Tindal v Federal Commissioner of Taxation [1946] HCA 26

Tindal v Federal Commissioner of Taxation [1946] HCA 26 - HCA 1946 case summary — Zoe

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EFERENCE from the Board of Review. Objections to an assessment of Gladys Clare Tindal to tax under mcome Tax Assessment Act 1936-1940 having been disallowed, , at her request, referred to the Board of Review. Upon the atter coming on to be heard before it, the Board of Review, at the request of the Federal Commissioner of Taxation, referred the matter to the High Court and set forth the facts substantially as follows : -

The taxpayer is the widow of Charles Henry Tindal deceased.
The deceased died on 3rd May 1926 having duly made and ' ited his last will and testament dated 14th September 1916, obate whereof was granted to Perpetual Trustee Co. (Ltd.) the itor and trustee therein named (hereinafter referred to as the The deceased by his will, so far as material, gave devised d bequeathed the whole of his real and personal estate to his r upon trust to pay all his just debts, funeral and testamentary es and to stand possessed of the residue of his estate to pay the ome thereof to his wife during her life subject to her maintaining and educating the children of the marriage. _ 3. At the date of his death the assets of the deceased comprised, mer alia, a pastoral property known as " Caramana" and one e in a grazing business carried on in partnership with one M. L. Hughes under the name of Tindal and Hughes.
Prior to his death but after the date of his will the deceased into a partnership agreement with Hughes which agreement expressed to be for a term of ten years dating from 1st January 26 and provided, inter alia, that if either of the partners should die the continuance of the partnership the partnership business be carried on by the surviving partner and the executor of the d partner for and during the term of the agreement and upon terms and conditions therein contained. By an order of the Supreme Court of New South Wales in its e Jurisdiction made on 20th May 1927 the trustee was author- d to carry on the partnership business with Hughes for the balance he term of the partnership agreement, namely until Ist January or for such shorter period as the trustee in its discretion should er to be in the interest of the estate of the deceased. The trustee has made further applications to the Supreme of New South Wales in its Probate Jurisdiction and orders been made by that court authorizing the trustee to carry on artnership business with Hughes until Ist January 1946. Since the death of the deceased the trustee and Hughes have tinuously carried on the partnership business. The pastoral

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realty and personalty valued for probate purposes at £11,000 and at £2,491 6s. 6d. respectively, the income actually received therefrom since his death up to the date of the conversion thereof should be apportioned between the realty and personalty in proportion to their respective probate values and that in respect of the realty Gladys Clare Tindal was entitled to so much of the income actually received as bore to the total income the same proportion as the value of the realty bore to the aggregate of the values of the realty and personalty and that in respect of the personalty Gladys Clare Tindal was entitled to interest at the rate of five per cent per annum from the date of the death on the probate value of the personalty as representing the income to which she was entitled under the will in respect of the personalty up to the date of the conversion thereof. (3) That in the event of the income actually received from the carrying on of the partnership and from or in respect of the personalty employed in the share-farming operations respectively being insufficient to pay the aforesaid interest to Gladys Clare Tindal any deficiency of such interest should be made up when funds were available out of the income of the residuary estate of the testator and in so far as such income was insufficient out of the capital of the residuary estate. (4) That such deficiency (if any) did not carry interest. 10. Under the decretal order the sum of £1,844 10s. 6d. was the nual amount to which the taxpayer was entitled in respect of the s employed in the partnership. The total amount due to the taxpayer under the decretal order up to and including 30th June 935 in respect of the assets was £16,894. The total amount to ich the taxpayer was entitled in accordance with the decretal i in respect of "'Caramana" up to the time of its sale was £2,917. Ii. A schedule marked "C" showed : - (1) the amount to which the taxpayer was entitled under the decretal order in respect to the partnership business and " Caramana " ; (2) remittance made to the taxpayer being sums paid by the trustee to her or paid at her request in respect of income tax for which she was liable ;

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preceding 1940 (in which she was actually paid smaller sums by tl trustee) the sum of £1,844 should have been included in her assessabl income in each of those years, although that sum was not paid to her. The result of this view is that the excess of £2,858 over £1,844, namely £1,014, which she received in 1940, should (if it existed so that she could have a present right to it as income) have been returned by her as income in some one or more of the previous years, but not in 1940. i The next question i is whether the facts stated bring this case within s. 97; e.g. in the year 1937, when she should have received £1,844, but actually received only £1,201, and the trustee received from the partnership only £500 - what was the share of income of the trust estate to which she was presently entitled ? The condition of the operation of s. 97 is that the beneficiary should be presently entitled - to a share of the income of the trust estate and not be under any legal _ disability. If this condition is satisfied, the result is that there is to be included in the assessable income " that share of the net income of - the trust estate", a phrase which must mean the share of the "net - income" to which the beneficiary, is presently entitled, although the opening words of the section are "a share of the income", not of - "the net income." It is therefore necessary to ascertain the net . income of the trust estate in relation to any year in respect of which the question arises. " Under s. 95 in order to ascertain " the net income of a trust estate" it is necessary to ascertain the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer. In the present case the trustee is carrying on business in partnership, and therefore s. 92 of the Act is applicable to the trustee (not to the widow, who is not a partner). Section 92 (1) provides that the assess- able income of a partner shall include " his individual interest in the

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producing asset of the trust estate is the share in a partnership conducting a pastoral business. As the will contained no directions displacing the application of the second part of the rule in Howe y. ' Lord Dartmouth (1), the life tenant, who is the taxpayer, was not _ entitled to the actual net income of the estate; and, in 1930, the Supreme Court in Equity made a decretal order declaring that she is entitled to interest at the rate of four and a half per centum per annum from the death of the testator on the capital value of the share _ of the testator in the partnership business, pending conversion. Con- - version has not yet taken place. The adjustment which the decretal order necessitated resulted in the crediting to the taxpayer, as life tenant, of a large amount representing underpayment of notional - income. This amount she did not immediately draw and each year since then the trustee of the estate has withdrawn a certain amount of the ascertained annual profits of the firm and each year the trustee has credited the taxpayer with the annual amount of notional income or interest to which she is entitled under the terms of the decretal order. At the beginning of the accounting period in ques- tion the position was as follows : - The trustee had paid to or on account of the taxpayer a total of £2,794 less than the total to which she had become entitled under the decretal order and which had been credited in the income account accordingly. The trustee, however, had drawn from the profits of the partnership a total amount less by £8,370 than the total sum credited to the income account pursuant to the decretal order. The facts stated in the reference show that there were profits of the partnership which were not drawn, but it does not appear whether the trustee's share of the undrawn profits earned since the death of the testator was or was not sufficient to cover the deficiency of £8,370. It is not clear how this deficiency was dealt with in the accounts of the trustee, but it would seem that it was debited to capital. During the accounting period upon which the assessment is based, the trustee received from the partnership a sum of £2,500 on account of the estate's share of the year's profits, which share amounted to £4,935 ; it credited the income account with the notional income or interest to which the taxpayer was entitled under the decretal order, being an amount of £1,844 ; and it paid to or on account of the taxpayer sums amounting to £2,858.

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Judgment (163 paragraphs)