Commissioner of Taxation v Bamford

• Jurisdiction: Australia Federal only
• Judge: French CJ,Gummow,Hayne,Heydon,Crennan JJ
• Judgment Date: 30 March 2010
• Neutral Citation: 2010-0330 HCA A,[2010] HCA 10
• Date: 30 March 2010
• Court: High Court
• Docket Number: Matter No S310/2009 Matter No S311/2009

[2010] HCA 10

HIGH COURT OF AUSTRALIA

French CJ, Gummow, Hayne, Heydon and Crennan JJ

Matter No S310/2009

Matter No S311/2009

Commissioner Of Taxation

Appellant

and

Phillip Bamford & Ors

Respondents

Phillip Bamford & Anor

Appellants

and

Commissioner Of Taxation & Anor

Respondents

Representation

J T Gleeson SC with T P Murphy SC and K J Deards for the appellant in S310/2009 and the first respondent in S311/2009 (instructed by Australian Government Solicitor)

Submitting appearance for the first and second respondents in S310/2009

A H Slater QC with R L Seiden and I S Young for the appellants in S311/2009 and the third respondent in S310/2009 (instructed by Robert Richards & Associates)

Submitting appearance for the second respondent in S311/2009

Income Tax Assessment Act 1936 (Cth), ss 6(1), 95–99A.

Commissioner of Taxation v Bamford

Bamford v Commissioner of Taxation

Income tax — Income of trust estate — Assessable income of beneficiary — Income Tax Assessment Act 1936 (Cth) (‘the Act’), s 97(1) provided that where beneficiary presently entitled to ‘a share of the income of the trust estate’, assessable income of beneficiary included ‘that share of the net income of the trust estate’ — Beneficiaries entitled to specific amounts of distributable income — One beneficiary also entitled to residue of distributable income — Disparity between net income and distributable income — Meaning of ‘that share of the net income’ in s 97(1)(a)(i) of the Act — Whether beneficiaries to be assessed by reference to their proportion of distributable income or specific amounts.

Income tax — Income of trust estate — Trustee determined, pursuant to deed of settlement, net capital gain to be treated as distributable income — Whether net capital gain was ‘income of the trust estate’ under s 97(1) of the Act — Relevance of trustee's determination — Whether ‘income of the trust estate’ income according to trust law or ‘ordinary concepts’ but excluding ‘statutory income’.

Words and phrases — ‘income of the trust estate’, ‘presently entitled’, ‘that share of the net income of the trust estate’, ‘trust estate’, ‘trustee’.

ORDER

In each matter, the appeal is dismissed.

1 French CJ, Gummow, Hayne, Heydon and Crennan JJ. These appeals are brought from the Full Court of the Federal Court (Emmett, Stone and Perram JJ) 1 and have been heard together. They concern the operation with respect to the income tax years of 2000 (‘the taxpayers' appeal’) and 2002 (‘the Commissioner's appeal’) of the provisions of Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) (‘the 1936 Act’). Division 6 is headed ‘Trust income’ and comprises ss 95–102. There is no relevant difference in the text of Div 6 as it stood in 2000 and 2002.

2 It is appropriate at this stage to note that s 97(1) applies where ‘a beneficiary of a trust estate … is presently entitled to a share of the income of the trust estate’ and that, if so, the assessable income of the beneficiary includes ‘that share of the net income of the trust estate’.

3 For the reasons which follow each appeal should be dismissed.

The facts

4 The facts are not in dispute and were fully detailed by Emmett J 2. It is sufficient to state what follows.

5 P & D Bamford Enterprises Pty Ltd (‘the Trustee’) is the second respondent in the taxpayers' appeal and the third respondent in the Commissioner's appeal. By deed of settlement made 9 February 1995 it was trustee of the trusts of the settlement established by that deed (‘the Deed’). Mr and Mrs Bamford were among the class of ‘Eligible Beneficiaries’ defined in cl 1(d). So also was Church of Scientology Inc (‘the Church’). Mr and Mrs Bamford were directors and employees of the Trustee. They are the appellants in the taxpayers' appeal, and first and second respondents in the Commissioner's appeal.

6 The Deed provided that, as to ‘the income arising from the Trust Fund’ (as defined in cl 1(n)), the Trustee was to hold it for such of the Eligible Beneficiaries as it selected under a provision in cl 4. This clause was of a kind found in what are commonly called ‘discretionary trusts’. Clause 7(n)

empowered the Trustee to determine whether any receipt ‘is or is not to be treated as being on income or capital account’.

The 2002 year of income

7 In respect of the 2002 year of income, the subject of the Commissioner's appeal, it was common ground that the Trustee treated as income available for distribution the net capital gain of $29,227 arising from the sale of certain real property in which the Trustee had held a half share. That capital gain was divided equally and included in the distribution made to Mr and Mrs Bamford by the Trustee. Mr and Mrs Bamford each lodged a tax return for the 2002 year in accordance with that distribution 3.

8 However, the Commissioner considered that the capital gain was not included in ‘the income of the trust estate’ of which s 97(1) speaks, with the result that there was no income of the trust estate to which s 97(1) could apply and that the Trustee itself was to be assessed under s 99A of the 1936 Act.

9 In this Court the Commissioner submits, contrary to the decision of the Full Court, that ‘the income of the trust estate’ did not include this amount. This is said to be so because, while available for distribution in accordance with the Deed, the capital gain amount was not, in the sense of the 1936 Act, ‘income according to ordinary concepts’.

10 On the second day of the hearing of the appeals the Commissioner made it clear that he accepts that the appeal should be dismissed if ‘the income of the trust estate’ within the meaning of s 97(1) includes ‘statutory income’ such as capital gains which are brought in as ‘assessable income’.

The 2000 year of income

11 In respect of the 2000 year, the subject of the taxpayers' appeal, the state of affairs giving rise to the dispute is more complex. Shortly put, the issue of construction concerns the application of the phrase ‘that share’ in s 97(1) in circumstances where the entitlement of beneficiaries is not to fixed proportions of the income of the trust estate but, as to some beneficiaries, to specific amounts and, as to another beneficiary, to the residue.

12 The Trustee determined under the Deed that the income for the year ended 30 June 2000 be distributed, as to consecutive amounts of $643 each to a child of Mr and Mrs Bamford, the next $12,500 to Narconon Anzo Inc, the next $106,000 to the Church, the next $68,000 to Mr and Mrs Bamford in equal shares, and the balance to the Church. The Trustee determined pursuant to cl 7(n) of the Deed that certain outgoings be treated as expenses and, in error, treated them as allowable deductions in computing the net income of the trust estate for the purposes of s 97(1). This was shown as $187,530.

13 Upon making the distributions in the above sequence, there was insufficient remaining to provide the $68,000 to Mr and Mrs Bamford, and no balance to go to the Church. There remained $67,744, which was distributed equally between Mr and Mrs Bamford (ie each received $33,872).

14 Rather than being merely $187,530, the net income of the trust estate included the non-deductible outgoings of $191,701. The Commissioner assessed Mr and Mrs Bamford by calculating the ratio which the actual distributions of $33,872 bore to the total of $187,530, and then applied that ratio to the excess of the net income addition of $191,701 over the distributable income. The Commissioner included the product of that calculation ($34,624) in the assessable income of each of the taxpayers. The taxpayers (contrary to the decision of the Full Court) contend that their share of the net income of the trust estate and thus the amounts included in their assessable incomes should have been ascertained as if the terms of the Deed, including the effect of any exercise of power of appointment over income, applied to the calculation of that ‘net income’.

15 The difference between the parties' submissions may be illustrated as follows. Upon the taxpayers' case, if there were trust income of $300,000 and net income of $180,000 and a beneficiary with an annuity of $100,000, the beneficiary's assessable income would be fixed at $100,000. Upon the Commissioner's case, the beneficiary's assessable income would not be fixed at $100,000 but would be the same one-third proportion (ie $60,000).

Trust law and income tax law

16 Before turning to consider further the relevant provisions of the 1936 Act, the following points of a general nature should be made respecting the intersection between the statute and the law of trusts.

17 First, both sides in argument on the present appeals accepted that whichever of the competing constructions of Div 6 were accepted examples could readily be given of apparent unfairness in the resulting administration of the legislation; it is more than 20 years since Hill J observed that ‘the scheme of Div 6 calls out for legislative clarification, especially since the insertion into [the 1936 Act] of provisions taxing capital gains as assessable income’ 4. Secondly, as Stone and Perram JJ emphasised 5 in the Full Court, the distinction between income and capital in trust law was a product of the administration of successive equitable estates with the balancing in particular of the concern of those with life interests in the receipt of income and those with remainder interests in the conservation and augmentation of capital. Thirdly, the ‘rules’ which were developed in Chancery regarding apportionment between capital and income of receipts and outgoings and losses largely took the form of presumptions which would yield to provision made in the trust instrument 6. Fourthly, against this background it was to be expected that the treatment of receipts and outgoings by a trustee would not...