Bamford v Commissioner of Taxation [2009] FCAFC 66 (3 June 2009)

TAXATION – Income Tax Assessment Act 1936 (Cth) s 97(1) – "that share of the net income of a trust estate" –meaning of "share"– whether "share" can, in certain circumstances, refer to an amount rather than a proportion – disparity between net income and distributable income

TAXATION – Income Tax Assessment Act 1936 (Cth) s 97(1) – "income of a trust estate" –meaning of "income of trust estate" – whether capital receipts deemed income by trust deed are income for the purposes of income tax assessment – whether present entitlement to income

Administrative Appeals Tribunal Act 1975 (Cth) s 44
Income Tax Assessment Act 1936 (Cth) ss 95, 97(1), 98, 99, 99A, 101
Income Tax Assessment Act 1997 (Cth) s 115-215(2)

Cajkusic v Commissioner of Taxation [2006] FCAFC 164; (2006) 155 FCR 430 discussed
Commissioner of Taxation v Australian and New Zealand Savings Bank Ltd [1998] HCA 53; (1998) 194 CLR 328 considered
Commissioner of Taxation v Montgomery [1999] HCA 34; (1999) 198 CLR 639 applied
Federal Commissioner of Taxation v Commercial Nominees of Australia Limited (1999) 167 ALR 147 approved
Federal Commissioner of Taxation v Harmer (1990) 24 FCR 237 approved
Richardson v Federal Commissioner of Taxation (2001) 187 ALR 680 applied
Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 cited
Tindal v Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608 approved
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 applied

PHILLIP BAMFORD & ORS v COMMISSIONER OF TAXATION

NSD 700 of 2008

EMMETT, STONE & PERRAM JJ
3 JUNE 2009
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 700 of 2008

BETWEEN:

PHILLIP BAMFORD
First Applicant

DAVINA BAMFORD
Second Applicant

P & D BAMFORD ENTERPRISES PTY LTD
ACN 057 927 009
Third Applicant

JUDGES:	EMMETT, STONE & PERRAM JJ
DATE OF ORDER:	3 JUNE 2009
WHERE MADE:	SYDNEY

1. The appeal, in so far as it relates to Administrative Appeals Tribunal proceeding NT 2005/488, be dismissed.

2. The appeal, in so far as it relates to Administrative Appeals Tribunal proceeding NT 2005/490, be dismissed.

3. The appeal, in so far as it relates to Administrative Appeals Tribunal proceeding NT 2006/114, be allowed.

4. The decision of the Administrative Appeals Tribunal in proceeding NT 2006/114 be set aside and that matter be remitted to the Administrative Appeals Tribunal for further consideration and determination according to law.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 700 of 2008

BETWEEN:	PHILLIP BAMFORD First Applicant DAVINA BAMFORD Second Applicant P&D BAMFORD ENTERPRISES PTY LTD ACN 057 927 009 Third Applicant
AND:	COMMISSIONER OF TAXATION Respondent
JUDGES:	EMMETT, STONE & PERRAM JJ
DATE:	3 JUNE 2009
PLACE:	SYDNEY

1 This proceeding is, in effect, three separate appeals. However, each involves the same trust estate and arises out of the same determination that contributions to an offshore superannuation fund were not allowable deductions. Two different questions of construction of s 97 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) are said to be raised. Two of the appeals involve the same question. The questions of construction are concerned with the clause "where a beneficiary of a trust estate... is presently entitled to a share of the income of the trust estate" in s 97(1). In order to put the questions in context, it is necessary, first, to say something about Division 6 of Part III of the 1936 Act, in which s 97 is to be found.

2 Division 6, which consists of ss 95 to 102, is concerned with trust income and deals with liability to pay income tax in respect of the income of a trust estate. Division 6 directs attention to trust estates, not as legal persons or deemed legal persons, but as conglomerates of assets, by which income is generated (see Federal Commissioner of Taxation v Commercial Nominees of Australia Limited (1999) 167 ALR 147 at [11]). The starting point is the net income of a trust estate, which is relevantly defined, in s 95 of the 1936 Act, as assessable income, less allowable deductions, of the trust estate in respect of a year of income, calculated as if the trustee were a taxpayer in respect of such income and a resident in respect of such deductions. Thus, net income is similar to the concept of taxable income found in the 1936 Act and in the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). The net income of a trust estate is brought to tax in the year in which the trust estate has net income.

3 The object of Division 6 is to secure payment of tax upon the whole of the net income of a trust estate, by either the beneficiaries or the trustee, whether or not that income is paid over to, or on account of, the beneficiaries (see Tindal v Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608 at 618). Division 6 sets out principles of derivation in respect of the income of the trust estate from which liability to pay income tax will follow. The liability to pay income tax is distributed between the trustee of the trust estate, on the one hand, and the beneficiaries, on the other, according to those principles of derivation (see Federal Commissioner of Taxation v Harmer (1990) 24 FCR 237 at 244).

4 Relevantly, for present purposes, Division 6 deals with two categories of case. The first is where a beneficiary is presently entitled to a share of the income of the trust estate. The second case is where there is at least a part of the net income to which no beneficiary is presently entitled. Sections 97 and 98 deal with the first case. Sections 99 and 99A deal with the second case.

5 Section 97 provides, relevantly, that, 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, the assessable income of the beneficiary includes that share of the net income of the trust estate. Section 98 correspondingly provides that, where a beneficiary of a trust estate, who is under a legal disability, is presently entitled to a share of the income of the trust estate, the trustee is to be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the taxable income of an individual. Section 101 of the 1936 Act provides that, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises that discretion is to be deemed to be presently entitled to the amount paid to, or applied for the benefit of, that beneficiary by the trustee in the exercise of that discretion. In such circumstances, either s 97 or s 98 would be enabled.

6 Sections 99 and 99A, on the other hand, provide, relevantly, that, where no part of the net income of a trust estate is included in the assessable income of a beneficiary pursuant to s 97 or in respect of which the trustee is assessed and liable to pay tax pursuant to s 98, the trustee is to be assessed and is liable to pay tax on the net income of the trust estate. Under s 99A, which relates to all trust estates other than deceased and bankrupt estates, tax is to be assessed at a special rate. Under s 99, which relates to deceased and bankrupt estates, tax is to be assessed at normal rates.

7 Thus, liability of beneficiaries under a trust to bear tax in respect of receipts of the trust estate and liability of a trustee to bear tax at the special rate depends upon whether the beneficiaries are presently entitled to a share of the income of the trust estate. In the present context, that calls for an enquiry as to the meaning of the word "share" and the phrase "the income of the trust estate".

8 The word "income" is not defined in the 1936 Act and the content of the concept of income is to be determined in accordance with the ordinary concept and usages of mankind. The phrase "ordinary concept and usages" is not a mere matter of ritual incantation but rather identifies the essential nature of the enquiry (see Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 and Commissioner of Taxation of the Commonwealth of Australia v Montgomery [1999] HCA 34; (1999) 198 CLR 639 at 661).

9 The precise language giving rise to the questions of construction of s 97 that are raised in this proceeding is that of s 97(1)(a)(i), which relevantly provides as follows:

10 The first question is concerned with the word "share", in circumstances where the beneficiaries under the trust are not entitled to share in the income of the trust in fixed proportions, but are entitled to specific amounts and where another beneficiary is entitled to residual income. The second question is concerned with the expression "income of the trust estate", in circumstances where the net income of the trust estate, as ascertained under s 95, differs from the income of the trust estate, determined according to ordinary concepts and usage.

11 In the relevant years of income, being the year ended 30 June 2000 (the 2000 tax year) and the year ended 30 June 2002 (the 2002 tax year), the first applicant, Mr Phillip Bamford and the second applicant, Mrs Davina Bamford, were directors of the third applicant, P&D Bamford Enterprises Pty Ltd (the Company). During both the 2000 tax year and the 2002 tax year, the Company acted as trustee of the Bamford Trust, which was established under a deed of settlement dated 9 February 1995 (the Bamford Trust Deed).

12 Under the Bamford Trust Deed, the expression Trust Fund is defined, relevantly, as meaning the sum of $10 settled on the Company, as trustee of the Bamford Trust, and all other moneys or property at any time transferred to and accepted by the Company as additions to the Trust Fund, as well as any accretions thereto and also includes the investments for the time being representing those moneys and that property. Clauses 3 and 4 of the Bamford Trust Deed deal with entitlement to the Trust Fund.

13 By clause 3(a), the Company is to stand possessed of the Trust Fund, and the income thereof, in trust for all or such one or more of the Eligible Beneficiaries as the Company shall determine and in such shares or proportions as the Company shall from time to time, before the Closing Date, appoint. Any such appointment can relate to the whole or any part of the Trust Fund or to the whole or any part of the income thereof.

14 Clause 4 then deals with the disposition of the Trust Fund in the event of default of, and subject to, any determination under clause 3. Clause 4(a) deals with "the income arising from the Trust Fund during the Trust Period" and clause 4(b) deals with "the capital". There is no definition of the term "income" or the term "capital". However, by clause 7(n), the Company, as trustee, is given the power to determine, in its absolute discretion, whether any receipt, profit or gain or payment, loss or outgoing or any sum of money or investment is or is not to be treated as being on income or capital account. If the Company fails to make a determination or, to the extent to which it fails to make a determination prior to the end of a year, the income of the Trust Fund for such year is to be calculated in the same manner as the net income of the trust estate is to be calculated under the provisions of the 1936 Act. Thus, the effect of the Trust Deed is to confer on the Company a discretion to determine what may be dealt with under clause 4(a) and what might be dealt with under clause 4(b).

15 By clause 4(a), the Company is to stand possessed of the income arising from the Trust Fund upon the following trusts:

• The Company is to hold the income arising in any year, or such part of the income as the Company shall determine, for such one or more of the Eligible Beneficiaries and in such proportions or manner as the Company shall, in its absolute discretion from time to time, but on or prior to 30 June in any year, determine. The Company may, at its discretion, accumulate the whole or such part of the income of the Trust Fund as shall not have been so paid or applied.

• Subject to those provisions, the Company is to pay or distribute the whole of the income of the Trust Fund for any particular year to all or such one or more of the Eligible Beneficiaries in such proportions as the Company shall, by the end of that year, in its absolute discretion determine.

• If, in any year, the Company has not exercised its discretion in respect of the whole or any part of the income in that year, then that income is to be deemed to have been paid on the last day of that year to such of the Primary Beneficiaries as should then be living, in equal shares.

16 By clause 4(b), the Company is to stand possessed of the capital of the Trust Fund upon the following trusts:

• The Company is to hold the capital for such of the Primary Beneficiaries as are living at the Closing Date absolutely, as tenants in common in equal shares, with substitution of the issue of the Primary Beneficiaries.

• If the capital does not vest under that provision, the capital is to be held for such of the Eligible Beneficiaries as are living at the Closing Date absolutely, as tenants in common in equal shares.

17 Clause 4(e) of the Bamford Trust Deed provides that, in making any payment, determination or application of income or capital, the Company may, in its discretion, determine and identify which income or capital or which part of the income or capital or which class of income or capital of the Trust Fund is to be the subject of any particular determination or determinations. The income or capital is to be treated for all purposes as being paid, applied, set aside, or accumulated, as the case may be, from the income, or capital, or part, or class thereof, so identified.

18 Clause 1 of the Bamford Trust Deed defines a number of the terms used in clauses 3 and 4. The term Eligible Beneficiaries includes Mr Bamford, Mrs Bamford, any children of Mr Bamford and such other persons, trusts, companies or charities as the Trustees shall, before the Closing Date, appoint to be beneficiaries for the purposes of the Bamford Trust Deed. It appears that the Church of Scientology Inc was subsequently appointed as an Eligible Beneficiary. The term Primary Beneficiaries means the children of Mr Bamford. The Closing Date is the earlier of the date that is 20 years from the death of the last survivor of the issue of King George VI living at the date of the Bamford Trust Deed or such earlier date as the Company may determine.

19 On 30 June 2000 the Company, in its capacity as trustee of the Bamford Trust, determined that "the income for the year ended 30 June 2000 be allocated in the following proportions":

The Company also determined that the allocation be credited to the accounts of the Beneficiaries with the Bamford Trust, to remain on deposit subject to payment on demand.

20 It appears that, in its capacity as trustee of the Bamford Trust, the Company employed Mr and Mrs Bamford. On 20 May 2000, the Company, as such trustee, made a contribution of $175,000 to the Bamford International Superannuation Fund in respect of Mr Bamford and Mrs Bamford in their capacity as employees of the Company. In order to fund that contribution, the Company, as trustee of the Bamford Trust, borrowed a sum of money from Equity Investment Bank. During the 2000 tax year, the Company, as trustee of the Bamford Trust, incurred an expense for interest in the sum of $16,701.67 in respect of the loan from Equity Investment Bank.

21 The profit and loss statement of the Bamford Trust for the 2000 tax year brought to account, as expenses of the Bamford Trust, the contribution of $175,000 and the interest of $16,701.67. After treating the contribution of $175,000 and the interest of $16,701.67 as expenses, the total income available for distribution was only $187,530. In the tax return for the Bamford Trust for the 2000 tax year, the amounts of $175,000 and $16,701.67 were claimed as deductions against the assessable income of the Bamford Trust in calculating net income pursuant to s 95 of the 1936 Act. On that basis, the net income of the Bamford Trust under s 95 was shown as $187,530.

22 After the distributions to J.H. Bamford, H.J. Bamford, Narcom Anzo Inc and the Church of Scientology Inc, the income was insufficient to provide $68,000 to Mr and Mrs Bamford and there was no "balance" to be allocated to Church of Scientology Inc. The income of the Bamford Trust was therefore actually distributed as follows:

23 Neither the contribution of $175,000 nor the interest of $16,701.67 was properly treated as an allowable deduction in the calculation of the net income of the Bamford Trust pursuant to s 95 of the 1936 Act. Accordingly, on 30 May 2005, the Commissioner issued amended assessments to each of Mr Bamford and Mrs Bamford for the 2000 tax year. The amended assessments included the additional aggregate amount of $34,624 as assessable income for each of them, on the basis that neither the contribution of $175,000 nor the interest of $16,701.67 was an allowable deduction in the calculation of the net income of the Bamford Trust for the 2000 tax year.

24 The proportion that the amount of $34,624 bears to the sum of $191,701.67 (the aggregate of the contribution of $175,000 and the interest of $16,701, which had been claimed as deductions but disallowed) is 18.062%. That is the proportion that the sum of $33,872 actually distributed to each of Mr Bamford and Mrs Bamford bears to the total amount of $187,530 distributed pursuant to the determination that the trustee made on 30 June 2000.

25 On 30 June 2002, the Company, acting in its capacity as trustee of the Bamford Trust, determined that "the net income for the year ended 30 June 2002 be distributed as follows":

• to Mr Bamford and Mrs Bamford - the first $60,000, including capital gain, shared equally;

The Company also determined that those allocations be credited to the accounts of the Beneficiaries with the Bamford Trust, to remain on deposit subject to payment on demand.

26 The Company made no express determination pursuant to Clause 7(n) of the Bamford Trust Deed that any capital gain was to be treated as being on income account. However, it is common ground that, pursuant to clause 7(n) of the Bamford Trust Deed, the Company treated as income available for distribution a capital gain arising from the sale of real property.

27 In the tax return for the Bamford Trust for the 2002 tax year, the net income of the Bamford Trust pursuant to s 95 was shown as nil. The tax return showed a net capital gain of $29,227, derived from the realisation of real property, and losses carried forward from earlier years of $26,448. The tax return stated that the net capital gain of $29,227 had been distributed to Mr Bamford and Mrs Bamford. Each of Mr Bamford and Mrs Bamford lodged with the Commissioner a tax return for the 2002 tax year in accordance with that distribution.

28 The losses carried forward, which were claimed as a deduction, resulted from treating the contributions to the Bamford International Superannuation Fund and interest expenses relating to those contributions as allowable deductions. As indicated above, they were not allowable deductions. To that extent, losses were not available to be carried forward to the 2002 Tax Year.

29 Accordingly, the Commissioner subsequently disallowed an amount of $16,100, as a deduction from the assessable income of the Bamford Trust for the 2002 Tax Year, in the calculation of net income under s 95. That amount was part of the amount claimed as an allowable deduction for the 2002 Tax Year for losses carried forward from previous years. On 27 February 2006, the Commissioner issued to the Company, in its capacity as trustee of the Bamford Trust, a notice of assessment under s 99A of the 1936 Act for the 2002 Tax Year. That notice showed taxable income of $16,100 and tax of $7,567, calculated at the special rate determined for the purpose of s 99A, on the basis that no person was presently entitled to that income.

30 Objections were lodged against the amended assessments issued to Mr Bamford and Mrs Bamford on 30 May 2005. In addition, an objection was lodged against the assessment issued to the Company on 27 February 2006. The respondent, the Commissioner of Taxation (the Commissioner), disallowed all of the objections. Appeals against those unfavourable objection decisions were lodged with the Administrative Appeals Tribunal (the Tribunal).

31 On 18 April 2008, the Tribunal affirmed each of the objection decisions. The Tribunal concluded that the "share" of all Beneficiaries presently entitled was to be determined by reference to the proportion of the income of the trust estate of the Bamford Trust distributed to the Beneficiaries, regardless of the fact that entitlement was expressed as a fixed dollar amount rather than as a proportion of the income of the Bamford Trust. The Tribunal also concluded that the expression "income of the trust estate" means ordinary income and does not include the net capital gain made in respect of the trust estate of the Bamford Trust, notwithstanding that that gain was determined by the Company, as trustee, to be income for the purposes of distribution under the terms of the Bamford Trust Deed.

32 An appeal to the Federal Court lies from a decision of the Tribunal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act), but only on a question of law. This proceeding was commenced on 15 May 2008 when a notice of appeal from the decisions of the Tribunal was filed on behalf of Mr Bamford, Mrs Bamford and the Company. An amended notice of appeal was filed on 30 July 2008.

33 The amended notice of appeal stated that the following questions of law are raised:

34 The proceeding in the Federal Court has been heard by a Full Court consisting of three judges, pursuant to s 44(3) of the AAT Act. As indicated above, there are two separate questions raised in the proceeding. The first question is raised by Mr and Mrs Bamford’s appeals in respect of the amended assessments for the 2000 tax year. The second question is raised by the Company’s appeal in respect of the assessment for the 2002 tax year.

35 The competing contentions on behalf of the applicants and the Commissioner may be summarised as follows:

• In relation to the first question, Mr and Mrs Bamford contend that the expression "that share" in s 97(1)(a)(i), which refers back to the word "share" in the opening words of s 97(1), means, where a beneficiary’s present entitlement is to a proportionate part of the income of the trust estate, that proportionate part of that income, or, where the present entitlement is to a specified amount, that specified amount. On the other hand, the Commissioner contends that the expression "that share" in s 97(1)(a)(i) means the beneficiary’s proportionate or fractional entitlement to the income of the trust estate that has been distributed or that is available for distribution. There may be other constructions for which neither party presently contends.

• In relation to the second question, the Company contends that the expression "income of the trust estate" in the beginning of s 97(1) means an amount that is income for dispositive purposes under the terms of the relevant trust instrument. It says that the income of the trust estate for the purposes of s 97 can be an amount received by the trustee as capital that the trustee determines to be income for the purposes of distribution to an income beneficiary. The Commissioner, on the other hand, contends that the expression "income of the trust estate" means only income according to ordinary concepts. There may be other possible constructions for which neither party presently contends.

36 Mr and Mrs Bamford contend that, where a beneficiary is entitled to a fixed amount out of the income of a trust estate, following the exercise by the trustee of a power of appointment, it would not accord with the legislative policy behind Division 6 or the scheme of Division 6 to treat the beneficiary as being entitled to a proportion of the income. The effect of s 101 is that the beneficiary is deemed to be presently entitled to an amount paid to that beneficiary or applied for the benefit of that beneficiary. That deeming does not, of itself, cause an amount to be included in the assessable income of the beneficiary. Rather, s 101 deems the beneficiary to be presently entitled to the amount so paid or applied. Section 97 treats the amount as the share of the net income under s 95 that is included in assessable income.

37 Mr and Mrs Bamford say that, in such a case, and in relation to the recipient of the amount so paid or applied, the natural meaning to give to the word "share" in s 97(1)(a)(i) is "part" or "portion". Where the net income under s 95 differs from the income of the trust estate, there is no consequent adjustment to the amount that is deemed, by s 101 in conjunction with s 97, to be the share of the net income included in the assessable income of the beneficiary to whom the amount has been paid or for whose benefit the amount has been applied, in the exercise of the trustee’s discretion (see Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 75). However, they say, where, in the exercise of a power conferred by a trust instrument, the trustee of a discretionary trust appoints the whole of the income, or the remainder after payment of specific sums to others, to one object of the power, or to several objects in stipulated shares, the beneficiaries of those appointments are, by s 101, deemed to be presently entitled to the whole or remainder of the income in the shares appointed. In such a case, the beneficiaries are presently entitled to a share, in the sense of a proportion, not of an amount.

38 Mr and Mrs Bamford say that, while the meaning of the word "share" in s 97(1)(a)(i) may not change, that which falls within its scope varies according to the circumstances in which the section operates. Where a beneficiary’s entitlement to income of the trust estate is an entitlement to a proportionate part of the income, the word "share" also means a proportionate part. However, they say, where a beneficiary’s entitlement is to a specified amount and no more, the word "share" means that amount. In other words, Mr and Mrs Bamford say the word share in s 97 denotes a concept which changes to reflect the method by which the beneficiaries’ entitlements to share in the income of a trust estate is determined.

39 Mr and Mrs Bamford say that, where there is a disparity between the net income of the trust estate and the distributable income, entitlement to which is governed by the trust instrument, the amount in respect of which each beneficiary is assessable must be calculated as if the terms of the trust instrument and any relevant appointment operated upon the amount of the net income of the trust estate as if it were the distributable income. They say that such a result accords with the concept that the liability to tax upon income should follow from the distribution of income according to the terms of the trust. While Mr and Mrs Bamford accept that there may be no construction that produces a fully satisfactory outcome in all of the various factual situations in which Division 6 operates, they say, nevertheless, that the construction for which they contend produces an appropriate result in most, even if not all, cases.

40 Mr and Mrs Bamford contend that the consequences of the fact that the net income of the Bamford Trust under s 95 is larger than the distributable income of the Bamford Trust are that:

• The share of the net income of the Bamford Trust assessable to the three beneficiaries first named in the Company’s appointment determination of 30 June 2000, aggregating $13,786, is the same as the amount to which they are deemed, by s 101, to be presently entitled, namely $13,786.

• The share of the net income of the Bamford Trust assessable to Mr and Mrs Bamford is $68,000, being the amount appointed to them and to which they are deemed, by s 101, to be presently entitled.

• The share of the net income of the Bamford Trust assessable to Church of Scientology Inc is the aggregate of the sum of $106,000, specifically appointed by the Company, and the balance of the net income: the gift of the balance of the income of the Bamford Trust fixes the proportion of the net income, after deducting the specific amounts, on which s 97 operates to include that proportion in the assessable income of Church of Scientology Inc.

42 The term "that share" in s 97(1) refers to a beneficiary’s proportionate or fractional entitlement to the income of the trust estate. Thus, a beneficiary presently entitled to income of the trust estate in a given year will have included in that beneficiary’s assessable income the proportion of the net income of the trust estate equal to the proportion that the income of the trust estate to which the beneficiary is presently entitled bears to the income that has been distributed during the year or remains available for distribution as at the end of the year, in accordance with ordinary principles of trusts and trust accounting. It is erroneous to treat "that share" as referring to a fixed amount.

43 The phrase "income of the trust estate" in the beginning of s 97(1) refers to distributable income. Distributable income is income ascertained by the trustee according to appropriate accounting principles and the relevant trust instrument and in accordance with the ordinary concept of income, which the 1936 Act adopts when it refers to "income". A beneficiary’s "share" is that beneficiary’s share of the distributable income. Having identified the share of the distributable income to which a beneficiary is presently entitled, s 97(1) requires that "that share of the net income of the trust estate" be ascertained. That share is then included in the beneficiary’s assessable income.

44 Several textual considerations are relevant to the proper construction of s 97(1) and the construction contended for by Mr and Mrs Bamford fails to give effect to the ordinary and natural meaning of the relevant words of s 97(1). It would be difficult to treat the word "share", where it appears in s 97(1)(a), as having the meaning for which they contend.

45 Clearly enough, the word "that" in s 97(1)(a)(i) refers to the share of the income of the trust estate to which the beneficiary is entitled, as described in the beginning of s 97(1). That share, or proportion, is applied to the "net income" of the trust estate, determined under s 95, to ascertain the extent to which that "net income" of the trust estate is to be included in that beneficiary’s assessable income.

46 The phrase "net income of the trust estate" in s 97(1)(a)(i) has the meaning given by s 95(1), namely, taxable income as opposed to distributable income. The words "that share" in s 97(1)(a)(i) refer back to the word "share" in the expression "a share of the income of the trust estate". That signifies that the same share is to be applied to an income amount, calculated according to a different formula, namely, taxable income as opposed to distributable income. Since the income amount may differ, the natural meaning to give to "share", where it appears for the second time, is "proportion" rather than "part" or "portion". The contrast between the phrase "share of the income of the trust estate" and "that share of the net income of the trust estate" signifies a legislative intention that present entitlement is related to distributable income and not to taxable income. Once the share of the distributable income to which a beneficiary is presently entitled is determined, the notion of present entitlement has served its purpose: the beneficiary is to be taxed on that share, or proportion, of the taxable income of the trust estate.

47 Section 97(1) refers to, and makes use of, the concept of "income of a trust estate" and the statutory concept of "net income" of the trust estate. That makes clear that distinct concepts are involved and that s 97(1) draws an intentional contrast between those two concepts. The first concept is used to determine the applicability of s 97(1). If s 97(1) is applicable, the amount that it causes to be included in the beneficiary’s assessable income is calculated by reference to the second concept.

48 If the drafter of s 97 had intended that a beneficiary be assessed on no more than the amount of the distributable income to which that beneficiary is presently entitled, that could have been made explicit by using the word "amount" instead of the word "share" in s 97(1) (see Zeta Force at 74-75). The use of the word "amount" in s 101 does not support the construction contended for by Mr and Mrs Bamford. Rather, the usage is equally consistent with "share" meaning "proportion", such that the amount to which the beneficiary is to be deemed to be entitled is converted into a proportion of the whole.

49 The construction contended for by Mr and Mrs Bamford could result in the assessment of a beneficiary whose entitlement is described as an entitlement to a balance amount, to tax of more than the beneficiary is entitled to receive. Further, it could result in an assessment to tax of a beneficiary who is notionally entitled to a balance of the distributable income of the trust after specific appointments have been made, in circumstances where there is in fact no residual income to be appointed and there is, accordingly, no gift that the beneficiary could disclaim in order to avoid the assessment; that is arguably the present case. Mr and Mrs Bamford’s contention would produce the result that Church of Scientology Inc would be presently entitled, in the 2000 Tax Year, to income of $106,000. However, its assessable income under s 97(1) would be $297,702, being $106,000 plus $191,702, representing the deductions not allowable in the 2000 Tax Year. That result is difficult to reconcile with the policy of Division 6 advanced by Mr and Mrs Bamford in support of the construction for which they contend.

50 The Tribunal made no error of law in concluding that the objection decision in relation to the 2002 year should be affirmed.

51 Receipts and outgoings of a trustee in relation to the trust estate must be allocated among the beneficiaries, according to their respective interests, on an equitable and fair basis. As a very general rule, a distinction was drawn in that regard between life tenants and remaindermen. The general law developed principles for determining, in the absence of any specific provisions in the instrument governing the trust estate, which of those categories of beneficiary were to receive the benefit of particular receipts and which were to bear the burden of particular outgoings. In general terms, recurring receipts and outgoings were for the account of the life tenants and other receipts and outgoings were for the account of the remaindermen. The concepts of "income", on the one hand, and "capital" or "corpus", on the other, were developed to guide and govern that determination.

52 However, the first duty of a trustee is to comply with the terms of the instrument governing the relevant trust estate and principles such as those referred to above operate subject to the provisions of the relevant trust instrument. Thus, a trust instrument may contain provisions that determine the respective entitlements of beneficiaries in a way that is inconsistent with the principles concerning allocation to life tenants and remaindermen that would be applied under the general law. Where the relevant trust instrument expressly stipulates the entitlement of particular beneficiaries by, for example, specifying that receipts that would be for capital account under the general law principles are to be distributed to life tenant beneficiaries, that provision prevails and determines the amount which the respective beneficiaries are entitled to receive.

53 As indicated above, the Bamford Trust Deed provides that, as between the Company, on the one hand, and the beneficiaries of the Bamford Trust, on the other, the Company, as trustee of the Bamford Trust, may determine whether any particular receipt, profit or gain is or is not to be treated as being on income account or on capital account, for the purposes of making distributions to the Beneficiaries. The Commissioner says that, while such a determination may affect a Beneficiary’s entitlement to a distribution, as against other Beneficiaries and the Company, it has no effect on the character, for the purposes of the 1936 Act, of a particular receipt, profit or gain in the hands of the Company, as trustee.

54 The Commissioner contends that the phrase "income of the trust estate" in s 97 does not include a capital receipt, which the Bamford Trust Deed might permit the Company to treat as income for the purposes of making distributions under the terms of the Bamford Trust Deed, but which is not income in accordance with ordinary concepts. A Beneficiary under the Bamford Trust may, by reason of a determination of the Company, become entitled to a distribution of the amount of a capital receipt. The Commissioner says that, unless that receipt had the character of income under the general law when it came into the hands of the Company as trustee, the Beneficiary’s entitlement is not an entitlement to a share of the income of the Bamford Trust, within the meaning of s 97(1).

55 A trust instrument may confer on a trustee power to make a determination to the effect that a receipt that is income according to ordinary principles is not income for the purposes of the Trust. In such a case, beneficiaries who would otherwise be entitled to a receipt that according to ordinary principles would be income that the Trustee determined would not be income for the purposes of the Trust, will not be entitled to that receipt. Such a determination will be binding on the beneficiaries under the Trust. However, such a determination could not bind the Commissioner (see Richardson v Federal Commissioner of Taxation (2001) 187 ALR 680 at [31]). The Commissioner says that the terms of the Bamford Trust Deed have no effect for the purposes of determining whether a beneficiary is presently entitled to a share of the "income of the trust estate" within the meaning of s 97(1). That will depend, he says, upon whether the receipt was income, in the hands of the Company, as trustee of the Bamford Trust, according to ordinary concepts. However, that does not follow from the proposition stated above.

56 An important assumption underlying Division 6 is that a beneficiary who derives a share of the net income should be in a position to pay the tax out of that income; otherwise, the beneficiary could be placed in a difficult position (see Federal Commissioner of Taxation v Whiting [1943] HCA 45; (1943) 68 CLR 199 at 215). That is to say, as a general rule, liability for tax on receipts of a trust estate should correspond with the enjoyment of those receipts. It is not essential to the achievement of that legislative assumption that the reference to "income of the trust estate" in the beginning of s 97 should be limited to that which, for the purposes of allocating entitlements between life tenants and remaindermen, is characterised as "income" under general law concepts.

57 There is no reason why "income of the trust estate" should refer to what is treated, for income tax purposes, as "income", whether as so defined or as income according to ordinary concepts. Had it been the legislative intention to adopt the concept of income as found in s 25 of the 1936 Act before its repeal, there would have been no need to draw a contrast, or to establish a relationship, between "income of the trust estate", on the one hand, and "net income of the trust estate", on the other.

58 The concept of "income" is no more than a mechanism by which the general law, in the absence of a direction in the trust instrument, effects an apportionment among the beneficiaries. The concept is not inconsistent with the contention that the beneficiaries should be treated as presently entitled, for the purposes of s 97, to any amount that, under the terms of the trust instrument, albeit contrary to the general law principles, they are entitled to receive. Rather, it is consistent with the scheme of Division 6 that the beneficiaries who are presently entitled to share in amounts, by the operation of the terms of the relevant trust instrument, should bear the tax on those amounts. Thus, if the trust instrument prescribes that a gain that would be included in the net income of the trust estate under s 95 is also to be included in the amount of "income" to be shared by particular beneficiaries, it is consistent with the object and purposes of Division 6 to regard that amount as one to which those beneficiaries are presently entitled for the purpose of s 97. Indeed, it may be inconsistent with the legislative intention to treat it otherwise.

59 Accordingly, where a trust instrument permits the trustee to treat a capital receipt as income for the purposes of fixing the entitlements of beneficiaries to distributions, a beneficiary who thereby becomes entitled to a share of that capital gain is presently entitled, within the meaning of s 97, to that part of the income of the trust estate. The beneficiary must include that share of the net income of the trust estate in that beneficiary’s assessable income and the trustee would not be liable to be assessed under s 99A.

60 The Company adduced evidence from the accountant who prepared the accounts for the Bamford Trust for the 2002 tax year. He said that, in accordance with the relevant Australian Accounting Standard, the capital gain from the sale of real property of the Bamford Trust was treated as revenue and was not credited to a capital reserve. While the Tribunal observed that income and revenue are different concepts, no finding was made by the Tribunal as to whether the capital gain in question was income according to ordinary concepts. Indeed, the Company says that it is not material to decide whether the gain in question was income or capital according to ordinary concepts. It is sufficient, the Company says, that it made a determination that, pursuant to clause 7(n) of the Bamford Trust Deed, the capital gain was to be treated as being on income account. The consequence of that determination is that it was to be dealt with under clause 4(a) of the Bamford Trust Deed rather than clause 4(b). On that basis, the Company says, the capital receipt was income of the Bamford Trust to which Mr Bamford and Mrs Bamford were presently entitled by reason of the determination, made on 30 June 2002, to distribute the capital gain to them, to be shared equally.

61 The amount of the "capital gain" that was the subject of the resolution of 30 June 2002 was not specified in the resolution and there was no finding that the resolution was intended to be limited to the net capital gain of $29,227 shown in the tax return. The first $60,000 of the income, including unspecified capital gain, was to be distributed to Mr Bamford and Mrs Bamford. The accounts of the Bamford Trust for the period ended 30 June 2002 show income of $106,602, including "profit on sale of assets" of $58,454. After expenses of $50,928, the profit and loss statement shows net profit from ordinary activities, before income tax, of $55,675. The balance sheet of the Bamford Trust as at 30 June 2001 shows a deficiency of liabilities over assets of $53,001.

62 Under the terms of the resolution of 30 June 2002, the first $60,000, including capital gain, of the net income for the year ended 30 June 2002 was to be distributed to Mr Bamford and Mrs Bamford, to be shared equally. That is to say, Mr and Mrs Bamford became presently entitled to the amount of the capital gain, which was distributable income of the Bamford Trust for the 2002 tax year, by reason of the Company’s determination of 30 June 2002. That must have included the whole of the capital gain resulting from the disposal of property by the Company. It follows that there was no part of the income of the Bamford Trust for the 2002 tax year to which no person was presently entitled. The Tribunal erred in concluding, in the circumstances, that Mr Bamford and Mrs Bamford were not presently entitled to the amount of $16,100.

63 The Company contends that the decision of the Full Court in Cajkusic v Commissioner of Taxation [2006] FCAFC 164; (2006) 155 FCR 430 (Cajkusic’s Case) compels acceptance of its contentions. The Commissioner, on the other hand, says that Cajkusic’s Case does not have the effect contended for by the Company and that the decision in Cajkusic’s Case either was not binding or should not be followed. The Company also relies upon the provisions of Division 115 of the 1997 Act to support its contentions. Division 115 deals with capital gains arising in respect of an asset held for 12 months or more. In the light of my conclusion, I do not propose to say anything about Cajkusic’s Case or about the operation of Division 115.

64 The appeal should be dismissed in so far as it relates to the 2000 tax year. However, the appeal should be allowed in so far as it relates to the 2002 tax year. The decision of the Tribunal affirming the objection decision of the Commissioner in relation to the Company’s objection to the assessment for the 2002 tax year should be set aside. That aspect of the matter should be remitted to the Tribunal for reconsideration and determination according to law.

65 The Court has been informed that it has been agreed between the parties that the Commissioner will bear the applicants’ costs in any event. Accordingly, it is appropriate to make no order as to the costs of the appeal.

I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 700 of 2008

BETWEEN:

PHILLIP BAMFORD
First Applicant

DAVINA BAMFORD
Second Applicant

P & D BAMFORD ENTERPRISES PTY LTD
ACN 057 927 009
Third Applicant

JUDGES:	EMMETT, STONE & PERRAM JJ
DATE:	3 JUNE 2009
PLACE:	SYDNEY

66 We agree with Emmett J that the appeal should be dismissed so far as it relates to the 2000 year for the reasons given by his Honour. We also agree that the appeal should be allowed in relation to the 2002 year but for slightly different reasons.

67 The taxpayers submitted that the expression "the income of the trust estate" in s 97(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") was to be interpreted as meaning the income of the trust according to trust law concepts. The law of trusts’ interest in the topic of income emerges from the longstanding conundrum facing trustees who have to distribute income and apportion expenses between successive equitable estates. However, the interstices of those rules, which take the form of presumptions about the intention of the settlor, always yielded to the terms of the trust. In the present case, the terms of the trust deed permitted the trustee to determine, in its absolute discretion, what should be treated as income and what should be treated as capital.

68 In the 2002 year, the trustee realised a capital gain of $58,454 which it appointed to income pursuant to cl 7(n) of the trust deed. The taxpayers submit that the consequence of the appointment of that capital gain to income was that it formed part of "the income of the trust estate" for s 97(1) purposes. Because s 97(1) gauges the extent of a beneficiary’s share of the net income of the trust by reference to the proportion that the beneficiary’s present entitlement bears to "the income of the trust estate", the arithmetical effect of the taxpayers’ submission is to increase the income of the trust (by the capital gain). This has the consequence of decreasing the extent of the beneficiary’s share and thereby reducing the amount exigible to tax.

69 The taxpayers also submitted that this conclusion was buttressed by the provisions of the Income Tax Assessment Act 1997 (Cth) dealing with capital gains. In particular, it was said that s 115-215(2) of that Act assumed, consistently with the taxpayers’ argument, that a capital gain might be included in the income of the trust for s 97(1) purposes.

70 The Commissioner, on the other hand, submitted that "income" should bear its natural legal meaning which was income in accordance with ordinary concepts: Commissioner of Taxation v Montgomery [1999] HCA 34; (1999) 198 CLR 639 at 661 per Gaudron, Gummow, Kirby and Hayne JJ. So viewed, it could not include statutory income, such as capital gains, and certainly could not be altered by the terms of the trust deed.

71 There are two related issues at play here. One concerns the meaning of the expression "the income of the trust estate"; the other the ability of the terms of the trust deed to have an impact on that concept.

72 The word "income" is not defined in the Act. There is no doubt that the content of the concept of income in the Act "must be determined in accordance with the ordinary concepts and usages of mankind": Scott v Federal Commissioner of Taxation (1935) 35 SR(NSW) 215 at 219 per Jordan CJ; Commissioner of Taxation v Montgomery [1999] HCA 34; (1999) 198 CLR 639 at 661 per Gaudron, Gummow, Kirby and Hayne JJ. As the latter case emphasises, the expression "ordinary concepts and usages" is no mere matter of ritual incantation but rather identifies the essential nature of the inquiry.

73 However, the expression presently to be construed is not "income" but rather "the income of the trust estate". The Full Court of this Court’s decision in Cajkusic v Commissioner of Taxation [2006] FCAFC 164; (2006) 155 FCR 430 ("Cajkusic") seems to us to require that the expression "the income of the trust estate" be interpreted as meaning the income of the trust as understood in trust law. In that case the Full Court held that despite the fact that expenses had been disallowed from the net income of the trust, as defined in s 95 of the Act, this did not have the consequence that they had ceased to be deducted from "the income of the trust estate" for the purposes of s 97(1). The trustee had determined, pursuant to an express power in the trust deed so to do, to treat the outgoings in question as being on the revenue account.

74 The Commissioner argued that the terms of the trust deed could not determine whether an outgoing could be so treated for the purposes of determining the income of the trust under s 97. Kiefel, Sundberg and Edmonds JJ said this (155 FCR 430 at 436 [21]):

75 The Commissioner submitted that this determination was an obiter dictum. We do not agree. The question before the Court was whether a determination by the trustee to appoint an outgoing to the revenue account could reflect the income of the trust for s 97 purposes. The Court concluded it could, in consequence of which it determined there was no income of the trust for s 97(1) purposes in the relevant year and, hence, no beneficiaries who were presently entitled. The effect of that conclusion was that s 97 did not operate to attribute any income to the taxpayers. The conclusion at [21], therefore, forms part of the ratio decidendi of the decision.

76 The Commissioner invited us not to follow Cajkusic. We could only do so if we were of the view that it was clearly wrong. We are not of that view. The Commissioner suggested that the Full Court in Cajkusic had failed properly to apply what fell from Gleeson CJ in Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd [1998] HCA 53; (1998) 194 CLR 328 at 337 [15]:

77 The Full Court explained in Cajkusic that this passage, when understood in context, was speaking of the net income of the trust for s 95 purposes and not the income of the trust for s 97 purposes: [2006] FCAFC 164; 155 FCR 430 at 438 [29]. We agree. It follows that the terms of the trust may have the effect of altering the income of the trust for s 97 purposes. That conclusion makes it unnecessary to consider the taxpayers’ argument based upon s 115-215(2). However, there is much to be said for the view that that matter is neutral.

78 For completeness it should be noted that this interpretation of s 97 does not, as the Commissioner’s submissions at times appeared to assume, have the consequence of thwarting the operation of the Act. Tax is exigible on the net income of the trust. If there are beneficiaries who are presently entitled pursuant to s 97, then s 97 operates to bring the entitlement of those beneficiaries in the relevant share of the net income of the trust to tax; to the extent that there are no eligible beneficiaries, the obligation to pay tax falls upon the trustee under ss 99 or 99A. The only purpose of the concept of "income of the trust estate" in s 97(1) is to determine the extent of the apportionment as between the beneficiaries and the trustee. It is not, in itself, a metric by which tax is imposed.

I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Stone and Perram.

Counsel for the Applicants:	Mr AH Slater QC with Mr IS Young

Solicitors for the Applicants:	Robert Richards & Associates

Counsel for the Respondent:	Ms J Davies SC with Mr DJ Batt and Mr PD Nicholas

Solicitors for the Respondent:	Australian Government Solicitor

Dates of Hearing:	24, 25 November 2008

Date of Judgment:	3 June 2009

Federal Court of Australia - Full Court

Bamford v Commissioner of Taxation [2009] FCAFC 66 (3 June 2009)