Taylor v Federal Commissioner of Taxation [1970] HCA 10; (1970) 119 CLR 444 (8 April 1970)

HIGH COURT OF AUSTRALIA

TAYLOR v. FEDERAL COMMISSIONER OF TAXATION [1970] HCA 10; (1970) 119 CLR 444

Income Tax (Cth)

High Court of Australia
Kitto J.(1)

CATCHWORDS

Income Tax (Cth) - Income - Trust - Infant - Beneficial entitlement - Income Tax Assessment Act 1936-1968 (Cth), ss. 97, 98, 99A.

HEARING

Melbourne, 1970, March 12, 13;
Sydney, 1970, April 8. 8:4:1970
APPEALS under s. 187 (b) of the Income Tax Assessment Act 1936- 1968 (Cth).

DECISION

April 8.
KITTO J. delivered the following written judgment:-
I have heard together by consent of the parties three appeals against June 1968. The appellants are the same two persons in each case, the assessments having been made against them as trustees of three settlements made by one Leslie Norman Taylor on 28th April 1967. He had three infant children and each of them was the principal beneficiary of a settlement. The settled fund in each case was a sum of $10, and this sum the appellants as trustees invested in shares from which they derived dividends in the relevant year of income. (at p446)

2. The Commissioner assessed the appellants to tax under s. 99A of the Income Tax Assessment Act 1936-1967 (Cth) in respect of each settlement, taking the view that no part of the net income of the trust estate was included in the assessable income of a beneficiary in pursuance of s. 97, and that in respect of no part of it were the trustees to be assessed and liable to pay tax in pursuance of s. 98: see sub-s. (4) (a) of s. 99A. The appellants objected on the ground that s. 97 or alternatively s. 98 applied to each of the three cases, contending that throughout the year the principal beneficiary in each case was presently entitled to the whole of the income of the trust estate. The contention was really limited to s. 98, for that is the section that applies where a beneficiary presently entitled to the income of a trust estate is under a legal disability. (at p446)

3. It will be convenient to take as typical the settlement under which one of the settlor's sons was the principal beneficiary. The tenor of the settlement was that the income arising from the fund from the date of the settlement until the attainment by the son of the age of twenty-one or his death should be held upon trusts which, so far as material, may be shortly stated as follows: (1) to pay the son's parent or guardian for the son's maintenance, education, advancement, support or benefit, or to apply for such purposes, the whole or such part (if any) of the income as the trustees should in their absolute discretion think fit; (2) to accumulate and invest the balance (if any), or the whole if none should be applied as aforesaid, but so that it should not form an accretion to the trust fund but should be available for payment or application in accordance with (1) and otherwise should go in accordance with trusts next to be mentioned; (3) if the son should attain twenty-one years to hold the accumulated income (as well as future income) for him for his own use and benefit absolutely; (4) but if he should die before attaining twenty-one years to hold that income upon trust for his personal representatives absolutely to the intent that it should form part of his estate. (at p447)

4. In the relevant income year the trustees did not pay out any part of the income in exercise of the discretion reposed in them. The whole of it was therefore accumulated. The son was still living and under twenty-one at the end of the income year. Although he was not given any right thereafter to receive personally any part of the income unless he should attain twenty-one, the appellants contend that the effect of adding to the trust for him if he should attain twenty-one a trust for his personal representatives if he should die under that age was to create in his favour an absolute vested interest in possession in the income to arise during his minority. (at p447)

5. The trusts declared to take effect in the alternative events of the son's attaining twenty-one or dying before attaining that age are both, in form, contingent. If the second of them had been in favour of a stranger their combined effect would have been that, notwithstanding the contingent form of the first, the son would have taken a vested interest liable to be divested by the event of his dying under twenty-one, and the stranger would have taken an interest contingent upon that event: In re Heath; Public Trustee v. Heath (1936) Ch 259 ; In re Kirkpatrick's Policies Trusts (1966) Ch 730 ; but since the second of the trusts is in favour of the son's personal representatives, that is to say his executors or administrators in their representative capacities (see Attorney-General v. Malkin (1845) 2 Ph 64 (41 ER 866) ), the question that arises is whether the whole of the words declaring the two trusts should not be read as creating a trust of the income for the son, postponed as to enjoyment but indefeasibly vested in interest, by the method of describing the two possible ways in which such a trust may take effect in possession. So to read them would accord with the settled interpretation of words of this kind. For example, a bequest to be paid so many months after the testator's decease to a named person "or to his personal representatives" is held not to create a primary trust for the legatee followed by a substitutional trust for his executors or administrators but to be simply a way of giving a vested interest to that person upon the testator's death, that is to say a way of giving him immediately a transmissible and therefore vested interest, though postponed as regards enjoyment. See In re Porter's Trust [1857] EngR 984; (1857) 4 K & J 188, at pp 193, 198 [1857] EngR 984; (70 ER 79, at pp 81, 83) ; Re Turner (1865) 2 Dr & Sm 501, at pp 508, 509 (62 ER 710, at p 713) . So here, the two trusts expressed as alternatives show that the intention of the settlor was to give the son the whole beneficial interest in the income of the period of his minority, he being made the sole object of the power of advancement etc., and given the sole right, in respect of the income not applied for his benefit under the power, to receive it if he should attain twenty-one or to transmit it by will or intestacy in case he should die under that age. I agree with the submission of counsel for the appellants that the principle of Re Cousen's Will Trusts; Wright v. Killick (1937) Ch 381, at pp 384-387 as to the operation of a gift to the personal representatives of a deceased person, where the intention is that the property given shall form part of the estate, is applicable only where the deceased person has died before the gift takes effect. Accordingly I put that principle aside as irrelevant to the problem. In my opinion, immediately upon the making of the settlement in the present case the son became absolutely entitled to the income arising during his minority, though his personal enjoyment of it was postponed. (at p448)

6. But is that enough to require the conclusion that the son was "presently entitled" to the income during the relevant year? He was not in fact entitled to receive any of it in that year, because he was not legally competent to break the trust for accumulation and demand immediate payment. If it is to be held that nevertheless he was "presently entitled" to the income, two propositions must be sustained: (1) that the quoted expression is to be so construed that a beneficiary is "presently entitled" if he either is entitled to require immediate payment of it to himself (s. 97) or would be entitled to do so were it not for a legal disability that he is under (s. 98), and (2) that in the present case the son's disability (infancy) was all that in the relevant year stood between him and a right to require the trustees to pay the income to him. (at p449)

7. The appellants contend for the suggested interpretation of "presently entitled", and they say that by reason of the rule in Saunders v. Vautier [1841] EngR 629; (1841) 4 Beav 115 (49 ER 282) (aff'd Cr & Ph 240 [1841] EWHC Ch J82; (41 ER 482)) the son, but for his disability from giving a discharge, could have required the trustees to disregard the trust for accumulation and pay the income in the relevant year to him. The rule was stated by the Master of the Rolls in these words:

"Where a legacy is directed to accumulate for a certain
period, or where the payment is postponed, the legatee, if he
has an absolute indefeasible interest in the legacy, is not
bound to wait until the expiration of that period, but may
require payment the moment he is competent to give a valid
discharge" [1841] EngR 629; (1841) 4 Beav 115, at p 116 [1841] EngR 629; (49 ER 282, at p 282).

Accordingly, if an amendment of the law in the year we are concerned with had removed the disability of infants to give valid discharges for money, the trustees would have had no answer to a demand by the son that they pay the income to him. (at p449)

8. The Commissioner, however, relies upon statements in the judgments delivered in this Court in the case of Federal Commissioners of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199 that -

"when the Act speaks of a beneficiary being presently
entitled to a share of income, it refers to the right of a
beneficiary to obtain immediate payment rather than to the fact
that a beneficiary has a vested interest"
(1943) 68 CLR, at p 215,

and that -

"a beneficiary is not . . . presently entitled to income unless
it can be established that there is income which he is presently
entitled to receive; that he is entitled to obtain immediate
payment thereof from the trustee"
(1943) 68 CLR, at p 219.

The Commissioner says that in the relevant year the trust for accumulation was in fact in full force and binding upon the trustees, and that in consequence the son was not "presently entitled" to the income in the sense attributed to that expression in Whiting's Case (1943) 68 CLR 199 . (at p450)

9. The statements above quoted from Whiting's Case (1) need, I think, to be understood in the light of the problem the Court was there considering; but before turning to the case it is well to look again at the terms of s. 98 itself. The section plainly acknowledges that a beneficiary may be "presently entitled" to income notwithstanding that he is under a legal disability. A disability from what? Since the consequence which the section attaches to the disability is that the trustee is to be assessed instead of the beneficiary the inference is clearly that the disability is from obtaining from the trustee income to which the beneficiary is presently entitled. It is therefore impossible to suppose that the learned judges who decided Whiting's Case [1943] HCA 45; (1943) 68 CLR 199 meant that a person whose title to a specific amount of income is absolute but who is under a disability from obtaining payment of it is for that reason to be held not "presently entitled" to it. (at p450)

10. In Whiting's Case [1943] HCA 45; (1943) 68 CLR 199 the Full Court differed from the primary judge (Rich J.) on a question as to the meaning and application of "presently entitled", and it is important to see how the difference of opinion arose. The income in question was income derived by a deceased estate which throughout the relevant year of income was in course of being administered by executors. The debts and liabilities of the estate had not all been paid nor had all the legacies, and an annunity had not yet fallen in, so that the residuary estate had not yet been ascertained. Nevertheless, the executors, regarding it as certain that there would be a residue, made entries in the estate books crediting certain amounts of income to the residuary beneficiaries in the proportions in which the will entitled them to the residuary estate. It was an amount so credited to a beneficiary that was in question in the case. Rich J. thought that since, on the true construction of the will, the beneficiary had "a vested interest in possession in income" - that is to say in income generally as distinguished from any specific amount of income - he was "presently entitled" to the income that had been appropriated to him. His Honour did not fail to recognize that as the administration was incomplete the beneficiary could not require the executors to pay that amount over to him, but he took a view that was based upon the special language of the Income Tax Assessment Act. He said:

". . . 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
[1935] HCA 7; (1935) 53 CLR 475, at pp 486, 490. It is,
however, certainly not income of the executors for the
purposes of the Commonwealth Act"
(1943) 68 CLR, at p 207. (at p451)

11. The members of the Full Court took a different view. Their Honours held that the provisions of the Act must be construed in the light of the general principles of law applicable to the administration of estates by executors and trustees, and that consequently the crucial question was at what moment of time, having regard to those general principles and to the provisions of the trust instrument, could it be said that a beneficiary had become presently entitled to a share in the income of a trust estate. The answer given was that only when the debts and liabilities, the annuity and the legacies had all been paid or provided for in full would it be possible to say that there was any income to which the residuary beneficiaries would be presently entitled. The point of difference between Rich J. and the Full Court was, therefore, that the former thought that a beneficiary is "presently entitled" to the income produced by the trust estate if under the trust instrument he is "presently entitled to income of the estate" whatever be the stage that administration has reached, while the Full Court considered that a beneficiary is not "presently entitled" to any income of the trust estate unless the administration has reached such a point that an amount of income has become identifiable as being the subject of a present interest in possession vested in him by the trust instrument. When their Honours spoke of the beneficiary having a right to obtain immediate payment, they could not have been referring to his legal capacity to give a discharge for the payment. Having regard to the point of difference from Rich J. to which they were addressing themselves, I think it is clear that they were holding only that an admittedly vested interest in possession in the income of an estate does not make the beneficiary "presently entitled" to any income which is not yet distributable, and so is not yet specifically caught by the beneficiary's interest. Notwithstanding a passage in the joint judgment of Latham C.J. and Williams J. (Federal Commissioner of Taxation v. Whiting (1943) 68 CLR, at pp 214-215 ) which I must own I do not altogether understand in view of the recognition by s. 98 that a beneficiary may be "presently entitled" to income notwithstanding that by reason of a legal disability he has no right to obtain immediate payment, the tenor of the judgments is, I think, that "presently entitled" refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he were not under a disability. (at p452)

12. Counsel for the Commissioner referred me to a sentence in the judgment of Dixon J. in Executor Trustee & Agency Co. of South Australia Ltd. v. Federal Commissioner of Taxation [1932] HCA 25; (1932) 48 CLR 26, at p 41 . Certain beneficiaries were entitled to shares of certain income of an estate, and his Honour observed that tax on those shares of income was assessable under the provisions of s. 31 (2) (b) of the Income Tax Assessment Act 1922-1929 (Cth) because the shares of income were indefeasibly vested in possession and no facts appeared which would disable the beneficiaries from demanding them at once. The provision there in question, however, applied in respect of income to which no person was "presently entitled and in actual receipt thereof". His Honour's observation affords no assistance on a question arising under a provision which does not contain the last five words. (at p452)

13. In my opinion the correct conclusion in the present case is that the son was "presently entitled" to the relevant income because (1) it was legally available for distribution, (2) as to the whole of it he had an absolutely vested beneficial interest in possession, and (3) but for his legal disability from giving a discharge he would have succeeded in an action to recover it from the trustees. (at p452)

14. I am therefore of opinion that s. 98 was the proper section to be applied in these cases, and that consequently the assessments made under s. 99A were erroneous. (at p452)

15. The order will be that the appeals be allowed with costs and that the assessments be set aside. The Commissioner will then be free to make assessments under s. 98. (at p452)

ORDER

Appeals allowed with costs. Assessments set aside.