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[2000] FCA 981
Federal Court of Australia
2000-07-31
Hill J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 The applicants are the trustees of a trust known as the Estate Mortgage Fighting Fund Trust established by Deed of Trust dated 2 August 1990 ("the trustees" and "the trust deed"). The trust deed was settled by an initial donation of the settlor, Mr Hari Bhagat, of $5,000. He desired to establish a trust to constitute a fund to institute and pursue claims and proceedings against Burns Philp Trustee Company Limited, Estate Mortgage Managers Limited, Estate Mortgage Financial Services Limited and others for the recovery of monies lost by beneficiaries consequent upon the failure of the various trusts known as the "Estate Mortgage Trusts". 2 Once the trust deed was executed the trustees commenced to solicit contributions to the trust from persons who had lost monies as beneficiaries of the Estate Mortgage Trusts. There were some 18,025 beneficiaries of those trusts who had lost money. 3 Accordingly, the trustees wrote to each of these 18,025 beneficiaries requesting that they make contributions to the trust. In the year ended 30 June 1991 the trustees received in excess of $2 million by way of contributions. As contributions were received they were placed on interest bearing deposit. The accounts of the fund for the year ended 30 June 1991 show interest received in that year of $128,988. In the year the trustees incurred in addition to mailing costs, printing and stationery and accounting fees a significant sum by way of legal costs, presumably related to the litigation which was intended to be financed from the fund. 4 In the taxation return which the trustees lodged in respect of the year ended 30 June 1991 the trustees claimed that the interest they received should be treated as not being assessable income. They claimed that if that contention was not right they should be entitled to a proportion of the expenses they incurred during the year by way of deductions. 5 In their return the trustees claimed a deduction for the totality of amounts expended by them for accounting fees, bank charges, bank handling and processing fees and depreciation. No deduction was claimed in respect of advertising and legal expenses but a deduction of 10 percent of the amounts outlaid was claimed for courier fees, mailing fees, mailing expenses, postage, printing, office expenses, stationery, telephone and travelling. 6 Ultimately the trustees received an assessment purporting to be made pursuant to the provisions of s 99A of the Income Tax Assessment Act 1936 (Cth) ("the Act"). The assessment calculated the net income of the trust's estate to be $40,648. In making this calculation, the Commissioner allowed in full, as claimed, amounts which might be referred to as the outgoings directly related to the fixed interest received and allowed the remaining outgoings to the extent of the deduction claimed. It was against this assessment that the trustees objected. 7 The trustees' objection was disallowed. Being dissatisfied with that objection decision the trustees applied to the Administrative Appeals Tribunal ("the Tribunal") to review it.
The decision of the Administrative Appeals Tribunal 8 The trustees were substantially unsuccessful in the Tribunal. The Deputy President, who determined the matter, set aside what he referred to as "the decision to refuse a deduction under s 51(1) for bank charges of $4,329 and bank handling and processing fees of $27,108". He remitted the matter to the Commissioner with a direction that those sums were deductible in the year of income. Otherwise the Tribunal affirmed the decision under review both so far as that decision concerned deductibility and so far as it concerned the issue of the application of s 99A of the Act. 9 It appears from the Tribunal's reasons that both the Commissioner and the trustees had requested the Tribunal to decide the application to the Tribunal on the papers without an oral hearing. The Tribunal was given written submissions, elicited the relevant facts from the material filed with it but heard no evidence or oral argument. In taking this course the Tribunal purported to rely upon s 33(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act"). Whether that subsection would authorise the determination of the matter without a hearing may be doubted but clearly s 34B of the AAT Act would. 10 As has already been noted there were two issues before the Tribunal. The first issue, properly stated, was whether, in the determination of the net income of the trust under s 95 of the Act, the trustees were entitled to a deduction of an amount greater than that which had already been allowed by the Commissioner in respect of the costs of mailing requests for donations to person who were beneficiaries of the failed Estate Mortgage Trusts and advising them from time to time of the trust's activities and progress of the litigation as well as various administration costs including accounting, advertising, bank charges, bank handling processing fees, courier fees and the like. Probably because there was no hearing, the learned Deputy President overlooked the fact that the Commissioner had already allowed an amount which the trustees had claimed in their return as a deduction in respect of these amounts and considered the claim on the basis that a deduction had been wholly disallowed in respect of this expenditure. Likewise the learned Deputy President overlooked the fact that a deduction had been granted by the Commissioner for the bank charges of $4,329 and bank handling and processing fees of $27,108 which the Tribunal found were deductible and which the Tribunal directed the Commissioner to take into consideration in reassessing. It is common ground between the parties, that whatever the ultimate outcome of the present appeal may be, I should set aside the first of the orders made by the Deputy President relating to the bank charges, bank handling and processing fees. 11 The Tribunal was of the view that the mailing and other similar costs were not allowable deductions to be taken into account in determining the net income of the trust. It had been conceded before the Tribunal that the trustees were not carrying on a business. Thus, in respect of the claimed deduction, the issue which arose was whether that part of the relevant outgoings as had not already been allowed as a deduction could be said to have been incurred by the trustees in gaining or producing the assessable income to be taken into account in calculating the "net income" of the trust estate and, if so, whether such outgoings were of capital or of a capital nature. 12 It was the Tribunal's view that the amounts in question were not "relevant or working expenses in gaining or producing the bank interest". The Tribunal also was of the view that in the sense that the amounts arose in respect of soliciting contributions to the trust they were of a capital nature. 13 The Tribunal likewise rejected the trustees' argument that they should not be assessed under s 99A of the Act but rather that the case was one where the beneficiaries of the trust were presently entitled to the income of the trust and thus liable to be taxed in respect of the whole of the net income of the trust pursuant to s 97 of the Act. An alternative argument, that the trustees were not liable to tax because the beneficiaries of the trust had a vested and indefeasible interest in the income of the trust so that the provisions of s 95A(2) deemed them to be presently entitled, was likewise rejected. It was from this decision of the Tribunal that the trustees applied to the Court by way of appeal. The appeal, which is in the original jurisdiction of the Court, is an appeal on, that is to say, limited to a question of law: s 34(1) of the AAT Act.
The Trust Deed 14 It is common ground between the parties that the resolution of the issue whether the trust is liable to be assessed for tax under s 99A of the Act depends on the rights and interests created under the trust deed. Although that deed is rather lengthy it is here set out in full. Any attempt to summarise it runs the danger of being incomplete or, worse, misleading. "THIS DEED is made on 2nd of August 1990 BETWEEN: HARI BHAGAT of 102 The Connaught, 187 Liverpool Street, Sydney, NSW, ("Settlor") AND: PAMELA ANN MESH of 102 The Connaught, 187 Liverpool Street, Sydney, NSW, 2000 and HELEN CHUPROFF of 1/51 The Grand Parade, Brighton Le Sands, NSW, 2216 ("Trustees") RECITALS A. The Settlor is desirous of establishing the trust created by this deed which unless the Trustees determine otherwise is to be known as the "Estate Mortgage Fighting Fund Trust". B. The Settlor has upon the execution of this deed transferred or is about to transfer to the Trustees the sum of A$5,000. OPERATIVE PROVISIONS:
The deductibility of expenses 15 Counsel for the trustees submitted that the expenditure at issue, which is subsumed in the phrase "mailing expenses" was incurred by the trustees in gaining or producing the interest income and was of a revenue and not a capital nature. Not all the expenditure in issue could rightly be characterised as "mailing expenses" but I am content to consider the issue by reference to those outgoing which were costs of mailing letters to beneficiaries of the failed Estate Mortgage trusts soliciting donations to the trust and the cost of mailing letters to those who had made donations advising them from time to time of the status of the trust and the status of the litigation financed by the trustees. 16 It is clear law that for an outgoing to be deductible there has to be a relationship between the outgoing and the activities which more directly gain or produce the assessable income: Charles Moore & Co (WA) Pty Ltd v Commissioner of Taxation (1956) 95 CLR 344 at 352, Commissioner of Taxation v Smith (1981) 147 CLR 578 at 585. While ordinarily it will be possible to point to the assessable income derived by the taxpayer as demonstrating the relationship between the outgoing and the assessable income, it is not necessary that assessable income be derived during the year of income for the legislation refers to "the assessable income",that is to say, assessable income generally. It would not necessarily matter that no assessable income has been derived during the year of income or at all. So, in Ronpibon Tin NL v Commissioner of Taxation (1949) 78 CLR 47 at 57 it is said: "In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income." 17 It is also clear law that the fact that the outgoing is a sine qua non of the derivation of income will not, of itself, authorise a deduction: Lunney v Commissioner of Taxation (1958) 100 CLR 478, Commissioner of Taxation v Cooper (1991) 29 FCR 177. There is, with respect to the submission, no principle of taxation law that an outgoing is deductible just for the reason that but for the outgoing no income would be derived. 18 The relationship required between the outgoing and the activities which directly gain or produce the assessable income has been described in various felicitous phrases in the case law. Those phrases are useful, although they are not a substitute for the words of the section itself, cf Handley v Commissioner of Taxation (1981) 148 CLR 182 at 189 per Stephen J. So, it is said that the expenditure in question has to be "incidental and relevant" to the activities which produce the assessable income: W Nevill & Co Ltd v Commissioner of Taxation (1937) 56 CLR 290 at 305, Ronpibon Tin at 56and Charles Moore at 350. 19 In the search for the necessary relationship which must exist between the outgoing and the activities which more directly produce the assessable income, it is necessary to look at the "essential character" of the expenditure: cf Cooper at 184, 198. Some kinds of outgoings may be easily characterised as working expenses which are deductible. So interest and rent will normally be deductible to a taxpayer who borrows money at interest and lends it to a third part at interest, or a taxpayer who pays rent, but subleases to a tenant at a commercial rental: Steele v Deputy Commissioner of Taxation (1999) 161 ALR 201, as to interest, and generally Texas Co (Australasia) Ltd v Commissioner of Taxation (1940) 63 CLR 382 at 468. In other cases it will be necessary to consider more carefully what the expenditure is for, that is to say "what the expenditure is calculated to effect from a practical and business point of view" before deciding whether the expenditure was earned in gaining or producing the assessable income and also before deciding whether that expenditure is of a capital nature: Hallstroms Pty Ltd v Commissioner of Taxation (1946) 72 CLR 634 at 648. 20 The issue whether expenditure is on revenue account or whether it is an expenditure of capital or of a capital nature is ordinarily resolved by reference to the oft cited tests suggested by Dixon J, as his Honour then was, in Sun Newspapers Ltd v Commissioner of Taxation (1938) 61 CLR 337 at 359-363, but particularly at 363. There, his Honour said: "There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment." 21 In the present case, emphasis is placed by the trustees on the fact that the asset obtained by soliciting contributions is of a depreciating nature and had a limited life, that the obligation to solicit continued over the life of the fund, that the mailing expenses were "recurrent" and that the funds solicited, while banked and unspent, earned assessable income. 22 The emphasis placed by the trustees on the depreciating nature of the funds solicited relies, in part, upon the decision of the High Court in Cliffs International Inc v Commissioner of Taxation v Federal Commissioner of Taxation (1979) 142 CLR 140. Plainly the expenditure incurred here was for soliciting contributions to the trust which were of a capital nature, and prima facie the mailing expenditure had, whether in whole or part, is not necessary here to decide, likewise the character of capital rather than of an ordinary working expense. 23 Cliffs International is a somewhat exceptional case. The taxpayer exercised an option to purchase shares on terms that the purchase price was payable in part by a lump sum and in part by amounts calculated on the basis of 15c per ton of iron ore mined from reserves held by the company. The acquisition of the shares was the means whereby the reserves became accessible to mining by a consortium from which the taxpayer received a royalty. A majority of the High Court were of the view that the taxpayer was entitled to a deduction for the regular payments it made based on the iron ore mined. The decision rests on the view that the amounts paid were not for the shares purchased, but rather were payable as a consequence of the purchase of the shares (see per Barwick CJ at 149). In the circumstances of that case the payments were held to be business disbursements of the taxpayer. From a practical and business point of view the payments were not made for the shares (albeit that was the form adopted) but for the rights obtained which enabled the taxpayer to enter into enjoyment of the mineral deposits and license the consortium to mine those deposits. That was the substance of the matter. 24 It is true that in Cliffs International there is reference to recurrence as a factor in the deductibility of the royalty paid by the taxpayer. However, the facts of that case are very different from those before the Court. Here, the only explanation for the expenditure is the raising of subscriptions for the trust. None other is suggested. Recurrence, itself not a test per se, is not, in the relevant sense, present in the circumstances of this case. It is obvious from a reading of Sun Newspapers that not all expenditure which is not made once and for all will satisfy the description of expenditure as being recurrent. The real test, as suggested in Sun Newspapers, of "recurrence" is one which emphasises the distinction between expenditure which is made once and for all and expenditure to meet a continuous demand: cf Ounsworth v Vickers Ltd (1915) 3 KB 267 at 273. While, no doubt, it was necessary to send letters out to potential beneficiaries of the trust to solicit money, that expenditure was not recurrent, in the sense used by Dixon J. It was expenditure to fund the trust or to provide details of the trust activities and as such it had the character of capital. It was not like rates on investment land, which is a typical example of recurrent expenditure. 25 Despite the submission to the contrary, the expenditure here is not at all analogous to the interest held to be deductible in Steele. Interest has, if not always, at least usually, the character of incomeso that, on the facts in Steele the interests was deductible. But that is not true where the outgoings can objectively be perceived as having a fundamental relationship to the soliciting of funds which represent the capital of the trust, even where, to the extent that capital is not expended, it is invested at interest. In my view the outgoings in question both lack the necessary connection with the activities which gained or earned the interest income of the trust (at least in whole) and this is so notwithstanding that without those funds, interest would not have been earned. Further, the outgoings were, in any event, of a capital nature. 26 It is unnecessary in the present case to consider in any detail the question of apportionment. The case was argued for the trustee on an all or nothing basis. This was, no doubt, because there had already been a deduction allowed in part for the expenditure and it was not possible to point to any evidence which would permit the apportionment of the outgoings on any basis other than that which the trustees had themselves adopted and which had been allowed by the Commissioner. That s 51(1) requires apportionment where an outgoing is both incurred in gaining or producing assessable income and, as here, incurred in gaining capital is beyond doubt. That apportionment, where appropriate, will be made on a basis that is, in all the circumstances, reasonable: cf Ronpibon Tin and Adelaide Racing Club Inc v Commissioner of Taxation (1964) 114 CLR 517. Since no other basis of apportionment is contended for and since the Commissioner does not seek to argue that the amount already allowed as a deduction should now be disallowed, it follows that the objection decision, so far as it concerns the deductibility of the mailing expenditure, should be affirmed and the application dismissed in respect of it. 27 That leaves then for consideration the more difficult question whether the trustees should be assessed for tax under s 99A of the Act, as the Commissioner contends, or whether the case is one where the trustees are not liable for tax on the net income of the trust estate, but rather one where the beneficiaries should have included in their assessable income a pro rata share of that net income.
Present entitlement? 28 In the relevant year of income, s 95(1) of the Act required there to be computed in respect of the trust estate its net income. Section 97(1) then provided: "Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate - (a) the assessable income of the beneficiary shall include - (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;" 29 Section 98, which may, for present purposes, be assumed not to apply, was concerned with the assessment of a trustee where the beneficiary who was presently entitled to a share of the income of the trust estate was under a disability, whether of age (eg a minor) or otherwise. It is not suggested that those who contributed to the trust who were, it may be assumed, beneficiaries of the failed mortgage trusts who made donations, were under a legal disability. 30 Finally, s 99A(4) then provided: "Where there is no part of the net income of a resident trust estate - (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or (c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia, the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section." 31 Section 95A of the Act then provided: "(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." 32 Counsel for the Commissioner relied particularly on three clauses of the trust deed as negating any present entitlement of the beneficiaries and as thus authorising the assessment of the trustees under s 99A(4). These were, most fundamentally, the trust for accumulation to be found in clause 3.2, the provisions of clause 7.2, declaring that the beneficiaries are not entitled to require transfer to them of the trust property and clause 4.5 which, subject to clause 4.6, authorised the trustee to keep accounts as one trust fund rather than accounting by reference to individual interests in the trust. 33 No doubt where there is a trust to accumulate income during the year of income it will ordinary be true that there could be no present entitlement, and thus an assessment for tax of the trustee under s 95A(4) is required. One exception which was relied upon by the trustee would be where, notwithstanding a trust to accumulate income, the trustees are empowered to apply income to or for the benefit of the beneficiaries and do so. In such a case the beneficiaries would be presently entitled to that income, whether because of the operation of s 101 or s 95A(1) of the Act: cf Sacks v Gridiger (1990) 22 NSWLR 502. But that is not the case here. Funds expended by the trustees in respect of the litigation were expended, not in any direct sense, as an application for the benefit of each beneficiary, pro rata to their donation, but for the benefit of all the beneficiaries and for that matter others who had not made donations but had lost money in the failed Estate Mortgage trusts and might take advantage of the litigation which the fund financed. In my view the learned Deputy President was right to reject the analogy in the present case with Sacks. 34 However a matter not explored in the submissions made to the learned Deputy President, and thus not in his reasons, somewhat complicates the question. It is far from clear to me how it came about that this matter was overlooked in the submissions made to the learned Deputy President. The present is a case where all the beneficiaries of the trust are it may be assumed, sui juris. As a result of clause 2.3 of the trust deed the trustees hold the trust assets upon trust for the beneficiaries in the shares in which they have made donations. Income derived from investments and forming part of the trust fund as defined in Clause 1.2 of the deed is likewise owned by the beneficiaries as tenants in common in equal shares, but subject to the right of the trustees to expend the money subject to the trust for accumulation by authorisation of the beneficiaries. The question arises as to what consequence these matters have, both on present entitlement and also on the applicability of s 95A(2). 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. 36 The principle is stated by the learned authors of Jacobs' Law of Trusts in Australia (6th ed) at para 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." 37 Before examining the application of this rule to the present trust, it is desirable to state what "present entitlement", as used in s 97 of the Act, entails. The expression has been the subject of discussion in a number of cases. The most significant are Commissioner of Taxation v Whiting (1943) 68 CLR 199, Commissioner of Taxation v Union Fidelity Trustee Co of Australia (1969) 119 CLR 177, Taylor v Commissioner of Taxation (1970) 119 CLR 444, Commissioner of Taxation v Totledge Pty Ltd (1982) 40 ALR 385, Harmer v Commissioner of Taxation (1991) 173 CLR 264 and Dwight v Commissioner of Taxation (1992) 37 FCR 178. 38 So, the beneficiaries of a deceased estate will not, while administration is incomplete, be presently entitled to the income of the estate for, while the trusts to pay administration expenses are in operation, the interest of the beneficiary may be said to be vested but it is not an entitlement which is presently existing. 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 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. 39 The trust in Harmer was one where money was held by an accountant to be applied in accordance with cost orders which were ultimately made by the Supreme Court. Until the order was made, none of the parties had any entitlement to either capital or income; none had an interest which was vested, either in interest or in possession. Their interests were, at best, contingent. None was presently entitled at the end of the year of income before the ultimate court order was made. 40 In Dwight, I suggested that the test laid down in Harmer might be subject to a qualification in that the ability to demand and receive payment of income may not always be a prerequisite of present entitlement. That this is so appears from the judgments of Latham and Williams JJ in Whiting at 216 where as an alternative to the right to demand payment it was suggested that where, within the meaning of s 19 of the Act, the trustee could reinvest, accumulate, capitalise, carry to any reserve, sinking fund or insurance fund, however designated or otherwise deal with income as the beneficiary directed or on behalf of the beneficiary, there would still be present entitlement in that income. While this qualification may not have great significance in many cases, it could accommodate the case where the beneficiary has authorised the trustee to deal with the income in a particular way (as here) and so might not be able to demand payment in a particular case. It is unnecessary to consider the qualification for reasons which will shortly appear. 41 It is clear that where there are successive beneficiaries in a trust estate so that, as the authors of Jacobs 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 (1995) 130 ALR 15 at 430. 42 Where, however, the beneficiaries do not have successive interests, but are, as in the present case, co-owners in equity, the situation may be different. If read literally, the passage from Jacobs quoted above would suggest that the need for all beneficiaries to consent is as applicable to the case where there are co-owners as it is to the case where the beneficiaries have successive interests. 43 The decision of Wynn-Parry J in In re AEG Unit Trust (Managers) Ltd's Deed [1957] Ch 415 would support the view that the consent of all co-owners is necessary to put an end to a valid trust for accumulation. That case concerned a unit trust where the trust deed provided that any income not distributed to unitholders should be added to capital and cease to be available to unit holders. The provisions of s 164 of the Law of Property Act 1925 (NSW) (equivalent to the now repealed s 31 of the Conveyancing Act 1919 (NSW) dealing with accumulations) was held to be inapplicable, with the consequence that the trust for accumulation was not voided. His Lordship said at 427: "But it cannot be doubted that, if at any time the whole of the certificate holders required the trust to be terminated or altered in a specific request, effect would have to be given to their requirements. Equally, if in any given year all the certificate holders required that the balance of the amount available for distribution should not be added to capital as contemplated, effect would have to be given to their requirements. The court would not enforce that provision against their unanimous wish, with the result that section 164 of the Law of Property Act, 1925 has no application." 44 Whether there is a difference between a unit trust and a fixed trust, or the result of the AEG case depended upon a particular provision in the unit trust deed which ensured that unit holders were not co-owners in equity, need not be considered here. 45 In Berry v Geen [1938] AC 53, the House of Lords held that the Court required the consent of all beneficiaries on the facts of that case where there was an invalid accumulation in part, for the application of the rule in Saunders v Vautier would have been to prejudice and possibly defeat the possible interest of the persons taking under an intestacy which might occur if the direction for accumulation in fact continued beyond the period permitted for accumulations. 46 However, other cases suggest that the proposition as stated in Jacobs requires some qualification. This indeed is recognised in Jacobs at para 2310 footnote 78 of the text which states: "…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." 47 In Lloyds Bank v Duker [1987] 1 WLR 1324, a case referred to at the footnote mentioned, the deceased's will provided for the division of the estate among named beneficiaries in certain shares. The testator's wife, who was entitled to 46/80ths of the estate, called upon the executor to transfer to her 574 shares in a private company, those shares representing approximately her entitlement. It was held that, notwithstanding that to transfer the shares would break up a controlling interest which the estate had and thus devalue the block of shares, the wife was entitled to call for the shares. This was so despite the fact that the will contained a trust to sell the shares. The general rule is that expressed in Snell's Principles of Equity 28th ed. (1982) at p 233 as follows: "The general rule is that in the absence of some good reason to the contrary a person who is indefeasibly entitled to a share in divisible personalty is entitled to have his share transferred to him, even if the property is held on trust for sale with power to postpone sale and the transfer would diminish the value of the other shares." The general rule is, however, itself subject to qualification. It can be excluded by "special circumstances" (see In re Marshall [1914] 1 Ch 192 at 199, 200) and the court will not order a transfer if there is a good ground to the contrary. So, as recognised in the Lloyd Bank case at 1329, Clauson J in In re Sandeman's Will Trusts [1937] 1 All ER 368, 371, said at 373: "I can conceive that there might be circumstances - they would have to be very special - which would justify the court in refusing to give effect to the plaintiff's rights." 48 In Whakatane Paper Mills Ltd v Public Trustee (1939) 39 SR(NSW) 426 it was held that there should be distributed to a beneficiary in a trust which beneficiary was entitled absolutely to a defined portion of both the capital and income of the fund a portion of the monies which comprised the trust and which represented its interest in the fund. Long Innes J said at 440, referring to the rule in Saunders v Vautier: "The rule … as I understand it, that whenever a trust fund of personalty, or to an aliquot share of such trust fund, such cestui que trust is entitled too terminate the trust so far as it concerns either the whole trusts fund, or such aliquot portion thereof as the case may be, and to call for an immediate payment to himself of such fund or aliquot portion, or the transfer of the investments representing the same; subject however, when he is entitled only to an aliquot part of such investments, to an exception probably in the case of investments on mortgage, It is immaterial whether that cestui que trust has become so entitled uno ictu by the trust deed or will, or by a multitude of subsequent transactions." 49 In Manfred v Maddrell (1950) 51 SR (NSW) 95, Sugerman J said at 97: "I find it difficult to distinguish the present case in principle from the Whakatane Paper Mills Ltd v Public Trustee (1939) 39 SR (NSW) 426. It may be true that there is for some purposes a difference between a right to a third of the entire income of a fund and a right to the income of a third of that fund. But the case which have been cited show that the question of making a distribution out of a fund or portion of a fund, so that a beneficiary entitled to which is in form or in substance an immediate, absolute and indefeasible interest may have the present enjoyment of his share, is governed by practical considerations and, in particular, by considerations of convenience of division and of the risk of prejudice to other beneficiaries. Thus, where real estate is held on trust for sale and division of the proceeds, one of several beneficiaries has no right to a transfer of his undivided share, because the remaining undivided shares will not fetch their full proportion of the proceeds of sale of the entire estate and so the other beneficiaries are prejudiced. A mortgage debt is not conveniently divisible into shares. Other forms of personal property, which, without attempting an exhaustive or conclusive definition, may be broadly described as fungibles or things which possess all the relevant characteristics of fungibles, do not present the same difficulties, for example, shares in companies or government securities. Even as to these, there may be special circumstances in particular cases such that division would be inconvenient or detrimental to the other beneficiaries. The Courts have not thought it necessary to define those circumstances, and there is no need to do so here since no special circumstances of this kind are suggested." 50 The Court in that case ordered transfer of certain assets to the children entitled to a share of income and the whole of the capital contrary to the wishes of the widow who was entitled to a third of the income. 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. 52 It is unnecessary to determine this issue conclusively. For I am of the view that if there is no present entitlement in the present case, because the intervention of the Court is necessary before a beneficiary would be in a position to have transferred any income to which the beneficiary would be otherwise entitled, there is, nevertheless deemed present entitlement under s 95A(2). I turn to that question on the assumption that there otherwise is no present entitlement.
Do the beneficiaries have a vested and indefeasible interest in the income 53 The Tribunal reached the conclusion that s 95A(2) had no application for two reasons. The first was that clause 7.2 precluded a beneficiary from entitlement to a transfer of any of the trust property. The second was that clause 8.3 provided that the trust could be terminated on a two-thirds majority vote contrary to the wishes of one third of the beneficiaries. So it was said that the fact that the interest of that one-third would be defeated by termination of the trust contrary to their wishes meant that the interests of the beneficiaries were defeasible. With respect I disagree. 54 The fact that a trust might come to an end tells nothing about whether until it does the interest of the beneficiaries is vested or indefeasible. Nor do I think that the fact that the deed provided that the beneficiaries might not be entitled to a transfer of the trust assets has any bearing on the issue. No doubt while administration is incomplete no beneficiary would be entitled to call for the assets of the estate, but that would not mean that the beneficiary would not have a vested and indefeasible interest. 55 The purpose of the introduction of s 95A(2) remains obscure. It may be the case that the section was introduced to overcome the decision in Whiting, so that a beneficiary otherwise with an absolute interest, in an unadministered estate might be treated as being presently entitled. If this be so there is nothing in any extrinsic material which makes it clear. The subsection has been considered by a Full Court of this Court in Commissioner of Taxation v Harmer (1990) 24 FCR 237, by myself in Dwight v Commissioner of Taxation (1992) 37 FCR 178 and by another full court in Walsh Bay. In summary these cases make clear that an interest in income will be vested where the holder has an immediate fixed right of present or future enjoyment. A contingent interest would not suffice. An interest will be indefeasible where it is not subject to any condition. 56 There is no doubt that the beneficiaries of the trust have an interest in both the capital and the income of the trust. That interest is pro rata to the contributions they have made to the trust. That there is an interest in income which is vested is recognised by clause 2.3 which refers back to the definition of the "trust fund" which includes both income and capital. It may be recognised also by clause 7.1 which treats the beneficiaries as consenting to the trustees' actions (implicitly, the use of the income for the purposes of the fund) by force of their having executed a form of approval. The evidence does not demonstrate whether any approval signed did in fact relate to the trustees dealing with income. But whether any such approval was given, the terms of the trust deed themselves acknowledge that the trustees will deal with income in accordance with the deed, that is to say, by subscribing to the trust beneficiaries can be taken to have accepted that the trustees would deal with income on the terms contemplated by the trust deed. 57 One may be permitted to ask whose money the trustees expended when they used income which was available to them. The answer is, as was acknowledged by counsel for the Commissioner, that the income expended belonged to the beneficiaries in the shares determined by their contributions. Clearly the expenditure was authorised by the beneficiaries, either impliedly or explicitly is not material. 58 There is no condition attaching to the entitlement of the beneficiaries to the income. That they have authorised it to be spent by the trustees is not a condition of their entitlement, it is something which arises because of that entitlement. 59 In my view the Tribunal erred in law in holding that the interest of the beneficiaries in income was not vested and indefeasible and its decision should be set aside. I am conscious that with the number of beneficiaries the Commissioner may have a difficulty now in reassessing the beneficiaries on their share of the income to which they were absolutely and indefeasibly entitled. But that can not stand in the way of the legal situation that the beneficiaries did have an interest in the income which fell within s 95A (assuming that they were otherwise not presently entitled) which had the consequence that the aliquot share of the net income of the trust should be included in their assessable income. 60 The Commissioner should pay the costs of the application to the Court. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.
Associate: Dated: 31 July 2000 Counsel for the Applicant: L Robinson
Solicitor for the Respondent: Australian Government Solicitor
Trustees of the Estate Mortgage Fighting Fund Trust
Commissioner of Taxation
(1956) 95 CLR 344
(1981) 147 CLR 578
(1949) 78 CLR 47
(1958) 100 CLR 478
(1991) 29 FCR 177
(1981) 148 CLR 182
(1937) 56 CLR 290
(1999) 161 ALR 201
(1940) 63 CLR 382
(1946) 72 CLR 634
(1938) 61 CLR 337
(1979) 142 CLR 140
(1964) 114 CLR 517
(1990) 22 NSWLR 502
(1943) 68 CLR 199
(1991) 173 CLR 264
(1992) 37 FCR 178
(1995) 130 ALR 15
(1990) 24 FCR 237
(1969) 119 CLR 177
(1970) 119 CLR 444
(1982) 40 ALR 385