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High Court of Australia |
UNION FIDELITY TRUSTEE CO. OF AUSTRALIA LTD. v. FEDERAL COMMISSIONER OF
TAXATION [1969] HCA 36; (1969) 119 CLR 177
Income Tax (Cth)
High Court of Australia
Barwick C.J.(1), Kitto(2), Taylor, Menzies(3) and Windeyer(4) JJ. (THE RIGHT
HONOURABLE MR. JUSTICE TAYLOR died before the delivery
of judgment in this
case.)
CATCHWORDS
Income Tax (Cth) - Assessable income - Trust estate - Income derived from source outside Australia - No beneficiary presently entitled - Trustee resident in Australia - Whether liable to tax on income of trust estate - Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth), ss. 95, 99.
HEARING
Melbourne, 1969, May 13;DECISION
August 6.2. Division 6 of Pt III of the Act is headed "Trustees" but its provisions range more widely. It contains three provisions plus a definition which are presently relevant. Section 97 provides that a beneficiary not under any legal disability who is presently entitled to a share of the income of a trust estate shall have that share of the net income of the trust estate included in his assessable income. (at p180)
3. Section 98 provides that where a
" . . . beneficiary is presently entitled to a share of theProvision is made as to what deductions may be made therefrom. (at p180)
income of a trust estate but is under a legal disability, the
trustee shall be assessed and liable to pay tax in respect of
that share of the net income of the trust estate as if it were
the income of an individual . . . ".
4. Section 99 provides:
"Where there is no beneficiary presently entitled to anyThe definition of "the net income of a trust estate" is to be found in s. 95 and is as follows:
part of the income of a trust estate, or where there is a part
of that income to which no beneficiary is so entitled, the
trustee shall be assessed and liable to pay tax on the net income
of the trust estate, or on that part of that net income as the
case may be, as if it were the income of an individual, and
were not subject to any deduction."
" . . . 'the net income of a trust estate' means the total"Taxpayer" is defined in s. 6 (1) of the Act to mean "a person deriving income". "Assessable income" means "all the amounts which under the provisions of this Act are included in the assessable income". Section 25 (1) provides that:
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, except the concessional deductions
and except also, in respect of any beneficiary who has no
beneficial interest in the corpus of the trust estate, or in respect
of any life tenant, the deduction of such of the losses of previous
years as are required to be met out of corpus."
"The assessable income of a taxpayer shall include -A resident so far as is presently relevant means a person, other than a company, who resides in Australia and a company which is incorporated in Australia or which carries on business in Australia and which has its central management and control in Australia. (at p180)
(a) where the taxpayer is a resident -
the gross income derived directly or indirectly from all
sources whether in or out of Australia; and
(b) where the taxpayer is a non-resident -
the gross income derived directly or indirectly from all
sources in Australia,
which is not exempt income."
5. Section 96 of the Act provides that except as provided in the Act a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Other than the provisions in Div. 6 there are none which render the trustee liable as such to pay income tax on the income of the trust estate. It may thus be said that the division is the exclusive source of liability of a trustee to pay income tax upon the income of the trust estate. But, in my opinion, for reasons which will appear, it cannot properly be said that the division is the exclusive source of the liability of a beneficiary to pay tax in respect of the beneficiary's share of the income of the trust estate paid or payable to the beneficiary. (at p181)
6. The effect of the definition of the net income of the trust estate in s. 95 is that the provisions of the Act are to be applied to the actual income of the trust estate as if it were the income of an individual deriving it. From the actual income of the trust estate there are abstracted all sums which can be seen to be assessable income. For the purpose of this abstraction or computation the only fact which is relevantly known is that the trustee, as a taxpayer, has derived the income. The residence of the trustees, or of any one of them, if there be more than one cannot afford a reason for varying the net amount of the income of the trust estate according to the accident of the trustee's residence in the year of tax. Its irrelevance is emphasized when the possibility of diverse residences of several trustees is contemplated. (at p181)
7. Income for the relevant purposes of the Act falls into one of two categories - that which is derived from an Australian source and that which is not derived from an Australian source. The scheme of the Act is to bring to tax both kinds of income where the taxpayer deriving it is a resident of Australia but to bring to tax only income of the former kind where the taxpayer is not a resident of Australia. It is therefore clear to my mind that if nothing is known as to the residence of a taxpayer the only income which can certainly be said to be assessable income is the income derived by the taxpayer from an Australian source. Unless it is known that he is a resident, it cannot be said that any other income is to be included in his assessable income. (at p181)
8. The net income of a trust estate calculated in accordance with the definition in s. 95 is the same sum throughout the division in respect of any given estate in any given year of taxation. The terms of the trust instrument as applied to the particular facts of the year in question will determine which section of the division is called into play: and the extent of the share of the income of the trust estate to which the particular section of the division is to apply. (at p181)
9. Both s. 98 and s. 99 require where the circumstances are appropriate that the trustee be assessed and be liable to pay tax upon that sum of money which is worked out by the use of the definition of the net income of a trust estate, that is to say, by the computation of that sum which is necessarily assessable income of the trust estate on the footing that a taxpayer had derived the income. (at p182)
10. The amount that the beneficiary is required by s. 97 to include in his assessable income is his share of the net income of the estate as defined. That amount will not vary, in my opinion, according to the residence of the beneficiary. It is the whole of the amount of that share which is to be included and it will be the same amount, in my opinion, whether the beneficiary is a resident of Australia or not. Further, the same is true, in my opinion, of the amount in respect of which the trustee is required to pay tax under s. 98. (at p182)
11. In the case of s. 99 there is no beneficiary so in any event the question of residence of the beneficiary cannot arise. The only condition relating to the beneficiary which brings ss. 97 and 98 into operation is the entitlement of the beneficiary to a share of the income of the trust estate, just as in the case of s. 99 it is the circumstance that there is no person presently entitled to the income. The time as at which to determine the assessable income of a taxpayer is in general the concluding day of the taxation year. There is no provision which takes the calculation under s. 95 in that respect out of the general scheme of the Act. (at p182)
12. In applying the provisions of Div. 6 a clear distinction must be maintained between the position of a person who is entitled to receive a share of the estate and one who has been paid the amount of it. When a beneficiary has been paid his share of the income of the estate in respect of a tax year he no longer satisfies the description of a beneficiary who is entitled to a share of the net income of the estate for that year. Thus, if at the close of the taxation year the appropriate share of the income of the trust estate has been already paid to the beneficiary who before the payment was merely entitled to it, the amount so paid to the beneficiary as his share of that income will form part of his assessable income by virtue of s. 26 (b) and not, in my opinion, by reason of s. 97. (at p182)
13. The purpose of these three sections in Div. 6, ss. 97, 98 and 99, it seems to me, is to anticipate the receipt by a beneficiary of the share of the trust income upon the receipt of which, whatever his residence, he would be liable to tax: and to bring the share of that income to tax before it is received by a beneficiary. The beneficiary under s. 97 must include in the assessable income money which he has not received but which in the year of income he is entitled to receive as his share of the net income of the estate. In the case of a beneficiary under disability but entitled to his share the trustee is to pay the tax, it being assumed that the beneficiary will not receive it in that year of tax because of legal disability, and in the case of s. 99 as there is nobody at present entitled to receive the amount to which that section applies, the trustee will be required presently to pay tax upon that amount. Where a beneficiary at the conclusion of a year of tax is still entitled to a share of income and, conformably to s. 97, includes the amount of that share which he has not received in his assessable income for that year, he will not be liable to tax upon the money he subsequently receives as that share any more than a person who has rendered his return of income on a credit basis is liable to pay tax upon the actual receipt of the money which he has already brought to account in computing income upon a credit basis. For the same reason, when the trustee has paid tax under s. 98, the subsequent receipt of the share of income by the person who was formerly under disability will not attract tax by reason of that receipt. The same will also be true of the person who ultimately becomes entitled to and receives income of the estate which has fallen within s. 99 and on which the trustees have paid tax in pursuance of that section. (at p183)
14. I have already pointed out that the net income of the trust estate, computed in accordance with the definition in s. 95, is the same sum which is referred to in each of the ss. 97, 98 and 99. When computing the total assessable income of a taxpayer whose residence is unknown, the only income which can in any event be included in that assessable income is income from an Australian source. Thus the total assessable income for the purposes of s. 95 includes, in my opinion, only the Australian-sourced income. On that footing, it is only the beneficiary's share of the income of the trust estate derived from an Australian source to which the beneficiary is entitled but which he has not received before the end of the year of tax which is to be included in the beneficiary's assessable income pursuant to s. 97 of the Act. Equally, it is only the beneficiary's share of that income which is the subject of tax under s. 98. The trustee is taxed under s. 99, in my opinion, only upon the net income of the estate derived from Australian sources to which no person is presently entitled. (at p183)
15. The scheme of the Act therefore seems to me to be that tax which would be payable by a beneficiary irrespective of the residence of the beneficiary at the time of the receipt of a share of the income of a trust estate will be exacted at the earlier point of time, namely, in the year of tax in which the beneficiary is entitled to but has not been paid a share of such income. Consequently, as it seems to me, contrary to some of the reasoning in one of the judgments of the above-mentioned case, there is no room in applying the provisions of Div. 6 of Pt III of the Act to have regard to the residence of the beneficiary. The Act in that division and by virtue of its provisions only proposes to tax so much of the total income of a trust estate as is derived from Australian sources. All the rest, if any, of the income of the trust estate, that is to say, income derived from non-Australian sources, will be brought to tax at the time of its actual receipt by the beneficiary if at that time the recipient is a resident of Australia. Division 6 performs the function, in my opinion, of bringing forward the time for the exaction of tax only upon income of the trust estate which was derived from Australian sources. (at p184)
16. I turn now to the Federal Commissioner of Taxation v. Belford [1952] HCA 73; (1952) 88 CLR 589 . In that case the taxpayer received in the year of tax, from the trustees of a will, a distribution of the income of the estate. The taxpayer was an Australian resident. The source of the taxpayer's income was therefore irrelevant: the source of the trustees' income even more so. The only question was whether the income sought to be taxed was income derived by the taxpayer. Clearly it was. Section 26 (b) expressly made the receipt by the beneficiary of the money from the trustees of the will income. But the taxpayer sought to have the income treated as exempt because the source of the trustee's income was ex Australian and the trustees themselves were not residents of Australia. The taxpayer, in my opinion, clearly had no substantial ground of objection. However, some members of the Court took occasion to discuss the provisions of Div. 6. In my most respectful opinion, none of this discussion was necessary for the decision of the case and what was said as to those provisions was entirely obiter. However, I respectfully agree with the view expressed by the majority of the Court that the residence of the trustee in relation to the provisions of Div. 6 is entirely irrelevant: but I am unable to agree that the residence of the beneficiary is in any wise significant or relevant to the determination of the net income of the trust estate as defined by s. 95 or of the share of that income which has to be included in assessable income under s. 97 of the amount upon which tax has to be paid under either s. 98 or s. 99. I have already expressed my opinion that only Australian sourced income is to be brought to account in determining the total assessable income for the purposes of s. 95. Once that sum is determined in accordance with that section, it is the whole or a share, as the case may be, of that sum which is either to be brought into the assessable income of a beneficiary under s. 97 or on which the trustee must pay tax under s. 98 or s. 99. There is, in my opinion, no warrant for apportioning any part of that sum in the case of a beneficiary who is not a resident of Australia. (at p185)
17. Earlier I indicated that, in my opinion, Div. 6 cannot properly be regarded as the exclusive source of the liability of a beneficiary to tax upon a share of income of a trust estate. No precise conclusion on that matter in that case was reached by the Court but several opinions upon the matter were expressed. I find no need to canvass them. Suffice it for my purposes in this case to say that, in my opinion, it is not necessary to find some construction of Div. 6 which will bring to tax under its provisions all the money to which a beneficiary may become entitled or which he may receive as his share of the income of the trust estate. Once it is realized that the actual receipt by the beneficiary of the proceeds of a share of the income of a trust estate will involve him in tax upon all sums which have not theretofore been brought to tax, either in his own or in the trustee's hands, the need to have regard to the residence of the beneficiary in applying any of the provisions of the division seems to me to disappear. (at p185)
18. In my opinion, the question should be answered in the negative. (at p185)
KITTO J. This is a case stated under s. 198 of the Income Tax Assessment Act 1936-1961 (Cth) in an appeal against an assessment of the income tax payable by the executors of the will of Nevil Shute Norway, who died on 12th January 1960, in respect of income derived in the year ended 30th June 1961. (at p185)
2. In that year the appellants, the executors, derived from sources out of Australia income in respect of certain books and a film scenario which their testator had written in his lifetime. They themselves were at all material times residents of Australia within the meaning of the Act, for one of them is a company incorporated in Australia and the other an individual who throughout the year of income resided in Australia: see the definition in s. 6 (1). At no time during the year was any beneficiary presently entitled to any part of the income of the estate (though a very small part of the income was in fact distributed to beneficiaries). This is so because "presently entitled to any part of the income of a trust estate" refers, not to the availability of any income for payment to him, but to a present title in possession in respect of any income the estate may produce; and in the present case the executorial duties had not been completed when the year ended. The executors were of course not yet trustees of the estate in the ordinary sense of the term; but by force of the definition in s. 6 (1) they were trustees for the purposes of the Income Tax Assessment Act, and it will be convenient to refer to them as such. An assessment of tax was made against them on the footing that the above-mentioned income from sources out of Australia formed part of the income upon which, as trustees of the estate, they were liable to be assessed and to pay tax. (at p186)
3. It is against that assessment that the appeal is brought in which the case before us has been stated. The question to be decided arises under the provisions made by s. 99 of the Act in the form which was applicable to assessments in respect of income derived in the relevant year. (I refer throughout this judgment to the Act as it applied to such assessments.) Section 99 is expressed to apply where, as here, there is no beneficiary presently entitled to any part of the income of the trust estate; and it provides that in such a case the trustee shall be assessed and liable to pay tax on "the net income of the trust estate" as if it were the income of an individual, and were not subject to any deduction. The expression "the net income of a trust estate" is defined by s. 95 to mean the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except the concessional deductions. (There is another exception but it is not material in the present case.) The expression "concessional deductions" is defined by s. 6 (1) to mean the deductions allowable under sub-div. B of Div. 3 of Pt III of the Act, and those are deductions which are allowable only where the taxpayer is a resident: s. 82A. (at p186)
4. The "assessable income" of the trust estate (see the definition of "assessable income" in s. 6 (1)) means all the amounts which under the provisions of the Act are included in the assessable income. By s. 25 (1) a general provision is made as to the inclusion of gross income in the assessable income of a taxpayer, and it is the only such provision that applies in this case. Paragraph (a) of s. 25 (1) includes in the assessable income of a taxpayer who is a resident the gross income derived from all sources whether in or out of Australia; while par. (b) includes in the assessable income of a taxpayer who is a non-resident only the gross income from all sources in Australia. The Commissioner has taken the view that, as a result of the operation of ss. 95 and 25 (1) in combination, the question whether the income of a trust estate from ex-Australian sources is included in the net income of the trust estate for the purposes of s. 99 is to be answered Yes or No according as the trustee is a resident or a non-resident. (at p186)
5. This is a sufficiently odd conclusion to make one suspicious of it; for not only is the intention highly unlikely that taxability in respect of a trust estate should depend upon so fortuitous and arbitrary a consideration as the residence for the time being of the trustee, but if that had been the intention some answer would almost inevitably have been provided for the obvious question: what if there are several trustees of whom some are residents and some are non-residents? The fault in the conclusion seems to me to be that it treats the expression in s. 95 "calculated under this Act as if the trustee were a taxpayer in respect of that income" as equivalent to "calculated under this Act as if the trustee had derived that income (and no other) beneficially". This, in my opinion, does less than justice to the precise wording of s. 95 and pays too little attention to definitions which the Act provides. (at p187)
6. In the light of the definition of "taxpayer" the expression "calculated under this Act as if the trustee were a taxpayer in respect of that income" may be expanded to read "calculated under this Act as if the trustee were a person deriving that income". But the "as if" shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by "a person" must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him a "resident" within the definition of that word in s. 6 (1). Unless a person is a "resident" of Australia he is by definition a "non-resident". Accordingly, by limiting the meaning of "the net income of a trust estate", for the purposes of (inter alia) s. 99, to the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except concessional allowances, s. 95 excludes from gross income all income which s. 25 (1) brings into assessable income in the case only of a taxpayer who is a resident (i.e., income from sources outside Australia), and, as consistency requires, excludes from the allowable deductions to be subtracted from the gross income which remains included in the assessable income those deductions which are allowable only in the case of such a taxpayer. (at p187)
7. The process of assessment which on this analysis the Act prescribes for such a case as the present is that which Dixon C.J. supported in Federal Commissioner of Taxation v. Belford [1952] HCA 73; (1952) 88 CLR 589, at p 602 though I have followed a slightly different line of reasoning from that which his Honour described. The conclusion treats the three sections, 97, 98 and 99, as giving effect to a harmonious policy, those sections together dealing with three cases: where a beneficiary has a present title in possession to a share of the income of a trust estate - not, be it noticed, to a share of the net income of a trust estate - and is not under any legal disability (s. 97); where a beneficiary has such a title but is under a legal disability (s. 98); and where no beneficiary has such a title to any part of that income or there is a part of it to which no beneficiary has such a title (s. 99). (There is a fourth case, of course, namely the case where a person, though having no present title in possession to the income of a trust estate or any part of it, has a beneficial interest in that income, such as a charge upon it; but that case is dealt with by s. 26 (b).) The operation of the three sections is only to provide for the taxation of "the net income of the trust estate", the need to do so being a consequence of the provision in s. 96 that, except as provided, a trustee shall not be liable to pay tax upon that income. Their operation is not to define the tax liability of beneficiaries in respect of distributions of estate income, for income which they receive from a trust estate is taxable in their hands by virtue of the general provisions of s. 25. If from such a distribution a beneficiary, having a present title to income, receives more than the amount of his share of "the net income of the trust estate" as calculated in accordance with the definition in s. 95, there will be an overlap between s. 97 and s. 25, just as there may be between s. 26 (b) and s. 25; but of course the inclusion of an amount in assessable income by force of two provisions is not an inclusion of it twice over. I make these observations simply in order to acknowledge that s. 99 is to be construed as part of the scheme of legislation which Div. 6 of Pt III of the Act embodies, and to show that the construction which I have placed upon that section is consonant with the scheme. (at p188)
8. The question in the case stated should in my opinion be answered No. (at p188)
MENZIES J. The seventeen-year-old expression of opinion by members of the Court in Federal Commissioner of Taxation v. Belford [1952] HCA 73; (1952) 88 CLR 589 would require a negative answer to the question asked in the case stated here by Kitto J. and I am of the opinion that such an answer should now be given to it, i.e. that income derived by the trustee of a trust estate from sources outside Australia to which no beneficiary is presently entitled is not taxable under s. 99 of the Income Tax Assessment Act 1936-1961 (Cth), notwithstanding that the trustee is resident in Australia. (at p188)
2. The initial difficulty in interpreting the provisions of Div. 6 of Pt III of the Act is to determine to what trust estates the Division applies. In its setting in the Act, I consider that its operation is confined to estates with Australian income, i.e. to estates deriving income from sources within Australia. I can see no justification for reading the division as applying to estates merely because the trustee or a beneficiary happens to be in, or a resident of, Australia during a tax year. It is significant that the division deals with "total assessable income . . . calculated under this Act". There must be a connexion between Australia and the income of the estate to attract the division. I would, therefore, regard an estate, which has no income except from sources outside Australia, as not within the division. The significance of this for present purposes is that it accepts, as the criterion of the general applicability of the division, the source of income rather than the residence of the trustee of a trust estate. (at p189)
3. Of course my reading of Div. 6 does not mean that beneficiaries who actually receive income from a trust estate in a year of tax may not be subject to income tax in respect of that income even if it be derived from sources outside Australia. Whether the income would be assessable or not would depend upon ss. 25 and 26 (b) of the Act, not upon Div. 6. Thus, for instance, by virtue of ss. 25 and 26 (b) the receipt by a resident of Australia of income from a trust estate having no connexion whatever with Australia would be the receipt of assessable income; so too, the receipt by a nonresident of income from a wholly Australian trust estate would be the receipt of assessable income unless tax on that income had already been paid. (at p189)
4. Furthermore, the reading of the division which commends itself to me would not, in conjunction with the other provisions of the Act, involve trustees or beneficiaries in double tax in respect of the income of a trust estate. If tax were to be paid by a trustee upon income of a trust estate pursuant to Div. 6, the subsequent receipt of that income by a beneficiary would, of course, give rise to no tax. Payments of tax by trustees under Div. 6 upon the income of a trust estate are properly to be regarded as payments in favour of the persons who eventually, as beneficiaries of the trust estate, receive the income already taxed. This, I think, is so notwithstanding provisions ex maiore cautela such as ss. 100 (2) and 102 (3). The subsequent receipt by the beneficiaries would, therefore, involve no further tax. (at p189)
5. The next difficulty in applying Div. 6 is to determine whether, in the case where there is an estate with income derived from sources in Australia - so that the division would apply - but also with income derived from sources outside Australia, the division applies to the whole income or only that part of the income derived from sources in Australia, even if it happens that the trustee of the estate is resident in Australia. I think the application of the division does not extend beyond income derived from sources in Australia. In reaching this conclusion I am influenced by my impression, already stated, that the division is essentially concerned with estates having a particular source of income rather than with the residence of the trustee of an estate and, on this point, I have found the course of reasoning of the members of the Court who, in Belford's Case [1952] HCA 73; (1952) 88 CLR 589 discussed Div. 6, helpful. It is most unlikely that it was intended that the taxation of the income of an estate would be made to depend upon an arbitrary matter such as the changeable residence of the trustee. Furthermore, it would be contrary to the scheme of the Act as a whole to exact income tax from a trustee because a non-resident beneficiary happens to be under a disability when, were the beneficiary capable of taking that to which he was entitled, e.g., income from a non-Australian source, there would be no tax payable either by the trustee or the beneficiary. Moreover, the trustee is not taxed as the person actually deriving the income but "as if" he was a person of unidentified residence deriving the income; such a person, according to the definition in s. 6 (1), would be a non-resident. Such considerations have led me to conclude that the division is concerned only with income derived from sources in Australia and not distributed, whatever the residence of the trustee, and that the taxation of undistributed estate income derived from sources outside Australia is provided for elsewhere upon the distribution of that income. (at p190)
6. Accordingly, the question asked should be answered "No". (at p190)
WINDEYER J. I agree that the question asked in the case stated be answered "No". (at p190)
ORDER
Question raised by the case stated answered - "No". Costs of the case reserved for the Justice disposing of the appeal.
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