Trustees, Executors & Agency Co Ltd v Acting Federal Commissioner of Taxation [1917] HCA 56; (1917) 23 CLR 576 (18 October 1917)

The Trustees, Executors and Agency Company Limited Appellant; and The Acting Federal Commissioner of Taxation Respondent.

Case stated by Barton J., pursuant to sec. 38 of the Commonwealth Income Tax Assessment Act 1915-1916. The appellant is the trustee of the will of Mary MacGregor. Income was received by the appellant for the year of taxation to the net amount of £1,475, out of which £600 is admittedly taxable. Liability as to the balance £875 is disputed, and also as to the amount of the tax claimed, viz. £53 18s. 4d., which is claimed on the basis that tax on the whole £1,475 is £90 17s. 10d. of which £36 19s. 6d. is attributable to the £600, leaving £53 18s. 4d. in respect of the balance of £875. The questions of law stated for opinion of this Court are:—(1) Was the appellant assessable to income tax in respect of the sum of £875? (2) Was that sum income of a charitable institution? (3) Was that sum income of a fund established by the will for public charitable purposes? (4) Was the appellant rightly assessed to income tax in respect of the said sum of £53 18s. 4d.? It cannot be disputed that unless either the second or the third question is answered in favour of the appellant, the whole £1,475 is taxable and the sum of £53 18s. 4d. is correctly assessed. The appellant contends that by reason of clauses (d) and (f) of sec. 11, sub-sec. 1, one or other of those two questions should be answered in favour of the taxpayer.

The estate now in the hands of the trustee is a large one, about £44,000, and we were told that the principles governing this case affect other cases. The estate is cleared except for two annuities, two legacies, and the gifts to three charitable institutions. Two annuities, £400 and £200 respectively, are payable to two children of the testatrix. They are living. After the death of the survivor of them, two legacies of £2,000 and £1,000 respectively are payable to two grandsons of the testatrix if living or their issue if living failing which the legacies lapse into the trust estate. Then the will provides: "And after and subject to the said two legacies to my two grandsons and to the aforesaid provisions in relation thereto, my trustee shall hold my trust estate as a perpetual trust fund, to be called Mary MacGregor Trust upon trust"; then follow trusts to invest and "to pay and divide the net interest, income, and annual produce to arise from such investments" as follows: one-half to the Melbourne Hospital, one-fourth to the St. Vincent's Hospital, and one-fourth to the Benevolent Asylum, North Melbourne. The expression "my trust estate" is defined by the will as comprehending "my real and personal estate and the investments thereof and the rents, interest, profits and all other income thereof." The annuities for the year of taxation have been paid, and the sum of £875 has been accumulated under the trusts of the will. The trustee has appropriated and set aside out of corpus assets sufficient to answer the two legacies to the grandsons, who—it is to be taken—are still alive. It does not appear that any fund has been set apart to secure the annuities.

The answers to questions 2, 3 and 4 depend on the effect of the two clauses of sec. 11 (1) already mentioned as applied to the facts before us. The clauses read as follow:—Clause (d): "the income of a religious, scientific, charitable, or public educational institution"; and clause (f): "the income of a provident, benefit, or superannuation fund established for the benefit of the employees in any business and the income of a fund established by any will or instrument of trust for public charitable purposes if the Commissioner is satisfied that the fund is being applied by the trustees to public charitable purposes."

I shall first consider sub-sec. 1 (d). Construing the words of the will as they stand, unguided by any decisions controlling construction, it could not be contended that the moment had arrived when the institutions could claim the income. Their interest is vested, but, on the strict language of the will in its ordinary sense, it is not vested in possession, which means with a right of present enjoyment. But that was the case also in the will the subject of the decision in Wharton v. Masterman[1]. There the words were "and from and after the decease of the survivor of the said annuitants," (the trustees) "do and shall sell" the funds and accumulations not already in cash, and stand possessed of the proceeds and of all cash in trust to pay and divide among the named public charities. Nevertheless, the House of Lords (affirming the Court of Appeal) held that the charities were presently entitled to the surplus yearly income after satisfying the annuitants. But though that was the conclusion as a matter of construction, it was arrived at only by means of the canon of construction afforded by Saunders v. Vautier[2]. I have then to see how this case differs from Wharton's Case. The ground of distinction in my opinion is that the doctrine of Saunders v. Vautier does not apply to interfere with the primary construction of the words of this will, because the annuitants and the legatees (grandsons) have an interest in the whole estate (Wollaston v. Wollaston[3]), and so it cannot be said that the surplus is exclusively for the benefit of the institutions. I stated in Glenn v. Federal Commissioner of Land Tax[4] what appeared to me to be the fundamental principle governing this aspect of the matter, and I refer to what I there said for the reasons leading me to that conclusion. In Central Trust and Safe Deposit Co. v. Snider[5] that principle was acted on (see particularly at p. 272). The principle is that equitable ownership, as it is called, is always commensurate with the right to relief in a Court of Equity. If the appropriate relief would not be present enjoyment, there is no equitable ownership in possession. This establishes the position that as a matter of right, upon the true construction of the trusts of the will, the institutions could not claim to be presently paid the £875. And if so, it cannot be their "income" within the meaning of sub-sec. (d), which refers to "income" which, unless exempted by that sub-section, would be taxable under sec. 10 as interpreted by secs. 3 and 14.

Mr. Mitchell urged that the surplus £875 fell within sub-sec. (d) if it went as accumulation to the general bulk of the estate, because the annuities having been paid and the grandsons being otherwise provided for, it was simply the institutions that were thereby benefited. But that is also answered by the principle already adverted to. What relief would equity give? Simply to compel the trustees to accumulate as part of the fund, and add to the fund; not to pay as income. And as the gift to the institutions is "subject to the two legacies"—and consequently to all that precedes them—the payment to the institutions is not to take place unless and until the legacies (and the annuities) are paid. (See In re Jobson; Jobson v. Richardson[6], and In re Young; Brown v. Hodgson[7].) Consequently, whatever rights the institutions have in respect of the surplus income of the trust estate, their rights do not include a right to consider it as their income.

Reliance was placed on Harbin v. Masterman[8], and particularly on Lord Lindley's words at p. 361. They are very important words. I have already stated at length my understanding of that case, and particularly of the words referred to, in Glenn's Case[9], and adhere to what I there said. In order to apply the doctrine of the decision relied on to the present case, it is necessary to point out that Harbin v. Masterman is the converse of Wharton v. Masterman[10]. Wharton's Case dealt with strict rights, and applied Saunders v. Vautier[11]. It dealt with the surplus annual income. But in Harbin's Case it was not a question of enforcing strict rights as they appeared on a true construction of the will, which is the point I have so far reached in the present case. The Court of Appeal there were considering, as Stirling J. had been considering in the Court of first instance, not the enforcement of strict rights, but their adjustment by departing from the exact construction of the trusts of the will. One of the annuitants, Mrs. Venables, stood on her strict rights (see p. 353), and declined to accept the Court's provision in satisfaction of her annuity. The charities presented a petition to compel her. Stirling J. made what he called "an administrative order"[12] under "the practice of the Court." In the Court of Appeal Lindley L.J., for the whole Court, held that, though that was the first case in which the Court had done so in spite of opposition, there was a practice to set aside a part of the capital to answer an annuity, though not strictly authorized by the will, and to let the remainderman into enjoyment in the meantime. But the authorities to which I refer in Glenn's Case[13] show that is curial discretion, as an administrator, not curial determination of strict rights. In re Evans and Bettell's Contract[14], in which Lord Parker (then Parker J.) definitely assigned this jurisdiction to "administration only," is a striking illustration, because there the Court had previously set aside a fund to answer annuities, and yet the strict rights of annuitants were recognized as still existing if protection were ever needed. Here, there has been no such curial order. As to the annuities here, there has not been even a segregation by the trustees. The annuitants have not, so far as appears, assented to a waiver of their rights. The grandsons apparently have not assented to a waiver, and, for all that appears, could not. The institutions have not received, and they may never receive, any actual benefit from the accumulations. They have no present right to demand any of the £875 either as a strict right, or under a discretionary order. I, of course, do not decide that a discretionary order would or could be made adversely to the annuitants or legatees—they are not before us as adverse litigants. I merely assume for the present purpose that such an order might be made. But the fact is that no such order has been made. Consequently the second question must, in my opinion, be answered in the negative.

Then we have to consider clause (f) of sub-sec. (1). Now, the first observation I have to make about that is that it is wholly inapplicable to such a trust as the one we are considering. Reading the whole clause, for the earlier part materially helps to indicate the mind of the Legislature, it appears to me to refer to a trust which is to be administered by the "trustees" themselves — they are to apply the funds—and does not refer to a mere trust to hand money over to an institution to be administered by that institution, the governing body of which has the duty of applying what it receives to the purposes of the institution. When money is handed over to an institution as "income" of that institution—it may not be income of the donor—the Commissioner has no duty, and no right, to be satisfied as to its application. But where the trust is in private hands, the Commissioner has that duty and that right. The income of a business fund described in the clause is exempt, apparently, without any supervision—though this may be an accidental omission—but the private character of the administration is common to that case, and to the charity fund in the same clause. As to the charity fund the Commissioner is to be satisfied that it is "being applied by the trustees to public charitable purposes." It is clear that if the institutions were "religious," or "scientific," or "public educational," the case would be outside clause (f). In that case, no one could say the fund was being "applied" by the trustees to "religious" or "scientific" or "educational purposes." And similarly as to the present institution. In my opinion the two clauses do not overlap, but were intended for totally separate cases. It would be a great stretch of language to say that the trustees in paying income to or for the benefit of "a charitable institution" within the meaning of clause (d), were "applying" it to the institution. And yet that would be nearer the truth. But if that could be said, it does not follow that that is the same as applying it to "public charitable purposes."

The case does not find, or state, that the purposes of the named institutions are "public charitable purposes" within the meaning of clause (f). The word "charitable" in the one clause does not mean the same as "charitable" in the other. In "public charitable purposes" in clause (f) the word "charitable" has, in my opinion, the strict technical meaning, and before I can answer the third question in appellant's favour, that meaning must be established. An institution may be a "charitable institution" in the Australian sense of that phrase—by long legislative usage, in nearly all, if not all, the States where Appropriation Acts make grants to or for "charitable institutions"—using "charitable" in that connection in its popular and not in its technical legal sense. On this case, I am not empowered to find facts, nor are there any facts from which as a matter of law, without any inference of fact, it appears that the purposes of these institutions answer the technical description of "public charitable purposes," or that if money paid over to these institutions or any of them and applied by them in paying off debts, or in extending premises or in carrying out certain of their purposes, would be an application to "public charitable purposes" (see St. Andrew's Hospital, Northampton, v. Shearsmith[15]).

Argument was addressed to us on the meaning of "applied," though it does not directly fall within the question asked. It must be observed, as pointed out by Mr. Mitchell, that a distinction is made between the "income" and the "fund," and "applied" is attached to "fund" and not to "income." Further, the words are "the fund is being applied"—not simply "applied." I agree that some elasticity must be given to the phrase. For instance, if a fund were established to purchase radium for free curative purposes, and if it were found that (say) £20,000 were required as a minimum, but the fund could accumulate only at the rate of £5,000 a year, and the Commissioner were satisfied that each year's income was deposited in a bank for the special purpose of getting together £20,000, and buying the radium, he could well say he was satisfied the fund was "being applied" to the charitable purpose. I would draw attention to the somewhat similar—though not identical—provision in the English Act of 1842, sec. 88 (3), where "stock" is spoken of as "applied" to purposes of repairs of buildings for divine worship and a provision for satisfying the Commissioners. "Being applied" is as true of the first step in the process as of the last. The Commissioner, in examining the facts, can judge of the reality of the first step, and of its actual standing as carrying out the provisions of the trust.

The fourth question is, therefore, necessarily to be answered in the affirmative.

The question in this case is whether the accumulated and invested net balance of income in the hands of the appellant trustee is entitled to exemption under sec. 11 of the Income Tax Assessment Act 1915-1916.

The appellant contends that the exemption is to be found in clauses (d) and (f) of sub-sec. 1 of this section. The clauses so far as is material are: (d) "the income of a ... charitable ... institution;" (f) "the income of a fund established by any will ... for public charitable purposes if the Commissioner is satisfied that the fund is being applied by the trustees to public charitable purposes."

The facts set out in the case stated show that the net income of the trust estate is being accumulated, invested and held by the appellant until the death of the survivor of the two children of the testatrix. Upon the happening of that event and after payment of the legacies bequeathed by the will, the appellant trustee is directed to hold the trust estate as a perpetual trust fund upon trust to invest the same and pay the net interest, income and annual produce to certain named charitable institutions. In these circumstances we do not think that any portion of the income of the trust estate is income of the charitable institutions in question, because they do not in fact receive any such portion.

Upon the facts of the case and the true interpretation of the will, we are of opinion that the events prescribed by the testatrix for the establishment of the fund for the charitable institutions mentioned in the will have not taken place, and that there is not yet in existence a fund established by this will for charitable purposes. If follows that there is not in existence any fund which the Commissioner can be satisfied is being applied by the trustees to public charitable purposes. The words "applied to public charitable purposes" in clause (f) in our opinion mean in point of fact applied to, used for, or expended on, such purposes (cf. Commissioners of Inland Revenue v. Forrest[16]; In re Marquis of Bristol's Settled Estates[17]).

We answer questions (a) and (d) in the affirmative, and (b) and (c) in the negative.

Solicitor for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.

[1] (1895) A.C., 186.

[2] Cr. & Ph., 240.

[3] 7 Ch. D., 58.

[4] [1915] HCA 57; 20 C.L.R., 490, at pp. 503-504.

[5] (1916) 1 A.C., 266.

[6] 44 Ch. D., 154, at p. 157.

[7] (1912) 2 Ch., 479, at p. 484.

[8] (1896) 1 Ch., 351.

[9] [1915] HCA 57; 20 C.L.R., 490.

[10] (1895) A.C., 186.

[11] Cr. & Ph., 240.

[12] (1896) 1 Ch., at p. 357.

[13] [1915] HCA 57; 20 C.L.R., 490.

[14] (1910) 2 Ch., 438.

[15] 19 Q.B.D., 624.

[16] 15 App. Cas., 334, at pp. 345, 346.

[17] (1893) 3 Ch., 161, at p. 167.

High Court of Australia

Trustees, Executors & Agency Co Ltd v Acting Federal Commissioner of Taxation [1917] HCA 56; (1917) 23 CLR 576 (18 October 1917)

HIGH COURT OF AUSTRALIA