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High Court of Australia |
COMPTON v. FEDERAL COMMISSIONER OF TAXATION [1966] HCA 1; (1966) 116 CLR 233
Income Tax (Cth)
High Court of Australia
Taylor J.(1)
Kitto(2), Menzies(3) and Owen(4) JJ.
CATCHWORDS
Income Tax (Cth) - Exemptions - Income of provident, benefit or superannuation fund established for benefit of employees - Fund not solely for benefit of employees - Employer indemnified against long service leave payments - Income Tax and Social Services Contribution Assessment Act 1936-1960 (Cth), s. 23 (j) (i).
HEARING
Sydney, 1965, December 13, 14; 1966, February 9. 9:2:1966DECISION
1966, February 9."8. Profit and Losses. (at p234)
2. An account shall be opened in the name of each member of the Fund and the
amount paid by the Company to the Trustees in accordance
with Clause 9 in
respect of each member shall be credited to such Member's account. All
interest profits and losses arising from
the investment of such of the moneys
of the Fund as stand to the credit of the individual members shall be credited
or debited as
the case may be to members' accounts in proportion to the
amounts standing to their respective credits at the preceding thirtieth
day of
June and all interest profits and losses arising from the investment of other
moneys of the Fund shall be credited or debited
to the Fund.
9. Contributions by Company. (at p235)
3. The Company shall except as herein provided and at its absolute and
uncontrolled discretion from time to time pay to the Trustees
such sum or sums
which sums shall be subject to the following provisions:
(a) Before paying any such sum or sums to the Trustees the Directors shall
determine the portion of the total payment applicable
to each individual
member who is to benefit under this plan;
(b) The Trustees shall keep a record of the apportionment and shall advise
the individual members concerned in writing within
one calendar month after
the thirtieth day of June in each year of the amounts arising under this
Clause which stand to their credit.
10. Voluntary Resignation Dismissal etc. (at p235)
4. In the event of the member either voluntarily resigning or being dismissed
from the service of the Company before attainment
of the retiring age he shall
cease to be a member and the Trustees may deal with the total amount at credit
of the member as they
at their discretion may determine and may at their
discretion pay the whole or part thereof to the member but any amount not paid
to the member shall be credited to the Fund and further that out of the
amounts so credited to the Fund the Trustees shall pay to
the Company any sum
which may be owing by the member to any of the Constituent Companies at the
date of his resignation or dismissal
upon receipt of a written request to do
so from the Secretary of the Constituent Company or Companies involved.
11. The total of the amounts credited to the Fund in accordance with the
preceding clause hereof or any part thereof less any prroper
deductions may
from time to time at the discretion of the Trustees be divided among the
members in proportion to the amount standing
to their respective accounts and
credited to such accounts." By cl. 12 it was provided that on attainment of
the retiring age, which
by definition means the attainment by a male member of
his sixty-fifth birthday or by a female member of her fifty-fifth birthday
or
in either case such other age as the directors may determine, the trustees
should pay to the member for his own use and benefit
absolutely either as a
capital sum or in such manner as the trustees may think fit "the moneys at
credit of the account of the Member
in the Fund". It was provided by cl. 13
that, in the event of the death of a member whilst a member of the fund, the
trustees should
pay by way of lump sum or of such other form of annuity or
pension or by transfers of securities which the trustees in their discretion
might determine all moneys standing to the credit of the deceased member to
such member's dependants or to any such one or more of
them to the exclusion
of the other or others as the trustees may determine. Clause 26 provided that
if the company should so determine
or if the company should go into
liquidation whether voluntarily or compulsorily except for the purpose of
reconstruction or amalgamation
the fund should be realized and, after payment
of any proper costs charges and expenses, any moneys not standing to the
credit of
particular members should be distributed amongst all or any of the
members in such proportions as should be deemed to be just and
equitable by
the trustees. Finally, cl. 29 provided that the trustees might from time to
time by instrument in writing and with the
consent of the company under its
common seal but not otherwise alter repeal or add to any of the provisions
contained in the deed
and make new provision to the exclusion of or in
addition to any of the said provisions provided that no such alteration or
addition
so made should reduce, vary or otherwise limit the amounts due or
payable to the members as at the date thereof except with the written
consent
of all the members or the member whose benefit is to be so reduced, varied or
limited. (at p236)
5. The only persons who at any relevant time were members of the fund were F. H. Compton, B. F. Compton, N. J. Compton and R. J. Compton. These four persons, who between them held 60,000 of the 100,000 issued shares in the capital of the company and whose wives, between them, held the remaining 40,000, were the directors of the company. It is common ground that the four Comptons were also employees of the company. They became members of the fund in February 1957. The company made a contribution to the fund of 800 pounds (200 pounds each) on their account and they, themselves, contributed 100 pounds each. But during the balance of the income year which ended on 30th June 1957 the company advanced approximately 19,000 pounds to the trustees and F. H. Compton advanced an additional 23,000 pounds. With these moneys the trustees made a number of investments including the purchase of 1,000 redeemable preference shares in the company and a like number in an associated company, F. H. Compton (Civil Engineers) Pty. Limited. The 500 issued shares of the capital of this latter company were owned in equal parcels by the four Comptons who were also the directors of that company. On 2nd February 1957 each of these companies had increased its capital and converted 1,000 of the new shares in each company into redeemable preference shares and by a special resolution had altered its articles to provide that such shares should confer on the holders "the right only to receive such dividends as the Directors may from time to time as they think fit determine". On 16th February 1957 the preference shares in each company were allotted to the trustees of the fund and on 16th March 1957 the directors of the company declared an interim dividend of 20,000 pounds on its redeemable preference shares. Except for a comparatively small amount of interest this was the only income received by the trustees on their investments in the income year ended 30th June 1957 and the provisions of cl. 8 seem to have created some difficulty in dealing with this income. The deed, it will be remembered, had been executed only on 1st December 1956 and there were, therefore, no "amounts standing to their (the members') respective credits at the preceding thirtieth day of June". For this reason no part of the income was credited to the individual accounts of the members but the whole amount was carried to the credit of what was called an accumulation account. Thereafter, in succeeding years, the moneys standing to the credit of the accumulation account were treated as "other moneys" for the purpose of cl. 8 with the result that the bulk of the annual income of the fund was credited to the accumulation account and a comparatively small portion only to the credit of the individual members. (at p237)
6. From time to time, during the relevant period, the company made further contributions to the fund to be placed to the credit of each member, further moneys were lent to the trustees in the income year which ended on 30th June 1958, some of which appears to have been repaid during the following year, and these moneys were invested by the trustees. The net income of the fund in the year ended 30th June 1958 was 47,805 pounds, in the year ended 30th June 1959, 24,051 pounds, and in the year ended 30th June 1960, 23,844 pounds. These amounts included dividends on the redeemable preference shares in the company and its associated company, F. H. Compton (Civil Engineers) Pty. Limited, amounting, in the first of these years, to approximately 41,000 pounds, in the second, to 14,400 pounds, and in the third year, to approximately 14,000 pounds. Of the net income in each of these years 45,167 pounds was credited to the accumulation account in the first of these years, 22,307 pounds in the second year and 21,931 pounds in the third year. The result was that on 30th June 1960 a sum of 109,954 pounds stood to the credit of the accumulation account and sums ranging between approximately 2,500 pounds and 2,700 pounds stood to the credit of the four members. (at p238)
7. The appellants were assessed by the respondent to income tax in each of the four years upon a taxable income which, subject to an adjustment occasioned by a small capital profit in the final year, corresponded with the amount placed to the credit of the accumulation account, i.e., 20,549 pounds for the year ended 30th June 1957, 45,167 pounds for the year ended 30th June 1958, 2,307 pounds for the year ended 30th June 1959 and 21,896 pounds for the year ended 30th June 1960. It is from these assessments that these four appeals are brought and the questions which arise for decision are whether, in the language of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act, these amounts represent income of "a provident, benefit or superannuation fund established for the benefit of employees" and, if that be so, whether the fund was during the relevant periods "being applied for the purpose for which it was established". (at p238)
8. It was pointed out to me that the evidence showed that the reason for the establishment of the fund was to create a situation in which substantial profits of the company could be distributed without attracting liability for tax. That this is so is, upon the evidence, beyond question. And there is no doubt that the situation so created virtually left the control and disposition of the fund in the hands of the four Comptons who were the four major shareholders in the company and the holders of all the issued shares in its associated company. It did so because it was for the four Comptons to decide who should become members of the fund and events show that no employees, other than themselves, became members. Indeed, no attempt was made to make known to other employees of the company that there was a superannuation fund in existence. But these considerations are, in my view, irrelevant to an inquiry as to whether the fund was one established for the benefit of employees. As to whether, during the relevant periods, the fund was "being applied for the purpose for which it was established" is, of course, another matter. I find myself in agreement with the pronouncement of Owen J. in Mahoney v. Federal Commissioner of Taxation of the Commonwealth of Australia (1965) 39 ALJR 62, at p 63 that: "Whether the fund that was established was a provident, benefit or superannuation fund established for the benefit of employees is . . . a matter which must be determined from the language of the deed and its meaning cannot vary according to the motives of those who established it." If upon examination of the deed it is found to answer the statutory description then that is the end of the matter and, provided the fund is being applied for the purpose for which it was established, its income will be exempt from tax whatever motives its founder had. (at p239)
9. The deed itself is, in most respects, in a form which is common enough. In effect, it purported to establish a fund for the benefit of members, which, by definition, means employees of the company or of its subsidiary or associated companies, nominated by the directors of the company for inclusion in the fund. It provided that a member should receive on retirement, in some form or other, the amount standing to the credit of his account and that, in the event of his earlier death, his dependants, or some one or more of them should receive the moneys standing to the credit of the deceased member. Subject to one matter with which I will deal presently, the fund clearly enough answered the description of a fund established for the benefit of employees and this may, therefore, be said to be the purpose, or what in this context is the same thing, the object of the deed. (at p239)
10. How is it said that this purpose was carried into effect? The four Comptons as directors of the company nominated themselves as members. But at no relevant time did they consider the question of admitting other employees as members of the firm. They did not even let it be known to their employees during the relevant period that there was a superannuation fund in existence which contemplated the admission of other employees as members. Indeed, there is undisputed evidence that on one occasion the knowledge that there was a superannuation fund in existence was actually withheld by one of the appellants from one inquiring employee who had had twenty years' service with the company. Although the deed did not contemplate the establishment of a fund for the benefit of all of the employees of the company as such its fundamental purpose was the establishment of a fund for the benefit of such of its employees as should be nominated as members of the fund. But the evidence establishes beyond question that during the relevant period no attempt was made to give effect to this purpose; indeed, it appears clearly enough that at all relevant times it was the intention of the four directors and for that matter, of the trustees, that no such attempt should be made. In these circumstances I find it impossible to say that during the relevant income years the fund was being applied for the purpose for which it was established. Particularly is this so when it is seen that the bulk of the income of the fund was being accumulated and that its ultimate disposition rested, by virtue of the provisions of cl. 26, virtually, in the hands of the four Comptons. (at p240)
11. There is a further difficulty in the way of the appellants. As already
appears only a small portion of the annual income was
credited to the accounts
of each of the four members and it was the amount standing to the credit of
each member's account to which
he was entitled upon retirement or, in the
event of his earlier death, to which his dependants were entitled. The
residue, the amount
standing to the credit of the accumulation account, was
not distributable except upon a winding up and then only among the members
at
that time. If these appropriations of income were made strictly in accordance
with the terms of the deed and it was intended by
the deed that the bulk of
the income should be accumulated and distributed only upon a winding up, it
can scarcely be said that the
fund was one established for the benefit of
employees. This was the qualification which I made earlier. However, Mr.
Conacher argued
that under cl. 8, or, possibly, under cl. 11, the whole of the
first year's income should have been credited in equal portions to
the four
members' accounts and that failure to follow this course inevitably led to
unjustifiable discrepancies in the accounts in
later years. But even if this
be so, the appellants are in no better case for, if this argument be accepted,
it is apparent that
the fund was not during the relevant income years being
applied for the purpose for which it was established. In the result the
appeals
should be dismissed.
(From this decision the taxpayers appealed to the Full Court.) (at p240)
12. N. H. Bowen Q.C. (with him C. V. Cullinan), for the appellants. Part of the income of the fund is credited to members, part, under the terms of the deed, is credited to what is called an "accumulation fund", and not allocated to members at that point of time. "Accumulation fund" is an accountants' name for a balance - it might equally be called "unallocated funds" or even "suspense account". The income of a fund is exempt provided it is a superannuation fund established for the benefit of employees and being applied in the way s. 23 (j) requires. The subject deed is a not unusual form of superannuation deed. The income, not only of superannuation funds, but of any provident or benefit fund, is exempted under this provision, if it meets the two tests of establishment for the benefit of employees and being in fact applied for that purpose. In considering whether it is established for the benefit of employees, motive is irrelevant; one looks at the legal effect of the deed only. It need not be established for the benefit of employees solely; it may apply to dependants or to persons named by employees under powers of appointment. It does not have to be established for all employees or even a substantial number, and there is no obligation to notify employees of the existence of the fund: that consideration is irrelevant to whether the fund is being properly applied. Employees who are also relatives of an employer, or shareholders of, or directors of, a contributing company, are not excluded. It need not be shown that particular benefits were in fact paid, or accrued, to any employee during the year. The section does not reject a fund which is being properly applied by the trustees, carrying out the declared objects in favour of employees, even though this involved investing the funds wisely and accumulating them in order that substantial benefits may be paid at the time of retirement, death or dismissal, or that help may be given other employee objectives. If the trustees were consistently committing breaches of trust in applying the fund for extraneous and improper purposes, the fund might then well lose its exemption. Under cl. 4, nomination is a prerequisite to membership, but there is no duty to nominate. An uncontrolled power of selection is given to the directors of the contributing companies. As to cl. 28, this provides for long service leave being paid, as it were, out of this fund. It is not an uncommon provision, a kind of stock clause, that the superannuation payment is not cumulative upon long service leave payments. There is nothing in the relevant legislation to prevent this. If the company requests, the trustees are obliged to provide the money to pay its obligations under the Long Service Leave Act. This does not deprive a fund, for example, of the benefits under s. 66 on the basis that the rights of the members are fully secured - the fund at least gives them some security for the payment of their long service leave. The fund was not in any way established with that in view, on the terms of the deed. Reading it as a whole, cl. 28 is anything but the key clause in the deed. It does not indicate that the deed does otherwise than to establish a fund for the benefit of employees. The company obtains a deduction for making a provision in this way, and no doubt this could be a reason for setting up the fund. That is all it obtains; it obtains no profit. It may well make a better provision because of such deduction; this also benefits the employees. The fund is not established solely for the benefit of employees, but really and substantially so. If this is a fatal clause, this virtually would become a test case for a very large number of deeds. There is nothing adverse in cl. 29 by which the trustees are given the power of alteration with the consent of the company. It is not just a naked or arbitrary power. They must exercise it for the purposes of their trust. If they exercised it for an extraneous purpose, it would be an invalid exercise of the power. The policy of the section is to encourage employers to have superannuation funds, firstly because, being beneficial to employees, it means that the private sector of the economy is providing what otherwise would fall upon the public sector; secondly, because it leads to stability, without denying mobility, of labour. This deed is not in any way a cloak or facade for some other transaction. There is no obligation to nominate whatever. Only after nomination does an employee become an object of the fund. The purpose of the fund is not defeated by restricting nomination to four persons. At best, some persons reading the deed might have an expectation which was disappointed by finding that there were only four. The recital shows that there is not a sound basis even for an expectation. The directors could nominate employees of any one of the constituent companies or themselves. They were entitled to consider it in the interests of the company to nominate only a fraction of the employees. The accumulation of the bulk of the income would not matter, provided it must go to the benefit of employees, because this would be one way to apply funds for their benefit. The purpose for which the fund is established is the same as the purpose for which it is applied. If subsequently a very large cash flow went into the accumulation fund, it is still no argument against the exemption of the income of the fund. It could not be distributed except on a winding up, and only to employees then. As to the view that the fund is not established for the benefit of employees if the great bulk of it must go forward to a winding up, this fund is unexceptionable in its terms in that regard. (He referred to Metropolitan Gas Co. v Federal Commissioner of Taxation [1932] HCA 58; (1932) 47 CLR 621 ; Mahoney v. Federal Commissioner of Taxation (1965) 39 ALJR 62 ; Driclad Pty. Ltd. v. Federal Commissioner of Taxation [1968] HCA 91; (1966) 40 ALJR 285 and Scott v. Federal Commissioner of Taxation (1966) 40 ALJR 265 .) (at p242)
13. M. H. Byers Q.C. (with him A. M. Gleeson), for the respondent. Section 23 (j) deals with an existing fund, for the period of its existence and no further. One must be able to say of that fund, and of all of it, that it was established for the benefit of employees. This means employees who are members for the time being of the fund from year to year. One must be able to say of the fund, so looked at from year to year, together with the employees who are members, that it was established for the benefit of those employees. A fund which provides for rights only in the event of its winding up cannot be a fund that answers the description in s. 23 (j). Clause 26 gives a right only when the fund has been wound up. The deed defines, for the existing members from time to time, a particular quantum of rights. However, that does not exhaust the fund. As to the rest of the fund, there is no right or benefit for the member except, for the first time, in the dissolution of the fund. Clause 26 prevents the fund from answering the description of being a fund established for the benefit of employees. The rights of members must be rights that enure for the whole period of the fund. When the fund has ceased to exist, it has ceased to be a fund in relation to which the income is exempt. Each year one cannot say of this fund that all of it is established for the benefit of the members from time to time. One cannot say that a fund is a provident, benefit or superannuation fund established for the benefit of employees unless all the benefits supplied by the instrument must be benefits for employees alone, in other words, solely for employees. The benefits cannot be conferred, for example, on employees and on the founder, which is a company, or on employees and non-employees. (Scott v. The Commissioner of Taxation (No. 2) (1966) 40 ALJR 265, at p 278 .) Under cl. 28, one of the persons entitled to benefits is the company, which is relieved of its obligation, or liability, to make long service leave payments. One cannot say that the benefits under this deed are chiefly (as in Lloyd v. Federal Commissioner of Taxation [1955] HCA 71; (1955) 93 CLR 645 ) - certainly one cannot say exclusively - for the benefit of the beneficiaries, because their very right is subject to destruction in the interest of the company. An additional reason for this conclusion is afforded by cl. 29, which is subject to no restriction except in the proviso ; under it, amendment could be made to cl. 28 extending it to matters other than long service leave ; and to cl. 26, so as to alter the destination of the money on the winding up to someone other than the members for the time being, for example, the company itself, so that one could not possibly say it was devoted to the benefit of employees. Quite clearly cl. 29 contemplates that any provision of the deed may be altered, and a fortiori that must include those provisions which confer the retirement benefits. Hence the fund is not established solely, or exclusively, or chiefly for the benefit of employees. The fiduciary power of the trustees has to be fiduciary in relation to some particular person, and the proviso indicates its extent. One must have, under the deed, beneficiaries who are living people and who are admitted. Even if there is no obligation to nominate, none the less the deed was not administered for the benefit of employees because nomination was deliberately restricted to directors. This does not exhaust the persons who were contemplated by the deed as capable of becoming members. Large sums were accumulated because the only nominated employees were directors (two of them being also trustees), so that the purpose for which the fund was applied during those years was for the benefit of these four persons alone, because they could apply the accumulated funds to themselves. The fund was brought into existence to obtain a tax benefit for the directors. (at p244)
14. N. H. Bowen Q.C., in reply, referred to Royal Australasian College of
Surgeons v. Federal Commissioner of Taxation [1943] HCA
34; (1943) 68
CLR 436 and Royal
College of Surgeons of England v. National Provincial Bank Ltd. (1952) AC 631
.
Cur. adv. vult.
(at
p244)
1966, November 30.
The following written judgments were delivered:-to be delivered by my brother Owen, and I need not repeat them. In my opinion, consideration of the deed as a whole, and particularly of cl. 28, leads necessarily to the conclusion that the fund here in question was established for the benefit, in part, of the companies referred to in the deed, by enabling them to be indemnified out of the fund against future liabilities for long service leave in respect of employees who might be members of the fund, and also against any expenses they might incur by voluntarily allowing long service leave to employee-members who might not be entitled to it by law. It is, I think, impossible to accept the appellants' invitation to brush aside this benefit to the companies as being insignificant for the purpose of deciding whether the fund answers the description in s. 23 (j) (i). It was established upon the terms of cl. 28 as surely as upon any of the other terms of the deed, and therefore the most that can properly be said is that it was established for the benefit of employees in so far as it might not be absorbed by benefits to the employers. That is not enough for s. 23 (j) (i). The plain truth is that a fund established in accordance with a deed which contains such a provision as cl. 28 combines the purposes of a superannuation fund for the benefit of employees with those of a reserve fund created to meet future contingent liabilities of employers. The exemption from tax which s. 23 (j) (i) provides cannot possibly be intended for income which in some events and to some extent may have to be applied, according to the trusts which govern it, for the benefit of employers. (at p245)
KITTO J. The facts of this case are sufficiently set forth in the judgment
2. I am content to decide the appeal on this ground, but having regard to the considerations which led Taylor J. to his conclusion against the appellants I am by no means satisfied that if there had been no cl. 28 in the deed the appellants would have been entitled to succeed. His Honour was influenced by the fact that what happened over the creation and administration of the fund was quite different from what one might have expected upon a mere perusal of the deed. The inaugural step was a payment of 800 pounds to the trustees by F. H. Compton & Sons Pty. Limited (which is called the company to distinguish it from its subsidiaries and associates), the payment being made on the terms that it should be allocated as to 200 pounds each for the benefit of F. H. Compton, B. F. Compton, N. J. Compton and R. J. Compton. This was done pursuant to a resolution passed on 16th February 1957 by the directors of the company, who in fact were the same four persons. What was done in this respect was treated, and no doubt correctly, as an implied nomination of the four Comptons to be members of the fund, though no formal nomination was ever made. The company made further contributions at later dates, for the benefit in each instance of the same individuals. These persons continued at all times to be the directors of the company, and it was as such that they authorized the making of the contributions. They were all employees as well as directors, and so were qualified to become members of the fund ; but although there were many other persons who were employees and so equally qualified to become members of the fund none of them was ever nominated either expressly or by the making of any contribution to the fund for his benefit. The only shareholders in the company apart from the four Comptons were their respective wives, and the Comptons themselves were the only shareholders in the associated company mentioned below. The trustees borrowed moneys and used them to take up newly-created redeemable preference shares in the company and one of its associates. On these shares substantial dividends were declared from time to time. The income of the fund was largely credited in the trustees' books to an accumulation fund, the credits to the accounts of the four members growing, in the relevant period, to amounts of the order of 2,500 pounds and 2,700 pounds only. The result was that profits which would have attracted undistributed profits tax if retained by the companies, or income tax in the hands of the four Comptons and their wives if distributed, were paid to a fund the income of which, it was hoped, would be exempt from tax and yet the benefit of which, as to both capital and income, could be made under cll. 25 and 26 to accrue to the four Comptons (or their dependants, etc., in which case there might perhaps be some saving of death and estate duties) and to no one else provided that care was taken not to commit the indiscretion of nominating any other employee to be a member of the fund. (at p246)
3. This bare outline of the history of the matter will suffice to show that if it had not been possible to dispose of the appeal on the ground of the presence of cl. 28 in the deed serious questions would still have arisen as to whether the fund was in truth constituted or applied as a superannuation fund for the benefit of employees. I am not at all sure that the correct conclusion would not have been that it was constituted and applied as a fund for the benefit of shareholders, that is to say shareholders who happened to be employees but were selected not as being employees but as being persons entitled to participate in distributions of profits of the companies. It was, of course, not the execution of the deed that constituted the fund, but the payment of moneys to the trustees to be credited to nominated persons in the manner provided by the deed. But the power of nomination was given to the directors for the time being of the company eo nomine, and therefore could not be validly exercised otherwise than bona fide for the benefit of the company : cf. Reynolds v. Atherton (1921) 125 LT 690, at p 693 . This means that a nomination, to be valid, must be made for the reason that the directors considered it to be for the benefit of the company that superannuation provision should be made for its own employees or those of its subsidiaries or associates. One question which suggests itself is whether the payments that were made out of moneys of the company to the trustees of the fund had the effect of establishing a fund in accordance with the deed. Perhaps the true view of the facts is that a fund was established which was not the fund contemplated by the deed, was not really a superannuation fund, and was not for the benefit of employees as such, but was a means of producing for the Comptons themselves advantages fundamentally different in character from employees' superannuation benefits. Again, the manner in which the fund was administered may be thought to raise a corresponding question, namely whether the purpose which governed the application of the fund throughout the relevant years was not rather the purpose of benefiting the Comptons as individuals than the purpose of providing them with superannuation as employees. Upon these questions, however, it is unnecessary to form a concluded opinion. I would dismiss the appeals. (at p247)
MENZIES J. Appeals by the appellants against income tax assessments treating part of the income of F. H. Compton & Sons (Superannuation Fund) as assessable income and not as income exempt from taxation by virtue of s. 23 (j) of the Income Tax and Social Services Contribution Assessment Act were dismissed by Taylor J. on the ground that the portion of the income of the fund in question was not being applied for the purpose for which it was established, that is, "a provident, benefit or superannuation fund . . . for the benefit of employees". (at p247)
2. Upon this appeal from Taylor J. the emphasis shifted to an anterior question, namely, whether the fund was established as a provident, benefit or superannuation fund for the benefit of employees. This question has to be determined by an examination of the provisions of the deed establishing the fund. These are summarized in the judgment of Owen J., in which cl. 28 of the deed is set out verbatim. I agree with his Honour in thinking that this clause is not one for the benefit of employees ; it is clearly a provision for the benefit of the employers. A vital question requiring determination is whether the fund is nevertheless "a provident, benefit or superannuation fund . . . for the benefit of employees". (at p247)
3. The presence of cl. 28 in the deed does not require the conclusion that the fund is not "a provident, benefit or superannuation fund". Upon the terms of the deed as a whole, I think it clearly does establish a fund falling within that description. There is, however, a further question, viz. whether, notwithstanding cl. 28, it ought to be concluded that the fund was established for the benefit of employees. In construing s. 23 (j), I do not derive much assistance from cases dealing with what I regard as an essentially different problem - that is, whether a particular corporate body is a charitable institution notwithstanding that some of its incidental and ancillary objects, looked at by themselves, are non-charitable in character: see, for instance, Congregational Union of New South Wales v. Thistlethwayte [1952] HCA 48; (1952) 87 CLR 375 and Salvation Army (Victoria) Property Trust v. Fern Tree Gully Corporation [1952] HCA 4; (1952) 85 CLR 159 . Lloyd v. Federal Commissioner of Taxation (1955) 93 CLR 645 is perhaps closer in point than the decisions just cited because the ultimate question there was whether a gift was for "public educational purposes". The decision that it was, however, was reached by determining what was the true character of the Sea Cadet Corps: see Kitto J. (1955) 93 CLR, at p 676 . (at p248)
4. The particular problem of the construction of s. 23 (j) (i) must, of course, be undertaken having regard to the context of that provision, and I find s. 23 (j) (ii) and (iii) illuminating. It seems to me that if the income of a fund is to be exempt under s. 23 (j) (ii) or (iii), the fund must have been established for the purposes therein enumerated and for no other purpose so that, for instance, for the income of a fund established by will to qualify for exemption under s. 23 (j) (ii), it would be necessary that the whole of the fund should be held for public charitable purposes, with the consequence that if the trustees of a particular fund could apply some part of it for a purpose not of a public charitable character, the fund would not qualify for exemption from tax upon its income. The problem of the construction of s. 23 (j) (ii) is, I think, essentially the same as that which has arisen when it has had to be determined whether a gift is charitable when part of it could be applied to other purposes: see Halsbury's Laws of England, 3rd ed., vol. 4, at pp. 269-272, and Attorney-General for N.S.W. v. Adams [1908] HCA 51; (1908) 7 CLR 100 . The exclusiveness which I find in s. 23 (j) (ii) and (iii) without any express limiting provision suggests, I think, that a like exclusiveness is to be found in s. 23 (j) (i), in which a similar pattern of language is to be found. Another consideration pointing in the same direction is the impossibility of establishing any satisfactory criterion to determine the character to be attributed to a fund which is in part to be used for the benefit of employees and in part for other purposes. (at p248)
5. These considerations have reinforced my first impression that s. 23 (j) (i) applies to exempt the income of a fund only if the whole of the fund must be devoted to be benefit of employees. This construction of s. 23 (j) (i) would not, of course, deny its applicability to a fund containing provisions for the benefit of dependants of employees. To benefit the dependants of employees is one way of benefiting employees. Indeed, I think that a broad view of what does constitute "the benefit of employees" should be taken as long as there is to be found a connexion between the benefit of the employees and the whole of the fund after meeting the expenses of its administration. (at p248)
6. Having come to this conclusion about the meaning of s. 23 (j) (i), it follows that by reason of the character of c. 28, the income of the fund under consideration is not exempt income. The purpose for which the fund was established goes outside the benefit of employees. (at p248)
7. I think, therefore, on this ground the appeals should be dismissed and I do not find it necessary to consider the other contentions that were raised in argument. (at p249)
OWEN J. The appellants in each of these four appeals are the trustees of the
"F. H. Compton & Sons (Superannuation Fund)" (the
fund)
which was established
pursuant to a deed dated 1st December 1956 made between F. H. Compton & Sons
Pty. Limited (the company)
and
three trustees, F. H. Compton and B. F. Compton
who were directors of the company and A. W. Moore an accountant. In each of
the
years
ending 30th June 1957, 1958, 1959 and 1960 the income of the fund
was substantial and in each year portion of it was credited
by
the trustees to
each of four persons who were the only "members" of the fund. These four
persons were the two Comptons mentioned
above and two other members of the
Compton family who were also directors of the company. All of them were at all
relevant times
also employees of the company. For reasons which it is
unnecessary to set out, however, a large proportion of the income was credited
by the trustees to what was called an "accumulation account" and in each of
the years in question the respondent Commissioner assessed
the trustees to tax
upon an amount which, apart from one small adjustment, corresponded with the
amount of the income credited in
that year to the accumulation account. The
appellants appealed against these assessments, claiming that the whole of the
income of
the fund was exempt from tax under s. 23 (j) of the Income Tax and
Social Services Contribution Assessment Act 1936-1957. That section
sets out a
series of classes of income which are declared to be exempt from income tax,
including in par. (j) (i)
"the incomes of the following funds, provided that theparticular fund is being applied for the purpose for which it was
established -established for the benefit of employees;
(i) a provident, benefit or superannuation fund
(ii) . . . .The appeals were heard by Taylor J. who dismissed them on the ground that if the fund in question was a provident, benefit or superannuation fund established for the benefit of employees, it was not being applied for the purpose for which it was established. Against that decision these appeals are brought.
(iii) . . . . "
2. It is clear that, in order to qualify for the exemption from tax for which s. 23 (j) provides, two conditions must be fulfilled. The fund must be a provident, benefit or superannuation fund established for the benefit of employees and it must have been applied for the purpose for which it was established. The first question then is whether this fund was a provident, benefit or superannuation fund established for the benefit of employees and this necessitates an examination of the deed under which the fund was established and, in particular, an examination of one of its clauses, cl. 28, to which the attention of Taylor J. was not drawn. (at p250)
3. Clause 1 of the deed contains a number of definitions. "The Company" is defined to mean F. H. Compton & Sons Pty. Limited and "The Constituent Companies" to mean that company and any of its subsidiary or associated companies. "Member" is defined as "an employee of one of the Constituent Companies nominated by the Directors of the Company for inclusion in the Fund". There are also definitions of "Dependants of a Member" and "Retiring Age". The deed goes on to vest the fund and its control and administration in the trustees and to provide, by cl. 4, that any employee of the constituent companies nominated by the directors of the company should become a member. The general scheme set up by the deed is as follows: The fund was to consist of such contributions as might be made from time to time by the company for the credit of such individual members as the directors of the company might determine, together with such other amounts as might be received by the trustees and interest or profits arising from investments made by them. The directors of the company were required to determine what portion of any contribution made by the company to the fund should be credited to a particular member and to do so before making the contribution. An account was to be opened by the trustees in the name of each member and all contributions made by the company for the credit of that member were to be credited to his account, along with interest and profits derived from the investment of the moneys standing to his credit. Losses arising from such investments were to be debited to the member's account. In the event of the resignation or dismissal of a member from the service of the company before reaching the retiring age, the trustees could, in their discretion, pay the whole or some part of the amount standing to the credit of that member's account to him. Any amount not so paid was to be credited to the fund and, if the trustees thought fit, divided among the remaining members in proportion to the amount standing to the credit of each. When a member reached the retiring age he was to be paid, either by way of lump sum or in such manner as the trustees might think fit, the amount standing to his credit. If a member died while still a member, provision was made for the payment of the amount standing to his credit to such of his dependants and in such manner as the trustees might determine. The company might at any time determine that the fund should be wound up and, in that event or if the company should go into liquidation, any moneys in the fund not standing to the credit of individual members was to be distributed amongst all or any of the other members in such proportions as the trustees should think just and equitable. (at p251)
4. Clause 28 was in these terms: "Notwithstanding any other provisions contained in This Deed if a Member shall have received or be entitled to receive from any of the Constituent Companies a period or periods of long service leave or any payment in respect of or in lieu of the same whether ex gratia or pursuant to the provisions of any statute, award, Industrial agreement, agreement inter partes or otherwise and whether before or after he became a member then upon request from the Constituent Companies paying or liable to pay the same the Trustees shall out of the moneys standing to the credit of the Member's account pay to such Constituent Company a sum equal to the amount paid or payable to the Member during or in respect of such period or periods of long service leave or paid or payable in lieu of the same. Should the amount standing to the credit of the Member be insufficient to pay such sum in full then the Trustees shall as further sums are credited to the Member's account pay the same or so much thereof as may be necessary for that purpose to the Constituent Company concerned until the amount due has been fully paid and satisfied." (at p251)
5. By cl. 29 the trustees were given wide powers to amend the deed with the consent of the company but subject to a proviso that no such amendment should "reduce vary or otherwise limit the amounts due or payable to the Members" as at the date of the amendment "except with the written consent of all the Members or the Member whose benefit is to be so reduced varied or limited". (at p251)
6. Having regard to the terms of cl. 28 the first difficulty that faces the appellants is, it seems to me, to show that the fund was one established for the benefit of employees. If an employee becomes entitled to long service leave or to payment in lieu thereof, whether that right is given by statute such as the Long Service Act, 1955 (N.S.W.) or by an industrial award or industrial agreement or agreement inter partes, his employer is bound, by law, to accept all the obligations which are therby involved and which necessarily involve payments to the employee. Clause 28, however, enables a constituent company which is obliged to make such payments to a member or becomes liable to make them to request the trustees to pay to it out of moneys standing to the credit of that member's account in the fund the amount required by it to meet its long service leave obligations to that member and the trustees are bound to comply with such a request. Under the clause the employer may therefore insist that it be paid so much of the amount standing to the credit of a member's account in the fund, which would otherwise have been paid to the latter on reaching the retiring age or to his dependants should he die, as may be necessary to make good payments which it has made or is liable to make in respect of the long service leave benefits to which the law entitles that member. Such a provision is, in my opinion, one for the benefit of the employer and not for the benefit of the employee. (at p252)
7. Counsel for the appellants submitted however that, because the right to long service leave is of benefit to an employee, a provision such as cl. 28 is also for his benefit because it affords him some assurance that his right to long service leave benefits will be satisfied. But, for the reason I have stated, this submission cannot be sustained. He contended further that when the deed is read as a whole it appears that its dominant or principal purpose was to establish a provident, benefit or superannuation fund for the benefit of employees and that this is sufficient to satisfy the requirements of s. 23 (j). That paragraph does not speak of a fund established for the "exclusive" or "sole" benefit of employees, and it is enough, it was said, if the benefit of employees was its main purpose. I do not agree with these submissions. In the first place, it seems to me to be impossible to say upon an examination of the deed that the establishment of a fund for the benefit of employees was its principal purpose. But even if this could be ascertained from its terms, the observations of Windeyer J. in Randwick Corporation v. Rutledge [1959] HCA 63; (1959) 102 CLR 54 , appear to me to be in point. The Court was dealing in that case with the question whether certain land vested in trustees was "used for a public reserve" and was therefore not ratable. But in the course of his judgment, with which Dixon C.J. and Fullagar and Kitto JJ. agreed, his Honour said: "A trust under which the trust property might, at the discretion of the trustees, be wholly applied to a non-public purpose cannot properly be called a trust for public purposes - that is only to say that a trust cannot be called a charitable trust if the trustees could, without breach of trust, apply the trust property to non-charitable purposes. So expressed the proposition is familiar law" (1959) 102 CLR, at p 95 . Applying that general principle to the present case, I am of opinion that a fund cannot properly be described as having been established by an employer for the benefit of his employees if under its terms the trustees are required, in certain events, to apply the whole or some part of the trust property for the benefit of the employer, thereby reducing or extinguishing the benefits which the trust instrument would otherwise have given to the employee and it is, in my opinion, impossible to treat cl. 28 as being merely incidental or ancillary to the other provisions of the deed which are directed to the provision of benefits to employees. (at p253)
8. In these circumstances I think it unnecessary to discuss the other weighty matters to which my brother Kitto has drawn attention in his judgment. (at p253)
9. I would dismiss the appeals. (at p253)
ORDER
Appeals dismissed with costs.
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