Teasdale v Webb

Federal Court of Australia|1994-10-05|Before: Foster J

appealed against objection decisions of the respondent (the "Commissioner") disallowing objections against assessments

made pursuant to the Income Tax Assessment Act 1936 (Cth) (the

"Assessment Act") for the year ending 30 June 1989. The matters in issue in relation to the assessments between each applicant and the Commissioner relate to arrangements made between the applicants in January 1989. These arrangements related to the deposit of a large sum of money at interest. It was part of the arrangements that the first applicant ("Walsh Bay") should indemnify the second applicant ("MSB") in respect of any liability to income tax incurred as a result of the arrangements. The Court is asked in these proceedings to resolve questions which are common to the assessments of each applicant. The questions have been argued on behalf of the applicants by counsel for Walsh Bay. A number of issues have been raised in relation to the assessments. The Court is asked, at this point of time, to resolve only two of those

Broadly, the Court is asked to rule whether the arrangements fall within Division 6 of Part III of the Assessment Act and, if so, what provisions of that Division apply to them. It is necessary, in the first instance, to set

BACKGROUND TO THE ASSESSMENTS Walsh Bay was originally named Patjay Pty Limited

("Patjay"), the change of name occurring on 10 July 1989.

Patjay waS incorporated in New South Wales on 15 November 1988. It was the Trustee for the Patjay Trust which was created by deed on 22 December 1988. The name of the Trust was itself changed to Walsh Bay Property Trust on 21 September 1989. The Trust was set up to enable three companies to join together in a major development project. This was the Walsh Bay Redevelopment Project ("the project") which involved the proposed redevelopment of an area of land of approximately 8.5 hectares located between Dawes Point and Millers Point in the area of Walsh Bay, Sydney. At all relevant times this land was owned by MSB. The project was of very significant size

and the commercial dealings in respect of it were complex.

There was an elaborate tendering process, the detail of which need not be referred to. By August 1988, through a process of elimination, only two tenderers remained, one of which was the consortium of three companies operating through the Patjay Trust. One of these tenderers was to be selected as the sole tenderer. That tenderer would then be able to enter into what was described as an exclusive negotiation agreement with MSB, the object of which was to arrive at a final agreement for the undertaking of the project. Patjay succeeded in being selected as the final tenderer as a result of offering to pay an amount described as "a single up~front payment" of $74,566,000 to MSB upon the execution of the agreement for the development of the project. It appears that this offer secured for Patjay the right to conduct exclusive

negotiations with MSB. The "single up-front payment",

apparently, continued to play a significant role in those negotiations although, ultimately, various qualifications and

conditions were arrived at in relation to 1ts payment. In

effect, it was a prepayment of rent in relation to property to

Agreement was finally reached between MSB_ and Patjay. The terms of this agreement were embodied in a Deed of Agreement dated 12 January 1989 ("the Deed of Agreement"). The provisions in relation to the "up-front payment" were detailed and fairly complex. It 1s necessary that they be set

(a) The developer shall promptly confirm in writing to the Board that all Development Approvals have been obtained upon conditions acceptable to the Developer of which the Developer is required to accept pursuant to clause 4.3.

(a} The Developer shall pay to the Board no later than 3 business days after the date of this Agreement (and time shall be of the essence in this regard) by way of unendorsed bank cheque the sum of $74,566,000 (seventy four million five hundred and sixty six thousand dollars) together with the amount calculated pursuant to paragraph (e) of this clause ('the Sum').

(b) The Board shall at the date it receives the Sum deposit the Sum with the Hong Kong Bank of Australia Lamited ('the bank') at the deposit rate being the average of the offer side of the banks quoting for the 30 day bank bill rate as displayed on Reuter B.B.S.W. page ('the Deposit Rate') at approximately 10.15 am on that date. The Sum shall initially be invested for a term of 30 days and thereafter shall be reinvested on a monthly basis at the Deposit Rate on the date that the Sum is reinvested.

(c) The Board shall invest the Sum with the bank in the joint names of the Board and the Developer to be held on trust pending the receipt of the notice referred to in Clause 8.3 or the return of the Sum to the Developer in accordance with Clause 8.2.

(d) The interest earned on the Sum shall be capitalised to the account.

(e) The Developer agrees that the Board shall be entitled to interest on the amount of $74,566,000 calculated on and from 28 December 1988 up to the date of the payment of the $74,566,000 in accordance with paragraph (a) as 1f that amount had been invested during that period at the rate of interest described in paragraph (b) hereof.

Subject to clause 13.2, if the Developer has paid the Sum and if the Project cannot proceed because Development Approval cannot be obtained or can be obtained only subject to the imposition of conditions which materially and adversely affect the commercial viability of the Project to the Developer or 1f this Agreement is otherwise terminated before the receipt of the notice referred to in clause 4.4(a) by the Developer or the Board in accordance with its terms then the Sum (together with interest hereinafter defined) shall become the absolute property of the Developer and the Board acknowledges that thereafter the Board shall have no interest or claim whatsoever under any circumstances in respect of the Sum or the interest and the Developer shall ummediately upon receipt of the Sum and the interest vacate such parts of the Land (1f any) of which it is then in occupation and the Developer and the Board shall thereafter be released from any further obligations under this Agreement (except in respect of any antecedent' breaches). The Board will forthwith do all things necessary on its behalf to ensure that the Sum and the interest 1s returned to the Developer in accordance with the terms of this clause. The Board shall deliver to the Developer any necessary direction to the Bank authorising the release of the Sum and the interest. In the event of the Sum being returned to the Developer in accordance with the provisions of this clause 8.2 all interest earned thereon shall be shared equally between the Developer and the Board provided that the Board's entitlement to such interest shall not exceed $1,000,000 (the quantum of interest to which the Developer is entitled being herein called 'the interest').

Upon receipt by the Board of the notice referred to an clause 4.4(a) the Sum (together with all interest earned thereon) shall forthwith become the absolute property of the Board and the Developer acknowledges that thereafter the Developer shall have no interest or claim whatsoever under any circumstances in respect of the Sum. The Developer shall deliver with the notice referred to in clause 4.4(a) a direction to the bank authorising the release of the Sum (together with all interest earned thereon) to the Board." [emphasis added]

The "Developer" referred to in these clauses was Walsh Bay, at that point still known as Patjay. The "Board" was MSB. These provisions reflected negotiations which had related to the way in which the "up-front payment" was to be dealt with, having regard to eventualities which might prevent the project proceeding and to the time which would necessarily elapse before those questions could be determined. It is the Commissioner's contention that these arrangements took the relationship between the parties into the field of trust. Other provisions of the Deed of Agreement are submitted by the Commissioner to be relevant to this question. I set them out in full, as follows:- "13.2 Termination provisions including Application of Performance Bond (a) If the Agreement is terminated as a result of the Developer's breach hereunder the whole of the moneys payable under the Project Performance Bond (subject to the provisions of clause 13.1(c)) and the whole of the moneys referred to in clause 8.1 (subject to clause 13.7) shall become the absolute property of the Board and the Developer acknowledges that it shall have no interest or claim whatsoever in

Notwithstanding the provisions of clause 13.2(c), in the event that this Agreement is terminated as a result of the Developer's breach hereunder prior to the giving of notice and direction referred to in clause 8.3, then the sum referred to in clause 8.1 (including all interest earned thereon) less an amount of tem million dollars ('the retention sum') Shall be returned to the Developer. The retention sum shall continue to be held in trust on the terms of deposit referred to in clause 8.1 pending the resolution either by agreement of the parties, or in default of agreement by a court of competent jurisdiction, of any claim that the Board may have in relation to the whole or part of the sum arising as a consequence of the Developer's default. Upon resolution of the dispute such part of the retention sum (together with the interest earned thereon) as is payable to the Board shall be paid to the Board and the balance shall be immediately refunded to the Developer and each party agreed to do all things reasonably necessary (including the giving of appropriate directions to the Bank referred to in clause 8.1) to give effect to this clause. Nothing in this clause shall affect the operation of clause 13.1. Notwithstanding the foregoing provisions of this clause 13.7, the Board shall first apply the Project Performance Bond to satisfy any claim for

The "Performance Bond" referred to in these provisions has no bearing upon the questions arising in this case. Otherwise the contents of these clauses are said to be of significance in the characterisation of the arrangements

Pursuant to the Deed of Agreement of 12 January 1$89, an account was opened with the Hong Kong Bank of Australia in the joint names of MSB and Patjay and "the Sum", calculated in accordance with clause 8.1 was paid by Patjay to

The development of the Project did not go ahead. On 13 July 1990, Walsh Bay gave written notice of termination to MSB. On 16 July 1990 the parties entered into a Deed of Termination and Release under which the amount deposited, together with interest accrued thereon, was disposed of in accordance with the provisions of the Deed of Agreement. As at 30 June 1989, no payments had been made out of the bank account to either MSB or Walsh Bay or to any person at the direction of either of them. It should also be noted, as some reference was made to the fact in argument, that MSB had consented to a charge being given by Walsh Bay over its interest in the amount deposited in favour of financiers who

had provided necessary finance to enable it to make the

As at 30 June 1989, an amount of approximately $5.2M had accrued by way of interest on "the Sum" deposited in accordance with the Deed of Agreement. The Commissioner issued tax assessments in respect of the sum on the basis that it was income of a trust estate in respect of which no beneficiary was presently entitled (s 99A of the Assessment Act). These assessments were the subject of objection and the

THE I ES FOR DETERMINATION At this stage, Walsh Bay and the Commissioner seek

tu have the following questions decided by the Court:-

(1) Was the income arising from the deposit with the Hong Kong Bank of Australia income of a "trust estate" within

the meaning of Division 6 of Part III of the Assessment Act?

(2) If the answer to (1) is "yes", was there a part of the net income of that trust estate which was not included in the assessable income of a beneficiary of the trust estate in pursuance of s 97 in respect of which the trustee was liable to assessment pursuant to s 99A of the Income Tax

Walsh Bay submits that the arrangements made pursuant to the Deed of Agreement did not give rise to any "trust" within the ordinary meaning of that word and, consequently, did not give rise to the existence of a "trust estate" within the meaning of Division 6 of Part III of the Assessment Act. This submission encounters the not inconsiderable threshold difficulty that the relevant provisions of the Deed of Agreement speak clearly of the

Clause 8.1(a) requires that the Developer pay the agreed amount of some $74.5M plus interest to the Board by bank cheque. Clauses 8.1(b) and (c) then require that the

Board invest the money so paid with the bank in a joint

account in the names of the Developer and the Board to be held "on trust" pending the receipt of the notice referred to in Clause 8.3, or the return of the Sum to the Developer in accordance with Clause 8.2. Clause 13.7, which deals with a "retention sum", part of the amount of «he original Sum deposited, provides that "the retention sum shall continue to be held in trust on the terms of deposit referred to in clause

8.1" pending the resolution of any claim made by the Board to

These provisions for the holding of "the Sum" in trust must, of course, be read with the provisions of clauses 8.2, 8.3 and 13.2 which make provision for "the Sum" becoming "the absolute property" of the Board or the Developer as the case may be, depending upon the occurrence of events in

relation to the continuance or otherwise of the Project.

Walsh Bay contends that, despite the use of this terminology in these carefully drawn documents prepared by the legal advisers of the parties, I should find that the applicants had no intention to create any trust in relation to the amount deposited of interest with the bank. It is submitted that the words "on trust" should be treated as mere surplusage, the rights and obligations of the parties being sufficiently defined and protected by the provisions of the Deed dealing with the disposition of the fund an the event of the relevant approvals being obtained for the project, or of

the termination of the Deed of Agreement through the fault of

the Developer or through failure to obtain satisfactory approvals. It was argued that those provisions were adequate to cover the agreed positions of the parties without the introduction of any trust arrangements. Consequently, it was to be inferred that, notwithstanding the words used, the parties had no relevant intention to create fiduciary rights

Reliance was placed upon cases such as Teasdale v Webb (1940) 57 WN (NSW) 151, Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178, and Kauter v Hilton (1953) 90 CLR 86. These cases are very different from the present. They involved the use of "trustee" savings bank accounts opened by depositors in the name of another person. The question 1n each of them was whether the opening of such an account necessarily involved the creation of a trust in favour of that person. The opening of the account, described as a "trustee account, was only one element to be taken into consideration in determining whether there had been any intention to create a trust of the contents of the account. In Kauter the Full Court of the High Court (Dixon CJ, William and Fullagar JJ) said (at 100):- "The effect of Jolliffe's case is that the mere opening of an account under the section by one

person ian trust for another is not necessarily suffacient to make that person a trustee for the

other person. All the relevant circumstances must be examined in order to determine whether the depositor really intended to create a trust. Even

where it is held that a trust is intended it is still material to ascertain its terms."

Similarly, cases such as Garrett v L'Estrange (1911)

13 CLR 430 and Tito & Ors v Waddell & Ors (No. 2) [{1977] Ch

106 do no more than indicate that an intention to create a trust must be ascertained, in every case, by consideration of

the relevant facts, the mere use of expressions such as "on

trust" not being determinative of the question. Thus, in Garrett, Griffiths CJ said (at 434): °...in the case of a

declaration of trust there must be an intention on the part of the person who makes the declaration to divest himself of the beneficial interest and constitute himself a trustee for the other party". In Tito, Megarry V/C said (at 211) "In every case one has to look to see whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a true trust has

These cases merely emphasise that the use of the words "to be held on trust" in the Deed of Agreement in the present case do not of themselves require a finding that a trust has been created. One cannot help remarking, however, that, in contrast to the informal use of the terms in the trustee bank account cases, the words, as they are used in the Deed of Agreement, have all the appearance of having been carefully chosen by the draftsman as reflecting the result of agreement between the parties reached after protracted and

In furtherance of the submission that no effect should be given to the words "in trust" and that they should be treated as mere surplusage, reliance was placed by the applicants upon these very negotiations and the detailed contractual terms which arose from them. It was put that, in truth, the parties saw their relationship as being based upon contract alone, it being argued that the only purpose of the words "on trust" was to merely indicate that the moneys in the joint account were to remain there in the joint names of the applicants until one or other of the nominated events occurred, those events being the subject of express conditions needing no fiduciary duties to enforce them. The contract

It was submitted that the true legal position was that Walsh Bay and MSB were the joint legal owners of the funds in the joint account, the investment and disposition of which were the subject of contractual arrangements entered into between them, the "up-front" funds being provided as an earnest of Walsh Bay's capacity and willingness to proceed with the transaction and which were to be held pending their ultimate payment out in accordance with arrangements which were contractual in nature. The funds had not been placed in the name of a third party but in the names of the parties themselves, a Situation which did not require the imposition

Indeed, 1t was put as an alternative and preferred argument that Walsh Bay was intended to remain the beneficial owner of the amount deposited and of the accrued interest until such time as, pursuant to the terms of the Deed, the fund was transferred to MSB or returned to Walsh Bay less the

amount of $1M which was to be payable to MSB in any event.

I have come to the conclusion that these submissions must be rejected. I am satisfied that the parties intended to, and did in fact, create an express trust of the moneys invested in the bank account. It was their intention to constitute themselves trustees of the fund, retaining for that purpose only the bare legal title to it. The beneficial ownership of the moneys was to be determined in accordance with the contingencies provided by Clause 8 and Clause 13 of

It was argued that, in the commercial setting of these transactions, the fact that the parties relied upon detailed and relatively complex contractual arrangements meant that they should be taken to have excluded from their intentions the imposition upon each other of fiduciary obligations. I am not persuaded by the arguments. On the contrary, I am of the view that the authorities clearly indicate that trust obligations can readily be found to

In Quistclose Investments v Rolls Razor Ltd [1970] AC 567 at 581, Lord Wilberforce considered an argument which

"The transaction, it was said, between the respondents and Rolls Razor Ltd was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondents' favour: a transaction may attract one action or the other it could not admit of both."

"I should be surprised if an argument of this kind - so conceptualist in character - had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and ali concerned. There 1s surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see [In re Rogers, 8 Morr. 243 where both Lindley L.J. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has , the remedies of equity may be invoked to give effect to it, if it has not (and the money in intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let ain these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it."

The facts an Quistclose, of course, were quite different from those in the present case, as appears from this passage. However, the case is indicative of the fact that contractual terms, even of a complex kind, can give rise to obligations in equity even where the language of trust is not employed. (See also Walker & Ors v Corboy & Ors (1990) 19 NSWLR 382; Re Australian Elizabethan Theatre Trust (1991) 30

Quite apart from the use, in the present case, of the language of trust there 1s, in my opinion, a significant indication that the parties intended to set up a trust arrangement in that they made provision for the establishment of the fund in a separate bank account. It was clearly not the intention that Walsh Bay would simply pay the "up-front" sum to MSB upon terms that the money would be repaid to it an certain eventualities. This would, of course, have created a simple debt, MSB having the right, before being called upon to repay, to mix the moneys so provided with its own funds and use 1t for its own purposes. The placing of the money in the separate bank account produced a different situation of the type discussed in the well-known passage from the judgment of Channell J in Henry v Hammond [1913] 2 KB 515 at 521, which reads as follows:-

",.. It 1s clear that 1f the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that

money and must hand it over to the person who is his cestui que trust. If on the other hand he is not

bound to keep the money separate, but 1s entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee ... but merely a debtor. All the

authorities seem to me to be consistent with that statement of law."

The very fact that Walsh Bay and MSB established the bank account, of which they were to be joint signatories, and which was to contain the money in question subject to the conditions that 1t could be only be paid to one or the other in defined circumstances would, without the use of the language of trust, have been strongly suggestive of the fact that they intended to retain only the bare legal estate in the fund, the equitable estate to be disposed of when one or the other of the contingencies occurred. They constituted themselves joint trustees of the fund which they impressed with the particular trusts which would determine the ultimate

disposition of the beneficial interest in the money.

All the requirements of a trust therefore existed, trustees, trust property, trust terms, and cestuis que trust. The addition in the Deed of Agreement of the term "in trust", in my view, puts the matter beyond doubt. I am quite satisfied that a trust was created by the Deed of Agreement and that the moneys in the bank account relevantly constituted

a "trust estate" within the meaning of the Assessment Act.

must deal with three subsidiary arguments raised on behalf of

the applicants. It was submitted that there could have been no intention to create a trust because Walsh Bay and MSB were appointing themselves as trustees for themselves. In these circumstances, it 1s said, the beneficial and legal estates would necessarily merge with the result that no trust estate could arise. I reject this submission. Such merger can only occur where equitable and legal estates, equal and coextensive, unite in the same person. (See per Farwell J In re Selous; Thomsom v Selous (1901] 1 Ch 921 at 922. See also per Arden MR in Brydges v Brydges 8 Ves Jun 120 at 126 where it was said that the merger of the equitable estate with the legal estate "must be understood always with this restriction; that it holds only, where the legal and equitable estates are coextensive and commensurate..."). In the present case these principles cannot apply. The disposition of the fund could not take place until the occurrence of a contingency which would determine which of the holders of the legal estate should become entitled to the commensurate equitable estate. Until the contingency occurred no equitable interest coextensive with the legal interest was held by either of the

A second argument was put based on the fact that the charge, to which I have made reference, was given over the fund to financiers who had lent money to Walsh Bay for the purpose of its being paid over to MSB. It was submitted that the granting of the charge was only consistent with an

intention that the beneficial interest in the fund should

remain, at all times with Walsh Bay. I can find no substance in this argument. In my view, the charge related only to such interest as Walsh Bay had at that time. This was not the full

A final argument put on this aspect of the case was tha MSB had no power to constitute itself trustee of the fund. I am satisfied there is no substance in this submission. I am satisfied that it had the power to do so as incidental to the exercise of its ordinary powers or duties (The Queen v Gough

Anor; Ex parte Australasian Meat Industry Employees' Union (1965) 114 CLR 384 at 406 and 416).

IS THE INTEREST INCOME ASSESSABLE UNDER _S_97 OR UNDER S_99A OF THE ASSESSMENT ACT?

In the event that the interest income on the deposited fund was the income of a trust estate, within the meaning of the Assessment Act, it is the contention of Walsh Bay that the income was assessable pursuant to s 97 of the Assessment Act. It was said to be so on the basis that, as at 30 June 1989, either alone or jointly with MSB, it was "presently entitled" to the income. On the other hand, it is the contention of the Commissioner that, as at that date, no beneficiary was "presently entitled" to the income and it was

Insofar as Walsh Bay's argument as to_- the assessability under s 97 depends upon its submission that it remained beneficially entitled to both the amount deposited and the interest accruing thereon until such time as the events nominated in Clause 8.1(c), Clause 8.2 or Clause 8.3 occurred, this submission has already been rejected. From the moment when the deposit occurred pursuant to the terms of the Deed of Agreement, it was held by both parties as joint tenants on trust that it be paid to one or other of them contingent upon the occurrence at some future date of the events which would determine the disposition of the fund. Of course, these events did not occur prior to 30 June 1989. I am satisfied that, as at that time, Walsh Bay was not

"presently entitled" to the fund or accrued interest.

The alternative submission was put that, as at 30 June 1989, both Walsh Bay and MSB were presently entitled. The totality of both the legal and beneficial interest was vested in them. They were in complete control of the fund and its income. The fact that at that time neither could demand Payment of the moneys to it did not prevent their being presently entitled. This contention was said to find support in a line of decided cases upon the meaning and operation of the sections in Division 6 Part III of the Assessment Act. Those cases are:~

(a) Federal Commissioner of Taxation v Whiting & Ors (1943) 68 CLR 199

(6b) Taylor & Anor v The Commissioner of Taxation (Cth) (1970) 119 CLR 444

(Cc) Federal Commissioner of Taxation v Totledge Pty Limited

(d) Harmer & Ors v The Commissioner of Taxation (Cth) (1991) 173 CLR 264

(e) Dwight v Commissioner of Taxation (1992) 37 FCR 178

I do not find it necessary to set out the relevant sections of Division 6. They have undergone changes over the years so that they are, for the most part, more detailed and involved than were the sections considered in the earlier cases. It 1s sufficient, for present purposes, if I set out the analysis of the scheme of Division 6, with which I

respectfully agree, provided by Hill J in Dwight. His Honour

"The scheme of Div 6 of the Act, albeit in part modified from time to time by amendments designed to overcome particular tax avoidance practices, remains

Much as it was in 1936. The identification of the relevant taxpayer and the share of the net income (defined in s 95(1)) upon which tax 1s payable,

depends upon whether there is a beneficiary of a trust estate who is presently entitled to a share of the trust law income of that trust estate. Where there are beneficiaries who, alone or together, are presently entitled to the whole of the income (ie trust law income) of the trust estate, then subject to territorial matters, not presently relevant, there will be no liability upon the trustee of that estate and the beneficiary, or each of the beneficiaries, as the case may be, who is presently entitled to a share of the trust law income will have included in his assessable income his proportionate share of the net income: ss 96 and 97.

Where, however, that beneficiary or beneficiaries are presently entitled, alone or together, to the whole of the trust law income but the beneficiary, or one or more of the beneficiaries, 1s under a legal disability, the trustee is obliged to pay the tax on a proportionate share of the net income correlative to that beneficiary's share of the trust law income: s 98.

Where there 1S a part of the trust law income to which no beneficiary 1s presently entitled, the

trustee will be liable to pay the tax in respect of a proportionate share of the net income corresponding to the share of the trust law income to which no person 1s presently entitled: s 99A or

s 999. Where s 99A applies, tax is payable at a special rate, which generally speaking equates to the maximum rate of tax. Where s 98 applies, the

rate of tax is, in general terms, assessed as if it were the income of the beneficiary under a disability but not subject to deductions other than concessional deductions, if any, that would have been allowable to that beneficuiary.

The Act does not define present entitlement as such. however, s 95A(2) which was introduced into the Act by the Income Tax Laws Amendment Act 1980 (Cth) (Act No 19 of 1980), s 9(1), provides: 'For the purposes of this Act, where a beneficiary has a vested and indefeasible unterest in any of the income of a trust estate but 1s not presently entitled to that income,

the beneficiary shall be deemed to be presently entitled to that income of the trust estate.'"

It is clear, of course, that the concept of "present entitlement", left undefined by the legislation, is critical to the application and operation of these sections. It was the object of close consideration in the cases set out above. I do not propose to undertake any detailed analysis of those cases. I am content to adopt, with respect, what was said by Hill J in Dwight (at pp 188-189) as to the effect of them. His Honour, having referred to the exploration of the meaning

"These cases were distilled by the High Court in Harmer (at 271) as establishing that:

'... a beneficiary 1s "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.'

Whiting (Supra) was concerned with whether there was present entitlement to income in the period between grant and completion of administration. In that period, a residuary beneficiary has no interest in the assets of the estate, nor, for the same reason in the income derived from those assets, notwithstanding that the beneficiary may be entitled under the will to a vested interest. Such a beneficiary may be entitled but will not be presently entitled: see Whiting at 216. As to the nature of the rights of a beneficiary in an unadministered estate: see Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 312-314.

While the ability to demand and receive payment of income referred to in Whiting and Harmer is an indicia of present entitlement, it may not, with respect to what is said in Harmer, always be a prerequisite of present entitlement. So mush appears to have been recognised by Latham CJ and Williams J in Whiting (at 216), where their Honours suggested as an alternative to the right to demand payment, that within the meaning of s 19 the trustee may properly reinvest, accumulate, capitalise, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as the

beneficiary or on has behalf. This alternative formulation would seldom add much to the test of capacity to demand payment. It would at least,

however, accommodate a case where, by force of a contractual obligation to which the beneficiary and perhaps the trustee were parties not creating an equitable interest in another, the trustee was obliged to pay the moneys which constitute trust income vested in the beneficiary to some other person on behalf of the beneficiary. As Taylor (supra) illustrates (at 452 per Kitto J), to accommodate the use of the words 'present entitlement' ins 98 of the Act, they must refer:

'... to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have

a right to obtain payment of it if he were not under a disability."

It has been submitted on behalf of Walsh Bay that the portion of this passage relating to a "contractual obligation" of a beneficiary or trustee requires a finding in the present case that either or both Walsh Bay or MSB were, in the year of income ending 30 June 1989, presently entitled to the whole or a portion of the income accruing in that year to the funds on deposit. I am quite unable to agree with this

In view of what I have held as to the nature of the trusts created by Clauses 8.1, 8.2 and 8.3 of the Deed of Agreement, involving, at the point of investment, the separation of the legal and equitable estates in the fund and providing for the ultimate disposition of the beneficial interests in accordance with the occurrence of defined contingencies, I am quite unable to find any room for the application to the case of this part of Hill J's formulation. Until the occurrence of one or other of the contingencies, either the giving of the requisite notice or the termination of the project, neither Walsh Bay nor MSB were in a position to demand payment of the whole or portion of the income. The fact that they could, in theory, by mutual agreement, in circumstances where no third party interest was involved, have altered or extinguished the trusts 15 not to the point. No such thing occurred in the relevant year of income. The

trusts which they had set up governed their relationship and

also the question of entitlement to the corpus and income of the fund they had established. In the relevant year there was no "amount of income that (was) legally ready for distribution". Distribution awaited the occurrence of a

It was asserted on behalf of Walsh Bay that, in effect, the present case was on all fours with Dwight's case and should be governed by it. Again, I cannot agree. This submission depended, as I see it, in the ultimate, upon the contention that the moneys in the fund remained the property at law and in equity of Walsh Bay subject to equitable rights

in MSB which fell short of equitable ownership. In other

words, Walsh Bay, at all times, held title to the funds subject to something in the nature of an equitable lien in favour of MSB which could fasten on the fund upon the

For reasons which are already quite apparent, I do not consider that this is the proper analysis of the situation arising from the Deed of Agreement. The present case is, in my view, far more analogous to the situation in Harmer where there was payment into court by way of interpleader and an investment of the amount so paid in at interest pending the decision of the interpleader issues. In Harmer the court said (at 272-273) that:-

interest in the moneys in the sense that they were entitled to insist that they be properly

administered and applied for the purposes for which they were paid in. However, no claimant was beneficially entitled to either the whole or any part of the moneys paid into court or of the interest earned thereon. (See eg, Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 312- 314.) The moneys were received and held by the Accountant to be applied in accordance with the orders ultimately made by the Supreme Court. The respective interests of the individual claimants were at best, contingent. None had an entitlement to the capital or the income of the fund which was vested either in interest or in possession. A fortior1, none had a present legal right to demand or receive payment of either capital or income. It follows that none of the claimants was 'presently entitled' to the income of the fund for the purposes of s 99A of the Act during the period between the time of the payment in of the moneys and the time when they were received by In Residence's solicitors to be deposited with the Building Society."

I am also, clearly, of the view that s 95A(2) does not assist Walsh Bay. In the relevant income year neither Walsh Bay nor MSB, in my view, had a vested and indefeasible interest in any of the income from the deposited funds. Neither had a vested interest until such time as occurrence of a relevant contingency caused such vesting. Even if there were an interest which could be described as "vested" it was clearly not "indefeasible" as it could be brought to an end by

I am quite satisfied that as at 30 June 1989 there was no beneficiary "presently entitled" to the income from the deposited funds. Accordingly, that income falls to tax under

I certify that this and the preceding twenty six (26) pages are a true copy of the reasons for judgment herein of the Honourable Mr Justice M. L. Foster.

Income Tax Laws Amendment Act 1980(Cth)

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Judgment (127 paragraphs)

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Cases Cited (18)

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