Secretary, Department of Families, Housing, Community Services & Indigenous Affairs v Elliott

The Statutory Framework 9 Part 3.18 of the Act is headed 'Means test treatment of private companies and private trusts'. Section 1207 sets out a 'simplified outline' of Pt 3.18. That outline explains (amongst other matters) that, for an asset or income in a private company or a private trust to be attributed to an individual: (a) the company must be a designated private company or the trust must be a designated private trust (sections 1207N and 1207P); and (b) the company must be a controlled private company in relation to the individual or the trust must be a controlled private trust in relation to the individual (sections 1207Q and 1207V); and (c) the individual must be an attributable stakeholder of the company or trust (section 1207X). 10 Section 1207 also explains: * A company or trust will be a controlled private trust or a controlled private company if the individual passes a control test or a source test. 11 The primary judge summarised the general operation of Pt 3.18 in relation to private trusts at [27]: Pursuant to subs 1207V(1), for the purposes of Pt 3.18, a trust is a "controlled private trust" in relation to an individual if the trust is a "designated private trust" (as defined in subs 1207P(1)) and the individual passes the "control test" in subs 1207V(2) or the "source test" in subs 1207V(3). 12 This appeal turns on the proper construction of one aspect of the control test, namely para (d) of s 1207V(2) of the Act. Section 1207V(2) provides: For the purposes of this section, the individual passes the control test in relation to a trust if: (a) the individual, or an associate of the individual ... is the trustee, or any of the trustees, of the trust; or (b) a group in relation to the individual was able to remove or appoint the trustee, or any of the trustees, of the trust; or (c) a group in relation to the individual was able to vary the trust deed or to veto the decisions of the trustee; or (d) the aggregate of: (i) the beneficial interests in the corpus or income of the trust held by the individual (whether directly or indirectly); and (ii) the beneficial interests in the corpus or income of the trust held by associates of the individual (whether directly or indirectly); is 50% or more; or (e) a group in relation to the individual had the power (by means of the exercise by the group of any power of appointment or revocation or otherwise) to obtain, with or without the consent of any other entity, the beneficial enjoyment of the corpus or income of the trust; or (f) a group in relation to the individual was able in any manner whatsoever, whether directly or indirectly, to control the application of the corpus or income of the trust; or (g) a group in relation to the individual was capable under a scheme of gaining the enjoyment or the control referred to in paragraph (e) or (f); or (h) a trustee of the trust was accustomed or under an obligation (whether formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual. (Emphasis in para (d) added.) 13 Under s 1207V(4), a reference in the section to the word 'group' in relation to an individual is a reference to: (a) the individual acting alone; or (b) an associate of the individual acting alone; or (c) the individual and one or more associates of the individual acting together; or (d) 2 or more associates of the individual acting together. 14 The appellant, in his written submissions, summarised the approach of the primary judge and, subject to one critical matter to which we refer below (at [28]), the summary seems to represent a comprehensive account of her Honour's approach. 15 The primary judge's general approach appears from [25]: The Social Security Act does not define "beneficial interests". The expression "beneficial interest" has no precise received meaning ... The expression "beneficial interests" therefore falls to be interpreted principally by reference to the statutory context in which it is used, and any guidance that the general law can provide. The Court may also have regard to extrinsic materials such as the second reading speech or the explanatory memorandum accompanying the Bill to confirm that the ordinary meaning of the expression is applicable or to assist in resolving any ambiguity: see Acts Interpretation Act 1901 (Cth), s 15AB. 16 After setting out the statutory framework, the primary judge referred to the extrinsic materials that accompanied the Bill introducing Pt 3.18: [32] - [33]. On the basis of comments in the extrinsic materials, the primary judge observed that it was open to doubt whether Pt 3.18 was intended to extend to persons such as the Elliotts, who 'have minimal, if any, control over the corpus or income of a trust' because 'neither singly nor together are the Elliotts (or the Elliotts and their daughter) able to control the disposition of the income or capital of the trust': [34]. 17 The primary judge then reviewed several cases relied on by the Elliotts as to the meaning of beneficial interests in a discretionary trust: [35] - [39] and [41] - ­[46]. According to her Honour, four of the cases (Gartside v Inland Revenue Commissioners [1968] AC 553, R & I Bank of Western Australia Ltd v Anchorage Investments Pty Ltd (1993) 10 WAR 59,Australian Securities and Investments Commission v Carey & Ors (No 6) (2006) 153 FCR 509 and Commissioner of Stamp Duties (Qld) v Livingston (1964) 112CLR 12) 'make it plain that, although the object of a discretionary trust holds a bundle of rights, these rights do not necessarily amount to what can be termed an "interest" or "beneficial interest", when considered from the perspective of a particular statute': [46]. 18 Finally, the primary judge turned to the use of the term 'beneficial interests' in s 1207V(2)(d) of the Act: 1. Her Honour observed that s 1207V(2) was 'intended to ensure that those assets that an individual can control and therefore utilise are taken into account in assessing whether that individual qualifies for a benefit under the Social Security Act': [48]. 2. According to her Honour, the criteria in paras (a) to (h) of s 1207V(2), 'all reflect a requirement that the individual, or his or her associate, or a "group" in relation to the individual ... exercise some legal or practical control over the trust': [49]. 3. Section 1207V(2)(d), her Honour said, 'must be construed in this statutory context' as 'set[ting] out a standard, which, if satisfied, supports the conclusion that the individual (alone or with his or her associates) has some practical control over the corpus or income of the trust': [49]. 19 This reading of s 1207V(2)(d) led the primary judge to hold that the AAT had erred in deciding that, on the facts as found by it, the Elliotts passed the control test because they satisfied s 1207V(2)(d) of the Act: [53]. 1. It was central to the primary judge's conclusion that 'neither of the Elliotts acting alone or together, or with their daughter (or with any lineal descendant as yet unborn) have any legal or practical capacity to take control of the testamentary trust'; 'the trustees (so the [AAT] found) exercised their independent judgment in considering whether or not to make payments to any of the discretionary beneficiaries'; and it was, in that context, 'inapt to attribute to the Elliotts "beneficial interests in the corpus or income of the trust fund", which are capable of aggregation, as s 1207V(2)(d) contemplates': [50]. 2. Nor did the direction to the trustees to have primary regard to the needs of Mr Elliott alter the essential nature of the rights held by him and the other discretionary beneficiaries: [52].

The Appellant's Arguments on Appeal 20 The appellant, on the hearing of the appeal, developed four arguments in support of his contention that the primary judge erred in construing s 1207V(2)(d) in the way her Honour did, and should have found that: 1. The 'beneficial interests' referred to in s 1207V(2)(d) include an individual's interests in relation to a trust that would not be recognised under the general law as giving the individual any rights in relation to the corpus or income of the trust; 2. the expression 'beneficial interests in the corpus or income of the trust' in s 1207V(2)(d) extends beyond interests that would give the beneficiaries of a trust the capacity to take control of the income or capital of the trust; 3. a person who is designated as one of a number of potential beneficiaries of a discretionary trust, and who is capable of benefiting from the exercise of the trustees' discretion under the trust, holds a beneficial interest in the corpus or income of that trust for the purposes of s 1207V(2)(d); and 4. because the only persons who are designated as potential beneficiaries of theTrust, and who canbenefit from the exercise of the trustees' discretion under the Trust, are the Elliotts and their 'associates' (as defined in s 1207C(1) of the Act), each of the Elliotts passes the control test prescribed by s 1207V(2)(d).

Analysis 21 The issue of whether a person who is a beneficiary or object, whether as to income or capital or both under a discretionary trust, has an 'interest' in that trust or the income thereof, invariably described as a 'beneficial interest', has been addressed in a number of cases over the last 120 years in different statutory contexts. In every case, the answer or conclusion arrived at has depended on two matters: 1. The nature of the discretionary trust in relation to the beneficiary or object; whether the trust is exhaustive with respect to the class of which the beneficiary or object is a member in the sense that the trustee is bound to distribute to one or more of the class or whether the trust is non-exhaustive by reason that the trustee has, in the case of income, a power to accumulate, or, in the case of corpus, there is a gift over in default of exercise of the discretion; and whether the relevant class is, at the relevant time, still open or closed; and 2. the statutory context in which the issue arises; in particular whether the mechanism of the statute cannot operate unless the precise extent of the interests can be identified. 22 In respect of the first matter - the nature of the discretionary trust in relation to the beneficiary or object - at least four kinds of trust have been identified: 1. Exhaustive trust with a closed class of beneficiaries; 2. exhaustive trust with an open class of beneficiaries; 3. non-exhaustive trust with a closed class of beneficiaries; and 4. non-exhaustive trust with an open class of beneficiaries. 23 Provided there is, at or during the relevant point or period of measurement, more than one member of the class, it is impossible to measure the extent of an individual beneficiary's interest in the trust whether the trust is of a kind which falls within (1), (2), (3) or (4). On the other hand, if the trust is of a kind that falls within (1) or (2), it will be possible, in relation to income, although perhaps not in relation to corpus in the case of trust (2), to measure the collective interests of all existing members of the class. This is, perhaps, best articulated by what Lord Reid said in Gartside [1968] AC 553 at 606: I think that this idea of a group or class right must have arisen in this way. Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes, you cannot tell what any one of the beneficiaries will receive until the trustees have exercised their discretion. But you can say with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income. You can have an equation x + y + z = 100 although you do not yet know the value of x or y or z. And that may lead to important results where the trust is of that character. But that is not this case. (Emphasis added.) 24 On the other hand, if the trust falls within (3), and certainly if it falls within (4), it will not be possible to measure the collective interests of all existing members of the class for the reason that the power to accumulate might be exercised. This is not to say that the members of the class have no rights; as French J said in Carey 153 FCR 509at [30]: I accept that there are some rights enjoyed, even by the beneficiaries of a non-exhaustive discretionary trust with an open class of beneficiaries. They include the right to inspect the trust documents - Re Londonderry's Settlement [1965] Ch 918 and the right to require the trustee to provide information about management of the trust fund - Spellson v George (1987) 11 NSWLR 300; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405. There is also a right to enforce the proper management of the trust by the trustee: Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12; Re Atkinson [1971] VR 612. But those rights are not, in any relevant sense, capable of measurement. 25 As to the second matter of statutory context, an illustration of the different conclusions that flow from different statutory contexts is Attorney-General v Heywood (1887) 19 QBD 326 and Attorney-General v Farrell [1931] 1 KB 81 on the one hand and Gartside [1968] AC 553on the other. The difference is summed up in the judgment of Lord Wilberforce in Gartside [1968] AC 553 at 619 - 621: Attorney-General v. Heywood was decided in 1887 upon s 38(2)(c) of the Customs and Inland Revenue Act, 1881, when what was levied was a stamp duty on property included in an account. The 1881 Act defined various categories of property to be included in an account, viz., property included in a gift made within three months of the death, property held on joint tenancy, and (under paragraph (c)) settled property in which a limited interest was reserved to the settlor or over which the settlor reserved a power of revocation. Attorney-General v. Heywood was concerned with a voluntary settlement under which the trustees had a discretion to apply income, during the settlor's life, for a class including the settlor, and it was held by a Divisional Court that section 38(2)(c) applied. The judgment of Wills J. contains the following passage: "The word 'interest' is capable of different meanings, according to the context in which it is used or the subject-matter to which it is applied. If the contention for the defendants is right nobody has any interest in the property settled, and yet the whole fund was to be held for the benefit of three classes of persons - the husband, the wife, and the children; and the sum of the benefits conferred on all these three classes taken together, being the sum of three nothings amounts to nothing, whereas, on the other hand, it must necessarily comprehend the whole interest in the fund. This is simply a reductio ad absurdum. The application of the word 'interest' is not confined to a vested or a necessarily contingent interest. The Act was meant to cast a wider net than such a construction would imply." When this decision was followed in Attorney-General v. Farrell, section 38(2)(c) of the Act of 1881 (as amended in 1889) had been incorporated by the unhappy technique of reference into section 2(1)(c) of the Finance Act, 1894 - "as if therein enacted". This case, too, was concerned with a settlement which contained a discretionary trust of income for the settlor and other persons. The Court of Appeal, not without hesitation, held that duty was payable and that Attorney-General v. Heywood ought to be followed. Lord Hanworth M.R. expressed himself as unwilling to dissent from a case which had stood for so long and been acted upon: Greer L.J. considered that but for Attorney-General v. Heywood the case would have presented great difficulty. Romer L.J. both applied and approved the previous decision. The appellants invited your Lordships to overrule these cases. The Crown supported them and urged that they should be treated as governing the meaning of "interest" in the present case. I see no need to take either course. Perhaps Attorney-General v. Farrell could have been decided the other way on the ground that once section 38(2)(c) had been embodied in the Finance Act, 1894, s. 2(1), the word "interest" in the earlier section should be given a meaning similar to that which it bears in paragraphs (b) and (d), each of which involved the conception of extent. But this was not done and one can appreciate why not. For section 38(2)(c) is concerned, broadly, with the case of persons who settle their property, yet wish to benefit from it so long as they live. To tax them in such a case is perfectly understandable, however large or small the reserved benefit may be and whether it is defined in extent or undefined. No definition is necessary, because the measure of the charge is the whole value of the property. So naturally no reference is made to "extent" - the mere fact of reservation is enough. I think, therefore, that the decisions in principle are acceptable. But - this is the other limb - acceptance of them does not carry the present case. In section 2(1)(b) of the Finance Act, 1894 (and the same is true of section 2(1)(d)), a duty is imposed the quantum of which is related to the extent of the interest and I see no difficulty in saying that the element of extent is relevant under the two sections but not under the third: the distinction is both made in the language and is necessary if the tax is to work. 26 The different conclusions that flow from different statutory contexts are similarly exemplified in the judgments of the House of Lords, in a case subsequent to Gartside [1968] AC 553, namely, Leedale v Lewis [1982] 1 WLR 1319. There the statute called for the apportionment of capital gains made by non-resident trustees where resident beneficiaries had 'interests' in the settled property, with the apportionment to be made 'in such manner as is just and reasonable between' them. The persons in question only had discretionary interests in the settled property. In concluding that such discretionary beneficiaries had 'interests in settled property' for the purposes of s 42(2) of the Finance Act 1965, Lord Fraser of Tullybelton said at 1327: Accordingly I agree with the Court of Appeal that the present case is not like Gartside v. Inland Revenue Commissioners [1968] A.C. 553, where the mechanism of the statute could not be operated unless the precise extent of the interests could be identified. And at 1329 Lord Wilberforce said: The key question is as to the meaning of the word "interests" in section 42(2) of the Finance Act 1965, the alternatives being whether this word refers only to such interests as can be assigned a value, or whether it is a word of more general significance capable of covering any interest, quantifiable or non-quantifiable, of a beneficiary under a trust. That either of these is a possible meaning in fiscal legislation is made clear (a) by the general observations of Lord Reid in Gartside v. Inland Revenue Commissioners [1968] A.C. 533 [sic], 603 (see also those of Stephen J. and Wills J. in Attorney-General v. Heywood (1887) 19 Q.B.D. 326) and (b) by a comparison of the cases just cited. In Heywood, which arose under section 38 of the Customs and Inland Revenue Act 1881, and where the question was whether the settlor had reserved "an interest" by including himself among a discretionary class of beneficiaries, the word "interest" was given the more general meaning. To require that it meant something to which an ascertainable value could be assigned would, it was held, be contrary to the scheme of the statute. In Gartside, on the other hand, which arose under section 43 of the Finance Act 1940, and where the question was whether estate duty would be charged in respect of the determination of a discretionary interest, this House held that the word must bear the narrower meaning because the statute necessarily required ascertainment of the quantum of the interest. In Gartside I expressed the opinion, from which the other members of the House did not dissent, that these two cases could stand together. The word "interest" is one of uncertain meaning and it remains to be decided on the terms of the applicable statute which, or possibly what other, meaning the word may bear. The appellant contends for the narrower meaning, and can find some support in section 42 of the Act of 1965. There is the reference to "values" in subsection (2). There is subsection (3) which, he contends, sets out a code for assigning values to discretionary interests in income or capital - an exclusive code within one of whose provisions a case must fall if a charge to tax in respect of a discretionary trust is to arise. There is, thirdly, the reference, in subsection (2), to a life interest or an interest in reversion, but, in my opinion this does not survive a first critical look: the reference is clearly illustrative and nothing more. The two main arguments are by no means negligible, but they are, in my opinion, greatly outweighed by those on the other side. I simply state them, as they impressed me; they are developed in discussion in the Court of Appeal's judgment. 1. The initial words of subsection (2) are "any beneficiary". Unless clearly directed otherwise, I would assume that "persons having interests" was correlative to these words. Discretionary objects are clearly "beneficiaries", so I would suppose them also to be included in "persons having interests." 2. The apportionment to be made under the subsection is mandatory. The amount of the gains - i.e., the whole amount - must be apportioned in the relevant year of assessment. This can only be done if discretionary objects, who may be the only "beneficiaries" in that year, can be the objects of apportionment. 3. The words, in subsection (2), "in such manner as is just and reasonable" and "as near as may be, according to the respective values of those interests" suggest a broad rather than an actuarial approach in which all relevant considerations may be taken into account. They permit, inter alia, consideration of the settlor's letter of intent which shows, at least, that the settlement was to be regarded as for the benefit of the grandchildren, not of the settlor's two children. 4. That subsection (3) represents an exclusive code is in my opinion not supported by the form of the section. On the contrary, the structure of it suggests that subsection (2) is the main and general charging provision, subsection (3) being auxiliary and confined to particular cases. These considerations together convince me that an apportionment in respect of "interests" under a discretionary trust can, indeed must, be made. 27 In the present case, the trusts as to both income and capital in cl 5(b) of the Will (together with cl 7(b)(i)) are non-exhaustive with an open class of beneficiaries. The beneficial interests of the existing beneficiaries both individually and collectively are incapable of measurement, but that is the very thing which s 1207V(2)(d) mandates before that 'control test' requirement is satisfied. In this regard, it is a statutory provision akin to that considered in Gartside [1968] AC 553 and unlike those considered in Heywood (1887) 19 QBD 326, Farrell [1931] 1 KB 81 and Leedale [1982] 1 WLR 1319.

Conclusion 28 The primary judge was very much alive to this issue. At [47] of her Honour's reasons she wrote: I accept that, as the Secretary submitted, the word "aggregate" in par 1207V(2)(d) is used in its ordinary sense, signifying "[t]o gather into one whole or mass; to collect together, assemble; to mass": see Oxford English Dictionary. Paragraph (d) of subs 1207V(2) presupposes, however, that there are in fact "beneficial interests in the corpus or income of the trust" that are capable of aggregation. If neither the individual nor his or her associates hold any such beneficial interests, then the paragraph cannot apply. The wide definition of 'interest' contended for by the appellant inevitably fails in the face of the statutory requirement of aggregation. 29 For the foregoing reasons, s 1207V(2)(d) cannot apply to the trust constituted by cl 5(b) of the Will and as the appellant relied on no other requirement of the control test in s 1207V(2), the appeal must be dismissed with costs as taxed or agreed. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Black and the Honourable Justices Stone and Edmonds.

Associate: Dated: 24 March 2009 Counsel for the Appellant: Mr P Hanks QC and Mr D Star

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the First and Second Respondents: Mr RB Phillips

Solicitor for the First and Second Respondents: Pearce Webster Dugdales