995) 130 ALR 415 at 430.'
63 There is no question in the present case of "co-owners" or "successive beneficiaries". Hill J recognised that the proposition as stated in Jacobs Law of Trusts in Australia was qualified, an example of which was in the case of personalty, noting the text at par 2310 footnote 78:
' "…in the case of personalty, a beneficiary absolutely entitled to an aliquot share thereof is, in the absence of special circumstances, entitled to have his share transferred to him."'
64 Hill J expressed the view in par 51:
'Clearly, if a beneficiary is absolutely and indefeasibly entitled to an aliquot share of the trust fund (or income) and the assets of the trust are money, the beneficiary will usually be entitled to call for the money. Whether there is some residual discretion of the Court where to distribute the money would be contrary to the intention of the trusts may be doubted. If there were, then there would be no present entitlement, since the right to demand income would be conditional on an order of the Court. If there is no such discretion, then, as presently advised, I see no reason why the beneficiary would not be presently entitled.'
65 Hill J said that it was not necessary to determine that issue conclusively in the case before him, because there would nevertheless be deemed present entitlement under s 95A(2).
66 Volume 48 of Halsbury's Laws of England, 4th edn says in par 627:
'If each class member is sui juris, then, if the members are unanimous, they may require all the income to be distributed to them.'
citing Re Smith, Public Trustee v Aspinall (1928) Ch 915.
67 In Buschau v Rogers Communications Inc, a judgment of 20 February 2004 of the Court of Appeal for British Columbia, Madam Justice Newbury, with whom the other members of the court agreed, said at [3]:
'… If each class member is sui juris, then, if the members are unanimous, they may require all the income to be distributed to them. …
[4] Where the rule is Saunders v. Vautier does apply, no court order or approval is necessary - at least in theory. The beneficiaries are entitled to call on the trustee to deliver over the property and the trustee must comply. (Alternatively, the trustee may invoke the rule and require the beneficiaries to accept the distribution of the trust property, and may pay it into court if they refuse: Underhill, supra, at 711.) In practice, however, most trustees will wish to ensure that they will not be subject to legal action by the settlor or beneficiaries should a question arise as to the propriety of abrogating the trust. Thus the direction of the court will generally be sought, if only to obtain its opinion as to the applicability of an undoubted rule.'
68 Arjon was a judgment of the Supreme Court of Victoria. The assertion by the Commissioner in that case was that Arjon as trustee of the Gandel Family Trusts (the sole unitholder of all the issued units of the GSF Unit Trust), was the owner of the equitable estate or interest in the Broadmeadows land. The question was whether Arjon was the owner for the purposes of the Land Tax Act 1958, "owner" being defined as every person entitled to any land for an estate of freeholding in possession.
69 At par 35 in Arjon, Phillips JA said:
'… In Karingal, in the judgment which is under appeal, Nettle, J. said this of MSP [2002] VSC at [47]:
"But where, as in MSP and here, the trust deed divides the beneficial interest in the fund into units and specifically confers on each unit holder an interest in the trust fund as a whole, the fact that certain of the unit entitlements, and perhaps even most of the unit entitlements, are discretionary in one sense or another, cannot mean that the trust is to be characterised as a discretionary trust in a sense that deprives the unit holders of the interest for which the deed expressly provides; and the High Court did not say otherwise."
This was recently quoted with approval by Goldberg, J. in Lock v. Commissioner of Taxation (Cth) (2003) 52 ATR 575 at [62], and, with respect, I too agree.'
70 His Honour Phillips JA referred in par 38 to the joint judgment of Tamberlin and Hely JJ in Kent at 71:
'On the relevant date, [the beneficiary] AFE had a contingent defeasible interest in the specific assets of the trust, including the ship. The interest was contingent on AFE being a beneficiary of the trust as at the vesting date, and was defeasible in relation to particular assets of the trust if they were disposed of by the trustee in the course of administration of the trust prior to the vesting day.'
Phillips JA continued:
'This may be correct in relation to the entitlement of a particular unit holder when there is more than one unit holder; but in a case like the present where the trust deed itself declares that the trust fund as a whole is vested in all the unit holders together and there is but one person holding all the issued units, it seems to me to follow that that sole unit holder must be regarded as in equity entitled to an interest, vested in possession, in all of the trust assets. The trustee has the legal title to the trust property, holding subject to the trust deed; and the equitable title to that property is in all of the unit holders together - or, when there is only one who holds all of the units, in that sole unit holder. To say that the sole unit holder does not have equitable title to the property unless and until the right to terminate the trust is exercised and the title called for appears to me, with respect, to confuse the right to be recognised as the owner in equity with the right to call for a transfer of the legal title. Again I emphasise that this is to speak only of the holder of all of the issued units; I am not dealing with the right of the individual unit holder who is but one of several.' (Emphasis in original)
71 The question in the present case is whether there was a present entitlement to income as between beneficiary and trustee. The issue in Kent was who was the owner, vis-ŕ-vis the third party, who wished to bring an action for damages in rem against the ship Maria Luisa as a surrogate of the vessels on which he was working when injured.
72 Consistent with the obiter view of Hill J expressed in par 51 of his Honour's reasons in Estate Mortgage, and the opinions of Rich J and Starke J in Whiting referred to above, in my opinion, Jancy was presently entitled to the 1992 net trust income of the CFGUT trust.