|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
High Court of Australia |
H C of A
23 November 1942
Rich J.
Fullagar K.C. and Spicer, for the appellants.
Ham K.C. and Adams, for the respondent.
1942, Nov. 23
Rich J. delivered the following written judgment:—
This is an appeal by the trustees of the estate of R. S. Whiting deceased against an assessment upon them of Commonwealth income tax based on income derived by that estate during the year ended 30th June 1940 and issued by an amended notice of assessment dated 3rd April 1941. The grounds relied on by the trustees are set out in exhibit E as follows:— (1) The trustees are assessable in respect of profits of the partnership of Clarke & Whiting only (if at all) to the extent of moneys actually distributed to them as trustees out of such profits and held by them as income subject to the trusts of the trust instrument. (2) The net income of the trust estate within the meaning of the Income Tax Assessment Act does not include profits of the said partnership not actually distributed to the trustees as trustees and held by them as income subject to the trusts of the trust instrument. (3) If and so far as there was any net income of the trust estate within the meaning of the said Act, there are beneficiaries presently entitled to the income of the trust estate within the meaning of the said Act, and the trustees are not liable to be assessed in respect of any part of the net income of the trust estate.
The substantial question raised by the appeal is whether the trustees as such are assessable in respect of the whole of the income derived by their estate; but there is a subsidiary question whether, whoever may be liable to be assessed, the net income of the estate includes the interest of the estate in the net income of the partnership in which it has a share and in which the trustees are engaged on its behalf, or only on so much of the income of the partnership as the trustees of the two deceased partners have chosen to cause to be distributed to one another. I accept the evidence of Major Walker and Mr. Bossley called for the appellants. No evidence was led on behalf of the respondent. The facts which I consider relevant for the determination of the issues between the parties are as follows:—
Robert Selmon Whiting died on 17th June 1929 leaving a will and five codicils. The appellants are the present trustees of the estate. Henry Joseph Whiting, who was an executor named in the will, died in 1939.
The gross value of the estate of the deceased as sworn for probate duty purposes was £98,604. The liabilities set out in the estate duty statement amounted to £40,154, but other liabilities subsequently discovered brought the total to about £59,000.
The principal assets in the estate were the interest of the deceased in two properties, one in Queensland and the other in Papua, which had been carried on for a number of years by the deceased and Sir Rupert Clarke in partnership. The Queensland property was a pastoral property, and the partnership business carried on thereon was conducted pursuant to the terms of a partnership agreement which provided that the term of the partnership should be for a period of ten years from 4th July 1910 and thereafter until the expiration of six months' notice to determine the partnership. The property in Papua was a rubber plantation carried on by the deceased and Sir Rupert Clarke in partnership under an agreement which provided that the term of the partnership should be for eighteen months from 30th June 1921, and thereafter until determined by six calendar months' notice.
Sir Rupert Clarke died on 25th December 1926 and after his death R. S. Whiting continued until his death on 17th June 1929 to carry on both businesses in partnership with the trustees of the late Sir Rupert Clarke pursuant to the terms of the partnership deeds (exhibit F).
Since the death of R. S. Whiting the partnership businesses have been carried on by the trustees of the respective estates of Sir Rupert Clarke and R. S. Whiting.
The interest of the deceased R. S. Whiting in the Queensland partnership was valued for estate duty purposes at £63,000, and his interest in the Papuan partnership at £3,400. These values were based upon the difference between the value of the assets in the partnerships and the liabilities of the partnerships at the date of R. S. Whiting's death.
The principal liabilities of the deceased at the date of his death, apart from his liability as a partner for partnership liabilities, were the sums of £25,849 and £9,338 due to the Union Bank, and £3,378 due to the A. M. L. & F. Co.
The deceased was survived by his widow, Mrs. Rose Whiting, one son, Henry Joseph Whiting, and three daughters, Mrs. Hammond Chambers, Mrs. Walker and Mrs. Nathan. The son died in 1939 and his executor is W. J. Byrne. The widow and three daughters still survive. The trustees of the estate have discharged all the personal liabilities which were owing by deceased at the date of his death with the exception of a sum of £5,600 payable by the deceased to his son H. J. Whiting under the terms of a settlement made by the deceased on his son, and the sum of £3,765 payable to E. E. Dye, one of the executors of the deceased, under an agreement between him and R. S. Whiting. The liability to the Union Bank was discharged pursuant to an arrangement made with the widow and children, whereby they made available to the trustees moneys which accrued from life policies which had been settled on them by the deceased. From this source the sum of £32,540 was made available and the beneficiaries concerned are entitled to have refunded to them out of the estate in respect of this transaction the amounts appearing under the heading of "advances made to the estate" in the balance-sheet (exhibit H) of the estate as at 30th June 1940. W. J. Byrne is interested in the amount due to Mrs. Rose Whiting and H. J. Whiting on this account by virtue of an assignment by H. J. Whiting to W. J. Byrne of his interest therein. The other liabilities shown in this balance-sheet, apart from the "contingent liabilities" shown at the foot thereof, as to which no present liability exists, include under the heading "Sundry Creditors" the sums due to the late H. J. Whiting and E. E. Dye, already referred to, the sum of £5,617 11s. 8d., succession duty payable by the trustees to the Commissioner of Taxation in Queensland upon the death of Mrs. Whiting, and a contingent liability to the Queensland Commissioner of Taxation for income tax assessed against the trustees, in respect of which the trustees have lodged objections similar to those taken in this appeal. All the specific legacies, pecuniary legacies and annuities provided for by the will have been satisfied, with the following exceptions set out in the balance-sheet, namely:— Amounts unpaid George Woolff £1,293 4 1 Mrs. A. A. Russell (Yda Reynolds) 700 14 3 Miss A. Buchanan 280 5 8 Arthur Turner 280 5 8 Arfred J. Turner (deceased) 98 12 9 Major G. B. Walker (legacy) 5,000 0 0 Major G. B. Walker (annuity) 5,066 8 3
The amount of the legacy payable to George Woolff has been paid to him by Mrs. Whiting, who has taken an assignment of the legacy. Mrs. Whiting has also paid to Alfred J. Turner the amount of his legacy and has taken an assignment of the amount due to him. Mrs. A. A. Russell and Miss Buchanan caused inquiries to be made concerning their legacies some years ago and were informed that in the interests of everybody concerned it was desired to reduce the overdraft on the partnership businesses, and they have not since pressed for payment of their legacies. In the case of the legacy payable to Arthur Turner, no steps have been taken by those entitled to collect the same.
The trustees have realized most of the assets of the deceased, with the exception of his interests in the partnerships. At the date of the death of the deceased it would have been difficult to realize them, because of the economic depression and a drought in Queensland. Since the death of the deceased the partnership businesses have been carried on and their value has considerably increased. Many attempts were made to sell both properties without result and the properties have been carried on as a trust investment under the power contained in clause 25 of the will and with the assent of the beneficiaries. At the date of the death of the deceased the liability of the partnership to its bankers amounted to £218,763. By 1940 this had been reduced to a sum slightly in excess of £100,000. The Queensland leases upon which the business in Queensland is carried on would have expired between 1933 and 1937. In addition to these improvements in the assets position, the stock has been considerably improved. The evidence was that the added value of the Queensland properties occasioned by the acquisition of the new leases amounted to over £100,000.
This position has been partly brought about by the policy which has been adopted by the trustees and approved by the beneficiaries whereby every effort has been made to reduce the liability of the partnership to its bankers. In conformity with this policy the trustees, with the consent of the beneficiaries concerned, have not paid or set aside any of the respective sums of £20,000 provided for in the will of the deceased, and the beneficiaries entitled to the benefit of such sums or the income thereof have agreed that such sums should not be set aside for the time being, and have also agreed to forego interest thereon for each year up to and including 30th June 1940.
From time to time the trustees have received from the partnership their share of the partnership profits and the amounts so received have been credited to the beneficiaries in the proportion to which those beneficiaries are entitled to share in the income of the ultimate residue of the estate, but no amounts so credited to such beneficiaries have been paid to them. This appropriation by the trustees appears to me to distinguish this case from Robertson v. Deputy Federal Commissioner of Land Tax[1] . That case was decided under a different Act with respect to a will which expressly provided for the payment of debts, &c., before any income became payable to the beneficiary (the University).
The net profit of the Queensland business for the year ended 30th June 1940 amounted to £6,451 17s. 7d., and the net profit of the Papuan business for the same year amounted to £11,600 17s. 5d. The taxable profit, in the case of the Queensland business, was £7,423 0s. 3d. from personal exertion and £183 18s. 9d. from property, and the taxable profit from the Papuan business was £11,763 13s. 3d. from personal exertion and £18 15s. from property. The total net profit for taxation purposes was £19,186 13s. 6d. from personal exertion and £202 13s. 9d. from property.
During the year ended 30th June 1940 the trustees of the estate of Robert Selmon Whiting received from the partnership a total sum of £2,465 0s. 1d., which represented their share of profits actually distributed by the partnership in that year. The amount was paid in various sums between August 1939 and May 1940, and the whole of such sums were paid on account of the Queensland business. No portion of the amount received by the trustees on account of profits was paid to the beneficiaries, but each beneficiary was credited with his or her proportion thereof in the proportion to which he or she was entitled to share in the income of the ultimate residuary estate. The amount so credited to each beneficiary is included in the amounts shown in the balance-sheet under the heading of "Beneficiaries' Income Accounts."
It is convenient to deal first with the contention that, in the case of the interest of the estate in the partnership which is being carried on by the trustees of the estates of the two deceased partners, income tax is assessable on so much only of the income of the partnership as the trustees have thought fit to take out of the partnership income and pay into their trust accounts, but not on the interest of the estate in the net income of the partnership. Section 92 of the Income Tax Assessment Act 1936-1940 provides that the assessable income of a partner shall include his individual interest in the net income of the partnership in the year of income, his individual interest in a partnership loss being an allowable deduction; and "net income" is defined to mean the assessable income of the partnership, calculated as if the partnership were a taxpayer, less all allowable deductions (s. 90). What is assessable is the partner's individual interest in the net income, that is, the whole individual interest, not so much only of the partner's individual interest as may have been distributed to him. By individual interest is here meant the interest to which a partner is solely entitled, as contrasted with his joint interest in the whole. The fact that one of the partners is a trustee of his share in the partnership does not prevent his interest as trustee in the net income of the partnership from being his individual interest for the purposes of s. 92. If, however, he has an individual interest in the net income of the partnership because he is trustee of a trust estate, s. 96, read in conjunction with s. 95, exempts him from liability as trustee to pay income tax upon his individual interest as trustee in that net income, save to the extent provided for by ss. 98-102. It follows that, in respect of the estate's interest in the net income of the partnership, there is nothing to prevent an assessment being made upon the appropriate person or persons in respect of the whole interest, irrespectively of whether a distribution has been made by the partnership in respect of all or any part of it.
I pass now to the substantial question, namely, whether the trustees as such are liable to be assessed in respect of the whole of the income derived by their estate.
Where income is derived by a person in a representative capacity, the questions whether income tax is payable on the income so derived or on the shares of the beneficiaries therein, and whether by the representative or by the beneficiaries, turn upon the language of the statute which provides for the incidence of the tax.
In the United Kingdom, as regards income derived from property in the case of a resident, income tax is chargeable upon the income derived from all his property, wherever situate, subject to the qualification that if the property is situated outside the United Kingdom and does not consist of stocks, shares or rents, it is chargeable on so much only of the income derived therefrom as is actually received in the United Kingdom. In relation to language such as this it is, or may be, important to determine the locus of the property as a criterion of liability. Where it consists of an interest in the residuary estate of a deceased person, it has been held that, for this purpose, until the estate has been fully administered by the personal representatives, the property constituted by the interest is not a proportion of the individual items from time to time making up the residuary estate and therefore situated wherever those items may happen to be, but a right to have the estate administered by the personal representatives and situated therefore at the place from which they are administering it (Baker v. Archer-Shee[2] ). When, however, the estate has been fully administered, and is held in trust for the beneficiaries, their interests become locally situated where the individual items of property are situated, unless the local law determining the nature of their interests otherwise provides (Baker v. Archer-Shee[3] ; Archer-Shee v. Garland[4] ).
In the United Kingdom, also, a sur-tax is chargeable in respect of the incomes of individuals whose total income exceeds a stated amount, but individuals are not assessable to sur-tax in a representative capacity. In relation to sur-tax, it has been held that until the residuary estate of a deceased person has been fully administered, any income derived from it is income of the executors received in a representative capacity, not income of the life tenants of residue, and that any sums paid out of such income to life tenants are therefore not received by them as income moneys liable to sur-tax (Corbett v. Inland Revenue Commissioners[5] ).
It is evident that in relation to legislation so framed it may be of great importance to ascertain whether at a given moment the estate of a deceased person had been fully administered; and this may be a matter of some difficulty. Mr. Birrell in his book on Trustees informed his readers that Sir John Wickens, a very nice observer, used to tell his pupils that the change from executorship to trusteeship invariably took place in the dead hours of the night. The question has now been held to be one of fact. It is not necessarily concluded by the circumstance that a mortgage debt is still outstanding (Inland Revenue Commissioners v. Smith[6] ; Inland Revenue Commissioners v. Wahl[7] ); and an appropriation of particular assets may work a complete administration qua them whilst leaving the rest of the estate still in process of administration.
Some of the argument that has been addressed to me in the present appeal has proceeded on the assumption that similar considerations are relevant to the determination of the matters here in issue. This depends on the language of the relevant portions of the Commonwealth Act—Income Tax Assessment Act 1936-1940.
By s. 96 it is provided that, except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the net income of the trust estate (s. 97), and the phrase "the net income of a trust estate" is defined to mean the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions (s. 95). A trustee is liable to be assessed and to pay tax in respect of that share of the net income of the trust estate to which any beneficiary under a legal disability is presently entitled (s. 98), and in respect of any part of the net income to which no beneficiary is presently entitled (s. 99), and also in certain other special cases mentioned in ss. 101A and 102.
By s. 6 "trustee" is defined to include an executor or administrator. Hence, the phrase "trust estate" includes the estate of a deceased person vested in a personal representative as such, and the provisions of the sections to which I have just referred must be read as applicable to the income of the estate before as well as after that estate has been fully administered. In these circumstances, authorities dealing with the incidence of income-tax based upon language which has been thought to indicate an intention to distinguish between the income of estates which have been and those which have not been fully administered are of no assistance in ascertaining the operation of the sections now in question. This must be determined upon the actual language used, and irrespectively of that distinction.
Reading the sections as a piece of English, I think it reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee is that he should be presently entitled to income of the estate. By this, I think, is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of income. This is now made plain by the omission from s. 99 of words which in s. 31 (2) (b) of the former Act had given rise to doubts, an omission which would appear to have been occasioned by the observations of this Court in Federal Commissioner of Taxation v. Higgins[8] and Executor Trustee & Agency Co. of South Australia Ltd. v. Federal Commissioner of Taxation[9] .
The questions whether in any particular case a beneficiary is presently entitled to a share of the income of a trust estate, and if so the amount of his share, are mixed questions of law and fact dependent on rules of law determining the principles upon which the nature and quantum of his interest should be arrived at, and on the ascertainment of the facts to which the rules should be applied. Thus, it may be necessary to take into consideration not only the dispositions of the will but the way in which the estate is being administered and the stage which the administration has reached. But if the estate has in fact earned net income which is not required to be accumulated for the benefit of persons interested in expectancy, and is not insolvent, the beneficiaries are presently entitled to that income notwithstanding that for the purposes of other language than that of the relevant sections it might be proper to describe it as income of the executors, and notwithstanding that in the proper administration of the estate the executors may be entitled to withhold payment and apply it to some other purpose, and that actual payment may be exigible only in the course of some later adjustment: Cf. Horton v. Jones[10] . It is, however, certainly not income of the executors for the purposes of the Commonwealth Act.
In a particular case, executorial duties may be in course of performance, the carrying out of which may have an important influence in determining to how much income the respective beneficiaries are presently entitled, in the sense in which that phrase is used in the sections. Unpaid pecuniary legatees may be entitled to a share of the income representing the interest on their legacies. If debts or legacies remain unpaid, the share of income to which life tenants of residue are entitled may depend in part upon whether the rule in Allhusen v. Whittell[11] applies in the State in question and, if so, upon the result of its application, and in a particular case it may depend upon the nature of the direction which the testator has given for payment of his debts and the extent to which it is necessary to give effect to it (Tewart v. Lawson[12] ; In re Darby; Russell v. MacGregor[13] ). If the executorial duties are in the main completed, questions of this kind may no longer arise, but the ascertainment of shares of income may still be complicated, for example, by the rule in Howe v. Earl of Dartmouth[14] . Further, it may result from the application of some of these rules of administration that none of the beneficiaries presently entitled is entitled to certain portions of the actual net income of the estate, and these portions may have to be applied for the benefit of persons who are entitled only to interests in expectancy in the corpus, with the result that the executors and trustees alone may be assessable upon these portions pursuant to s. 99.
But whatever stage the administration may have reached, and whether the estate is being administered by the executors in their character of executors, or whether so little remains to be done of an executorial nature that it is being administered substantially as a trust estate, it is always possible, although it may be difficult, by applying the appropriate principles of law to the relevant facts, to determine to what share, if any, of the income of the estate each beneficiary is presently entitled. And it must always be remembered that what attracts liability to a beneficiary is the fact that, being entitled in possession to an immediate interest, he is presently entitled to a share of income. The facts that he has not yet actually received the share to which he is presently entitled, and that there may be considerable delay in his getting it, do not affect his liability to be assessed and to pay in respect of it, nor divert the liability from himself to his trustee.
It is, in my opinion, these considerations which should be applied in determining whether the trustees are assessable to income tax in the present case, and if so to what extent. Applying them, it is clear that the assessment appealed against cannot stand. By it, it is sought to charge the trustees with income tax in respect of the whole net income of the trust estate. It is at least clear that they are not liable for this. The question whether they are liable to be assessed in respect of some portion of the net income has not been raised or debated; and it is not, therefore, desirable to pass upon it or to make any order which would preclude it from being raised hereafter. In this connection, I would refer only to clause 37 of the will, from which, if from nothing else, it would appear that in a given year the whole net income of the trust estate is not necessarily identical with the income thereof to which the beneficiaries are presently entitled.
The appeal is therefore allowed, the assessment is set aside, but without prejudice to the right of the Commissioner to make assessments upon the beneficiaries and to re-assess the trustees, and, since the appeal has been substantially successful, the costs of the appeal are to be paid by the Commissioner.
Appeal allowed. Order of Rich J. set aside. Assessment confirmed. Respondents to pay costs of appeal to High Court and of this appeal.
Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.
Solicitors for the respondents, Whiting & Byrne.
H C of A
19 March 1943
Latham C.J., Starke and Williams JJ.
Fullagar K.C. and Spicer, for the appellants.
Ham K.C. and Adams, for the respondent.
1942, Nov. 23
Rich J. delivered the following written judgment:—
This is an appeal by the trustees of the estate of R. S. Whiting deceased against an assessment upon them of Commonwealth income tax based on income derived by that estate during the year ended 30th June 1940 and issued by an amended notice of assessment dated 3rd April 1941. The grounds relied on by the trustees are set out in exhibit E as follows:— (1) The trustees are assessable in respect of profits of the partnership of Clarke & Whiting only (if at all) to the extent of moneys actually distributed to them as trustees out of such profits and held by them as income subject to the trusts of the trust instrument. (2) The net income of the trust estate within the meaning of the Income Tax Assessment Act does not include profits of the said partnership not actually distributed to the trustees as trustees and held by them as income subject to the trusts of the trust instrument. (3) If and so far as there was any net income of the trust estate within the meaning of the said Act, there are beneficiaries presently entitled to the income of the trust estate within the meaning of the said Act, and the trustees are not liable to be assessed in respect of any part of the net income of the trust estate.
The substantial question raised by the appeal is whether the trustees as such are assessable in respect of the whole of the income derived by their estate; but there is a subsidiary question whether, whoever may be liable to be assessed, the net income of the estate includes the interest of the estate in the net income of the partnership in which it has a share and in which the trustees are engaged on its behalf, or only on so much of the income of the partnership as the trustees of the two deceased partners have chosen to cause to be distributed to one another. I accept the evidence of Major Walker and Mr. Bossley called for the appellants. No evidence was led on behalf of the respondent. The facts which I consider relevant for the determination of the issues between the parties are as follows:—
Robert Selmon Whiting died on 17th June 1929 leaving a will and five codicils. The appellants are the present trustees of the estate. Henry Joseph Whiting, who was an executor named in the will, died in 1939.
The gross value of the estate of the deceased as sworn for probate duty purposes was £98,604. The liabilities set out in the estate duty statement amounted to £40,154, but other liabilities subsequently discovered brought the total to about £59,000.
The principal assets in the estate were the interest of the deceased in two properties, one in Queensland and the other in Papua, which had been carried on for a number of years by the deceased and Sir Rupert Clarke in partnership. The Queensland property was a pastoral property, and the partnership business carried on thereon was conducted pursuant to the terms of a partnership agreement which provided that the term of the partnership should be for a period of ten years from 4th July 1910 and thereafter until the expiration of six months' notice to determine the partnership. The property in Papua was a rubber plantation carried on by the deceased and Sir Rupert Clarke in partnership under an agreement which provided that the term of the partnership should be for eighteen months from 30th June 1921, and thereafter until determined by six calendar months' notice.
Sir Rupert Clarke died on 25th December 1926 and after his death R. S. Whiting continued until his death on 17th June 1929 to carry on both businesses in partnership with the trustees of the late Sir Rupert Clarke pursuant to the terms of the partnership deeds (exhibit F).
Since the death of R. S. Whiting the partnership businesses have been carried on by the trustees of the respective estates of Sir Rupert Clarke and R. S. Whiting.
The interest of the deceased R. S. Whiting in the Queensland partnership was valued for estate duty purposes at £63,000, and his interest in the Papuan partnership at £3,400. These values were based upon the difference between the value of the assets in the partnerships and the liabilities of the partnerships at the date of R. S. Whiting's death.
The principal liabilities of the deceased at the date of his death, apart from his liability as a partner for partnership liabilities, were the sums of £25,849 and £9,338 due to the Union Bank, and £3,378 due to the A. M. L. & F. Co.
The deceased was survived by his widow, Mrs. Rose Whiting, one son, Henry Joseph Whiting, and three daughters, Mrs. Hammond Chambers, Mrs. Walker and Mrs. Nathan. The son died in 1939 and his executor is W. J. Byrne. The widow and three daughters still survive. The trustees of the estate have discharged all the personal liabilities which were owing by deceased at the date of his death with the exception of a sum of £5,600 payable by the deceased to his son H. J. Whiting under the terms of a settlement made by the deceased on his son, and the sum of £3,765 payable to E. E. Dye, one of the executors of the deceased, under an agreement between him and R. S. Whiting. The liability to the Union Bank was discharged pursuant to an arrangement made with the widow and children, whereby they made available to the trustees moneys which accrued from life policies which had been settled on them by the deceased. From this source the sum of £32,540 was made available and the beneficiaries concerned are entitled to have refunded to them out of the estate in respect of this transaction the amounts appearing under the heading of "advances made to the estate" in the balance-sheet (exhibit H) of the estate as at 30th June 1940. W. J. Byrne is interested in the amount due to Mrs. Rose Whiting and H. J. Whiting on this account by virtue of an assignment by H. J. Whiting to W. J. Byrne of his interest therein. The other liabilities shown in this balance-sheet, apart from the "contingent liabilities" shown at the foot thereof, as to which no present liability exists, include under the heading "Sundry Creditors" the sums due to the late H. J. Whiting and E. E. Dye, already referred to, the sum of £5,617 11s. 8d., succession duty payable by the trustees to the Commissioner of Taxation in Queensland upon the death of Mrs. Whiting, and a contingent liability to the Queensland Commissioner of Taxation for income tax assessed against the trustees, in respect of which the trustees have lodged objections similar to those taken in this appeal. All the specific legacies, pecuniary legacies and annuities provided for by the will have been satisfied, with the following exceptions set out in the balance-sheet, namely:— Amounts unpaid George Woolff £1,293 4 1 Mrs. A. A. Russell (Yda Reynolds) 700 14 3 Miss A. Buchanan 280 5 8 Arthur Turner 280 5 8 Arfred J. Turner (deceased) 98 12 9 Major G. B. Walker (legacy) 5,000 0 0 Major G. B. Walker (annuity) 5,066 8 3
The amount of the legacy payable to George Woolff has been paid to him by Mrs. Whiting, who has taken an assignment of the legacy. Mrs. Whiting has also paid to Alfred J. Turner the amount of his legacy and has taken an assignment of the amount due to him. Mrs. A. A. Russell and Miss Buchanan caused inquiries to be made concerning their legacies some years ago and were informed that in the interests of everybody concerned it was desired to reduce the overdraft on the partnership businesses, and they have not since pressed for payment of their legacies. In the case of the legacy payable to Arthur Turner, no steps have been taken by those entitled to collect the same.
The trustees have realized most of the assets of the deceased, with the exception of his interests in the partnerships. At the date of the death of the deceased it would have been difficult to realize them, because of the economic depression and a drought in Queensland. Since the death of the deceased the partnership businesses have been carried on and their value has considerably increased. Many attempts were made to sell both properties without result and the properties have been carried on as a trust investment under the power contained in clause 25 of the will and with the assent of the beneficiaries. At the date of the death of the deceased the liability of the partnership to its bankers amounted to £218,763. By 1940 this had been reduced to a sum slightly in excess of £100,000. The Queensland leases upon which the business in Queensland is carried on would have expired between 1933 and 1937. In addition to these improvements in the assets position, the stock has been considerably improved. The evidence was that the added value of the Queensland properties occasioned by the acquisition of the new leases amounted to over £100,000.
This position has been partly brought about by the policy which has been adopted by the trustees and approved by the beneficiaries whereby every effort has been made to reduce the liability of the partnership to its bankers. In conformity with this policy the trustees, with the consent of the beneficiaries concerned, have not paid or set aside any of the respective sums of £20,000 provided for in the will of the deceased, and the beneficiaries entitled to the benefit of such sums or the income thereof have agreed that such sums should not be set aside for the time being, and have also agreed to forego interest thereon for each year up to and including 30th June 1940.
From time to time the trustees have received from the partnership their share of the partnership profits and the amounts so received have been credited to the beneficiaries in the proportion to which those beneficiaries are entitled to share in the income of the ultimate residue of the estate, but no amounts so credited to such beneficiaries have been paid to them. This appropriation by the trustees appears to me to distinguish this case from Robertson v. Deputy Federal Commissioner of Land Tax[15] . That case was decided under a different Act with respect to a will which expressly provided for the payment of debts, &c., before any income became payable to the beneficiary (the University).
The net profit of the Queensland business for the year ended 30th June 1940 amounted to £6,451 17s. 7d., and the net profit of the Papuan business for the same year amounted to £11,600 17s. 5d. The taxable profit, in the case of the Queensland business, was £7,423 0s. 3d. from personal exertion and £183 18s. 9d. from property, and the taxable profit from the Papuan business was £11,763 13s. 3d. from personal exertion and £18 15s. from property. The total net profit for taxation purposes was £19,186 13s. 6d. from personal exertion and £202 13s. 9d. from property.
During the year ended 30th June 1940 the trustees of the estate of Robert Selmon Whiting received from the partnership a total sum of £2,465 0s. 1d., which represented their share of profits actually distributed by the partnership in that year. The amount was paid in various sums between August 1939 and May 1940, and the whole of such sums were paid on account of the Queensland business. No portion of the amount received by the trustees on account of profits was paid to the beneficiaries, but each beneficiary was credited with his or her proportion thereof in the proportion to which he or she was entitled to share in the income of the ultimate residuary estate. The amount so credited to each beneficiary is included in the amounts shown in the balance-sheet under the heading of "Beneficiaries' Income Accounts."
It is convenient to deal first with the contention that, in the case of the interest of the estate in the partnership which is being carried on by the trustees of the estates of the two deceased partners, income tax is assessable on so much only of the income of the partnership as the trustees have thought fit to take out of the partnership income and pay into their trust accounts, but not on the interest of the estate in the net income of the partnership. Section 92 of the Income Tax Assessment Act 1936-1940 provides that the assessable income of a partner shall include his individual interest in the net income of the partnership in the year of income, his individual interest in a partnership loss being an allowable deduction; and "net income" is defined to mean the assessable income of the partnership, calculated as if the partnership were a taxpayer, less all allowable deductions (s. 90). What is assessable is the partner's individual interest in the net income, that is, the whole individual interest, not so much only of the partner's individual interest as may have been distributed to him. By individual interest is here meant the interest to which a partner is solely entitled, as contrasted with his joint interest in the whole. The fact that one of the partners is a trustee of his share in the partnership does not prevent his interest as trustee in the net income of the partnership from being his individual interest for the purposes of s. 92. If, however, he has an individual interest in the net income of the partnership because he is trustee of a trust estate, s. 96, read in conjunction with s. 95, exempts him from liability as trustee to pay income tax upon his individual interest as trustee in that net income, save to the extent provided for by ss. 98-102. It follows that, in respect of the estate's interest in the net income of the partnership, there is nothing to prevent an assessment being made upon the appropriate person or persons in respect of the whole interest, irrespectively of whether a distribution has been made by the partnership in respect of all or any part of it.
I pass now to the substantial question, namely, whether the trustees as such are liable to be assessed in respect of the whole of the income derived by their estate.
Where income is derived by a person in a representative capacity, the questions whether income tax is payable on the income so derived or on the shares of the beneficiaries therein, and whether by the representative or by the beneficiaries, turn upon the language of the statute which provides for the incidence of the tax.
In the United Kingdom, as regards income derived from property in the case of a resident, income tax is chargeable upon the income derived from all his property, wherever situate, subject to the qualification that if the property is situated outside the United Kingdom and does not consist of stocks, shares or rents, it is chargeable on so much only of the income derived therefrom as is actually received in the United Kingdom. In relation to language such as this it is, or may be, important to determine the locus of the property as a criterion of liability. Where it consists of an interest in the residuary estate of a deceased person, it has been held that, for this purpose, until the estate has been fully administered by the personal representatives, the property constituted by the interest is not a proportion of the individual items from time to time making up the residuary estate and therefore situated wherever those items may happen to be, but a right to have the estate administered by the personal representatives and situated therefore at the place from which they are administering it (Baker v. Archer-Shee[16] ). When, however, the estate has been fully administered, and is held in trust for the beneficiaries, their interests become locally situated where the individual items of property are situated, unless the local law determining the nature of their interests otherwise provides (Baker v. Archer-Shee[17] ; Archer-Shee v. Garland[18] ).
In the United Kingdom, also, a sur-tax is chargeable in respect of the incomes of individuals whose total income exceeds a stated amount, but individuals are not assessable to sur-tax in a representative capacity. In relation to sur-tax, it has been held that until the residuary estate of a deceased person has been fully administered, any income derived from it is income of the executors received in a representative capacity, not income of the life tenants of residue, and that any sums paid out of such income to life tenants are therefore not received by them as income moneys liable to sur-tax (Corbett v. Inland Revenue Commissioners[19] ).
It is evident that in relation to legislation so framed it may be of great importance to ascertain whether at a given moment the estate of a deceased person had been fully administered; and this may be a matter of some difficulty. Mr. Birrell in his book on Trustees informed his readers that Sir John Wickens, a very nice observer, used to tell his pupils that the change from executorship to trusteeship invariably took place in the dead hours of the night. The question has now been held to be one of fact. It is not necessarily concluded by the circumstance that a mortgage debt is still outstanding (Inland Revenue Commissioners v. Smith[20] ; Inland Revenue Commissioners v. Wahl[21] ); and an appropriation of particular assets may work a complete administration qua them whilst leaving the rest of the estate still in process of administration.
Some of the argument that has been addressed to me in the present appeal has proceeded on the assumption that similar considerations are relevant to the determination of the matters here in issue. This depends on the language of the relevant portions of the Commonwealth Act—Income Tax Assessment Act 1936-1940.
By s. 96 it is provided that, except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the net income of the trust estate (s. 97), and the phrase "the net income of a trust estate" is defined to mean the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions (s. 95). A trustee is liable to be assessed and to pay tax in respect of that share of the net income of the trust estate to which any beneficiary under a legal disability is presently entitled (s. 98), and in respect of any part of the net income to which no beneficiary is presently entitled (s. 99), and also in certain other special cases mentioned in ss. 101A and 102.
By s. 6 "trustee" is defined to include an executor or administrator. Hence, the phrase "trust estate" includes the estate of a deceased person vested in a personal representative as such, and the provisions of the sections to which I have just referred must be read as applicable to the income of the estate before as well as after that estate has been fully administered. In these circumstances, authorities dealing with the incidence of income-tax based upon language which has been thought to indicate an intention to distinguish between the income of estates which have been and those which have not been fully administered are of no assistance in ascertaining the operation of the sections now in question. This must be determined upon the actual language used, and irrespectively of that distinction.
Reading the sections as a piece of English, I think it reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee is that he should be presently entitled to income of the estate. By this, I think, is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of income. This is now made plain by the omission from s. 99 of words which in s. 31 (2) (b) of the former Act had given rise to doubts, an omission which would appear to have been occasioned by the observations of this Court in Federal Commissioner of Taxation v. Higgins[22] and Executor Trustee & Agency Co. of South Australia Ltd. v. Federal Commissioner of Taxation[23] .
The questions whether in any particular case a beneficiary is presently entitled to a share of the income of a trust estate, and if so the amount of his share, are mixed questions of law and fact dependent on rules of law determining the principles upon which the nature and quantum of his interest should be arrived at, and on the ascertainment of the facts to which the rules should be applied. Thus, it may be necessary to take into consideration not only the dispositions of the will but the way in which the estate is being administered and the stage which the administration has reached. But if the estate has in fact earned net income which is not required to be accumulated for the benefit of persons interested in expectancy, and is not insolvent, the beneficiaries are presently entitled to that income notwithstanding that for the purposes of other language than that of the relevant sections it might be proper to describe it as income of the executors, and notwithstanding that in the proper administration of the estate the executors may be entitled to withhold payment and apply it to some other purpose, and that actual payment may be exigible only in the course of some later adjustment: Cf. Horton v. Jones[24] . It is, however, certainly not income of the executors for the purposes of the Commonwealth Act.
In a particular case, executorial duties may be in course of performance, the carrying out of which may have an important influence in determining to how much income the respective beneficiaries are presently entitled, in the sense in which that phrase is used in the sections. Unpaid pecuniary legatees may be entitled to a share of the income representing the interest on their legacies. If debts or legacies remain unpaid, the share of income to which life tenants of residue are entitled may depend in part upon whether the rule in Allhusen v. Whittell[25] applies in the State in question and, if so, upon the result of its application, and in a particular case it may depend upon the nature of the direction which the testator has given for payment of his debts and the extent to which it is necessary to give effect to it (Tewart v. Lawson[26] ; In re Darby; Russell v. MacGregor[27] ). If the executorial duties are in the main completed, questions of this kind may no longer arise, but the ascertainment of shares of income may still be complicated, for example, by the rule in Howe v. Earl of Dartmouth[28] . Further, it may result from the application of some of these rules of administration that none of the beneficiaries presently entitled is entitled to certain portions of the actual net income of the estate, and these portions may have to be applied for the benefit of persons who are entitled only to interests in expectancy in the corpus, with the result that the executors and trustees alone may be assessable upon these portions pursuant to s. 99.
But whatever stage the administration may have reached, and whether the estate is being administered by the executors in their character of executors, or whether so little remains to be done of an executorial nature that it is being administered substantially as a trust estate, it is always possible, although it may be difficult, by applying the appropriate principles of law to the relevant facts, to determine to what share, if any, of the income of the estate each beneficiary is presently entitled. And it must always be remembered that what attracts liability to a beneficiary is the fact that, being entitled in possession to an immediate interest, he is presently entitled to a share of income. The facts that he has not yet actually received the share to which he is presently entitled, and that there may be considerable delay in his getting it, do not affect his liability to be assessed and to pay in respect of it, nor divert the liability from himself to his trustee.
It is, in my opinion, these considerations which should be applied in determining whether the trustees are assessable to income tax in the present case, and if so to what extent. Applying them, it is clear that the assessment appealed against cannot stand. By it, it is sought to charge the trustees with income tax in respect of the whole net income of the trust estate. It is at least clear that they are not liable for this. The question whether they are liable to be assessed in respect of some portion of the net income has not been raised or debated; and it is not, therefore, desirable to pass upon it or to make any order which would preclude it from being raised hereafter. In this connection, I would refer only to clause 37 of the will, from which, if from nothing else, it would appear that in a given year the whole net income of the trust estate is not necessarily identical with the income thereof to which the beneficiaries are presently entitled.
The appeal is therefore allowed, the assessment is set aside, but without prejudice to the right of the Commissioner to make assessments upon the beneficiaries and to re-assess the trustees, and, since the appeal has been substantially successful, the costs of the appeal are to be paid by the Commissioner.
Appeal allowed. Order of Rich J. set aside. Assessment confirmed. Respondents to pay costs of appeal to High Court and of this appeal.
Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.
Solicitors for the respondents, Whiting & Byrne.
1. [1941] HCA 40; (1941) 65 C.L.R. 338.
2. [1927] UKHL 1; (1927) A.C. 844.
3. [1927] UKHL 1; (1927) A.C. 844.
4. [1930] UKHL 2; (1931) A.C. 212.
6. (1930) 1 K.B. 713, at p. 728.
8. [1930] HCA 44; (1930) 44 C.L.R. 297, at p. 305.
9. [1932] HCA 25; (1932) 48 C.L.R. 26, at pp. 44, 45.
10. [1935] HCA 7; (1935) 53 C.L.R. 475, at pp. 486, 490.
11. (1867) L.R. 4 Eq. 295, at p. 303.
14. [1802] EngR 197; (1802) 7 Ves. 137 [32 E.R. 56].
15. [1941] HCA 40; (1941) 65 C.L.R. 338.
16. [1927] UKHL 1; (1927) A.C. 844.
17. [1927] UKHL 1; (1927) A.C. 844.
18. [1930] UKHL 2; (1931) A.C. 212.
20. (1930) 1 K.B. 713, at p. 728.
22. [1930] HCA 44; (1930) 44 C.L.R. 297, at p. 305.
23. [1932] HCA 25; (1932) 48 C.L.R. 26, at pp. 44, 45.
24. [1935] HCA 7; (1935) 53 C.L.R. 475, at pp. 486, 490.
25. (1867) L.R. 4 Eq. 295, at p. 303.
28. [1802] EngR 197; (1802) 7 Ves. 137 [32 E.R. 56].
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/HCA/1943/45.html