Deputy Federal Commissioner of Taxation v Purcell [1921] HCA 59; (1921) 29 CLR 464 (12 August 1921)

HIGH COURT OF AUSTRALIA

H C of A

12 August 1921

Gavan Duffy, Rich and Starke JJ.

Woolcock and Hart, for the appellant.

Feez K.C., Ryan K.C. and Douglas, for the respondent.

Woolcock, in reply,

The following written judgments were delivered:?

Aug. 12, 1921

Gavan Duffy and Starke JJ.

The Commissioner of Taxation assessed the taxable income of the respondent under the Income Assessment Act 1915-1916 for the financial year 1917-1918 at the sum of £35,129, and the respondent brought an appeal against the assessment to the High Court. The appeal was heard before the learned Chief Justice, who ordered the amendment of the assessment, and declared that the income derived by the respondent during the period 1916-1917 was derived by him as trustee, and that certain sums amounting to about £12,810 should be treated as income distributed to beneficiaries. The matter comes before us on appeal by the Commissioner from the judgment of the Chief Justice.

According to the provisions of sec. 10 of the Income Tax Assessment Act, coupled with the definition in sec. 3, every person who in any financial year derives any taxable income from sources within Australia is liable to income tax; and, if such person derives it as trustee, he is liable in respect of the tax as if he were beneficially entitled to the income, subject to the provision that in the assessment of a trustee there shall be deducted from the tax assessable to him so much of the total tax as bears to the total tax the proportion which that part (if any) of the whole income which is distributed to the beneficiaries bears to the whole income (Income Tax Assessment Act 1915-1916, secs. 26, 27 (2)).

The respondent Purcell was, prior to 20th May 1916, possessed of pastoral interests in Queensland from which the income in question in this case was substantially derived. On this day Purcell, by a document in writing, declared that he held the interests in trust as to one equal undivided third part for his wife, and another equal undivided third part to pay the income to his daughter until she attained the age of twenty-one years and, when she attained that age, as to both capital and income for his daughter absolutely, and as to the remaining equal undivided third part for himself. The declaration contained some very wide and unusual powers of management, control and investment, which are set forth at large in the report of the case Purcell v. Deputy Federal Commissioner of Taxation[1] , and need not be repeated here. At the time the declaration was executed the daughter was about sixteen years of age, and she is still alive.

The learned counsel who appeared for the Commissioner contended that the declaration created no obligations such as a Court of equity could enforce, and left Purcell as the owner both at law and in equity of the interests set forth in the declaration. Substantially, the observations of our brother Isaacs in his judgment in Purcell v. Deputy Federal Commissioner of Taxation[2] were relied upon in support of this contention. It is unnecessary to consider whether this question was determined against the Commissioner by the majority of the Court in Purcell's Case, for we are of opinion that the argument is not well founded.

Assuming, for the purpose of the argument, that the declaration evidenced a real and genuine transaction, then it creates, in our opinion, an equitable obligation binding the settlor to deal with certain property, over which he has control, for the benefit of certain persons of whom he is one, or, in other words, a trust. The large and unusual powers of management, control and investment given to the trustee are not contrary to any rule of law or equity. No doubt, effective control of the trustee is very much reduced, but the clauses do not destroy or render null and void the obligation to stand possessed of the property or its proceeds for the benefit of the persons named in the declaration.

Next, the Commissioner insisted that the declaration, if in form it created a trust, was in fact a mere sham?a device whereby property belonging to the settlor is made to appear to belong in equity to someone else in order to escape taxation. Undoubtedly, if the Commissioner could establish this position, the respondent would be assessable as the absolute owner pursuant to sec. 10 of the Act, and not merely as a trustee. The question is one of fact. The Chief Justice found that the declaration was not a sham, and that the respondent did in fact intend by the document to benefit his wife and daughter, although he had present in his mind and was to some extent influenced by the fact that the disposition would reduce the burden of taxation. The learned counsel for the Commissioner stressed this latter part of the finding; but the right of every man to dispose of his property, if he can, in a way which will relieve him of taxation, and for that purpose, has been recognized by the highest authority (Simms v. Registrar of Probates[3] ). No doubt it is our duty to determine for ourselves the true effect of the evidence so far as the circumstances of the case enable us to do so; but when the conclusion of the trial Judge depends on materials which give him a better opportunity than an appeal Court for discerning the true state of the facts, such Court ought not in ordinary circumstances to interfere. The Chief Justice approached the case with suspicion, and gave a considered judgment discussing all the relevant facts from both points of view. He heard the testimony of those persons who took part in the transactions culminating in the execution of the document relied on as a declaration of trust, and on that testimony he was satisfied that the settlor intended to make his wife and daughter owners of two thirds of the property comprised in the document. We think the testimony justified him in arriving at that conclusion if he believed the testimony, and we are not prepared to say that any facts disclosed in the evidence justify us in saying that he should not have believed it.

The Commissioner next contended that, even if the declaration evidenced a real, genuine and valid transaction, yet it was struck by sec. 53 of the Income Tax Assessment Act 1915-1916. If the argument be sound the assessment is of course unimpeachable. It is therefore essential to consider the true construction of sec. 53. The section, as the Chief Justice says, does not prohibit the disposition of property. Its office is to avoid contracts, &c., which place the incidence of the tax or the burden of tax upon some person or body other than the person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. But any agreement which directly or indirectly throws the burden of the tax upon a person who is not liable to pay it, is within the ambit of sec. 53. It follows, from what we have said, that there is no contravention of sec. 53 in the present case. The Act, by sec. 26, provides that any person who derives income as a trustee shall be assessed and liable in respect of income tax as if he were beneficially entitled to the income. The respondent is so liable in precise accordance with the terms of the Act. The incidence of the tax as regulated by the Act is not altered, the respondent is not relieved from tax which he should pay, and he does not defeat, evade or avoid duty or liability imposed upon him by the Act, nor does he prevent the operation of the Act in any respect.

The only other question is the application of sec. 27 (2) to the facts proved in this case?in other words, what deduction is the respondent as trustee entitled to claim? As to a sum of £12,510 15s. part of the total income assessed by the Commissioner, the parties agreed before the Chief Justice that it has been distributed to the beneficiaries if the respondent was taxable as a trustee. We do not know the reason for this agreement, nor does it concern us. The agreement was made, and must be adhered to. As to three several sums of £100 each paid into the bank account of Mrs. Purcell, the Chief Justice declared that these sums must be treated as income distributed to a beneficiary within the meaning of sec. 27 (2). Before the declaration of trust it was the custom of the respondent to pay into Mrs. Purcell's banking account from time to time small sums of money for household expenses. These sums were paid out of his general banking account. This practice was followed after the execution of the declaration, and each of the sums of £100 was so paid into Mrs. Purcell's account and was used by her for household expenses. But it was said that the payments to Mrs. Purcell must, since the declaration of trust, be treated as income accruing to her under that document. The assessment is primâ facie evidence of its correctness (see sec. 35 (1) (b)), and we think that the evidence is more consistent with the conclusion that these three sums of £100 were personal contributions of the respondent to household expenses than a distribution of trust income. The declaration made by the Chief Justice as to these three sums must be deleted, but otherwise the judgment is affirmed.

The respondent has substantially succeeded in this appeal, and the appellant's small success as to £300 cannot alter the costs of the appeal, which the appellant must pay.

Rich J.

This case originally came before Knox C.J. The learned Chief Justice decided certain questions of fact and law, but referred to the Full Court the question "whether the declaration of trust dated 20th May 1916 executed by the appellant, not having been registered in the manner prescribed by the Bills of Sale Act of 1891, is a valid declaration of trust binding on the appellant, or is of no effect with respect to the chattels comprised therein." The majority of the Court held that the declaration of trust was valid and binding on the settlor, notwithstanding the nature of its terms and notwithstanding the provisions of the Bills of Sale Act of 1891 (Purcell v. Deputy Federal Commissioner of Taxation[4] ). The Court had not to decide whether the declaration of trust was a sham?i.e., an unreal or colourable transaction intended to throw dust in the eyes of the Commissioner of Taxation, and not intended to confer benefits on the settlor's wife and daughter. Nor had the Court to decide whether the declaration of trust was obnoxious to sec. 53 of the Income Tax Assessment Act 1915-1916.

The case now comes before the Court by way of appeal from Knox C.J. on the questions decided by him. The first is a question of fact. The essential point is whether the settlor did actually give his wife and daughter certain beneficial interests in the business and property as he purports by the declaration of trust to do. His motives for giving those interests are immaterial. "The question whether an apparent transfer is also a real one is a question which occurs not very rarely, and on which the evidence of actual dealings by the parties can usually be brought to bear. But if we are to dive into the motives of a person acting by himself, and to find out whether a desire to avoid a tax, which probably everybody thinks desirable per se, was, when he gave away property, a dominant motive with him, or a substantial motive, or a minor motive, or any motive at all, that is an inquiry of a vague and indefinite kind" (Simms v. Registrar of Probates[5] ). The Chief Justice has expressly accepted the evidence of Mr. Smith without qualification, treating him as a truthful, accurate and intelligent witness. He also accepts the evidence of Purcell and MacGregor, and sums up his finding thus:?"I am satisfied on a careful consideration of the whole of the evidence ... that the proper inference to be drawn from the facts proved is that the appellant really did intend at the time of executing the declaration of trust that his wife and daughter should become the beneficial owners of two thirds of the property comprised in it. I have no doubt that in forming this intention he was influenced to some extent by a desire to lessen the burden of taxation, but the existence of this motive, assuming the existence concurrently of the intention to part with the beneficial ownership of the property transferred, in no way vitiates the transaction." In view of the evidence given by Smith and MacGregor, and the acceptance by the Chief Justice of that evidence as true, I think that the proper inferences have been drawn from it that the declaration of trust was not a sham, but was genuinely intended to confer beneficial interests on the settlor's wife and daughter.

The next question is as to the true construction of sec. 53 of the Income Tax Assessment Act 1915-1916. It is difficult to say what is its precise scope and effect; but, whatever its meaning, it would be unreasonable to construe it so as to include a genuine gift which had the incidental effect of diminishing the donor's assets and income. In my judgment the document in question is not within the section.

In the opinion I have expressed it becomes unnecessary to deal with the question of onus decided by the Chief Justice. I am not, however, to be taken to concur with his decision on that point.

Having regard to the Chief Justice's finding of facts, I think that the trustee is entitled to the deduction of the three sums of £100 each as being payments made under the obligation of the deed rather than as voluntary payments in respect of pin-money. The trustee is also entitled under the agreement of the parties to the deduction of the sum of £12,510 15s.

For these reasons I think that the order of the Chief Justice should be affirmed, and the appeal dismissed with costs.

Appeal allowed as to the declaration with respect to the three several sums of £100 contained in the judgment herein of 26th August 1920 and the same is hereby set aside and deleted therefrom. Appeal otherwise dismissed and the said judgment otherwise affirmed. Appellant to pay the costs of this appeal.

Solicitors for the appellant, Chambers, McNab & McNab, for Gordon H. Castle, Crown Solicitor for the Commonwealth.

Solicitors for the respondent, Atthow & McGregor.

1. [1920] HCA 46; 28 C.L.R., 77.

2. 28 C.L.R., at pp. 85 et seqq.

3. (1900) A.C., at p. 333.

4. [1920] HCA 46; 28 C.L.R., 77.

5. (1900) A.C., at pp. 335-336.