Nicholas v Federal Commissioner of Taxation [1947] HCA 48

OF AUSTRALIA.

(HIGH COURT OF AUSTRALIA.) Roe hs d ;. - s ; . APPELLANT ;

a axp oe COMMISSIONER Be TAXA * Raspoxpen.

Tax~-Income—Truat in reapect of any income or income-producing assets ue for benefit of unmarried infant children—Settlement— Beneficiaries con- 'of adults and minors—Income Tax Assessment Act 1936-1943 (No. 27 }6—No. 10 of 1943), #. 102 (1) (b). he appellant was the sole trustee of a deed whereby her husband settled 00 shares in a company, as to one-fourth upon trust for her absolutely, nd as to the other three-fourths upon trust until his death to divide the me equally amongst such of his children as should be living at the time he said income being received and upon his death upon trust to divide 'capital amongst his children and their issue as therein mentioned. 'The 'was still alive and had three sons, one of whom was over twenty-one i - yea 'of age and the other two under that age and unmarried during the iS ended 30th June 1943. 'The dividends received during that wt by the appellant from the trust fund were divisible equally between f and the three children, She was assessed as trustee of the settlement 102 (1) (b) of the Income Tax Assessment Act 1936-1943, upon £350, 'of the net income to which the two infant sons were entitled. amount of tax assessed, £325 10s,, was stated in the assessment to be the 'of tax by which the tax actually payable by the settlor on his own 'income was less than the tax which would have been payable by him d received the £350. the assessment as made by the Commissioner was correct.

the Commissioner of Taxation.

Mari Nicholas was the sole trustee of a deed, dated 12th MMI, whereby her husband, David Thomas Nicholas, settled o F. W. Williams & Co. Pty. Ltd., as to one-fourth her absolutely, and as to the other three-fourths

H.C. ov A. 1947. we

Sypyey,

Dec. 1, 12.

Williams J.

H. C. or A.

1947. Se

NicHoLas a

Dee, 12.

HIGH COURT

upon trust until his death to divide the income equally am such of his children as should be living at the time the said inco was received and at his death upon trust to divide the capi amongst his children and their issue as therein mentioned. :

The settlor was still alive and had three sons one of whom h attained the age of twenty-one years and the other two were that age and unmarried in 1943. The dividends received by th appellant from the trust fund during the income-year ended 30th. June 1943 were divisible under the deed in the sums of £175 to herself, £175 to the adult son and £175 to each of the infant sons,

(b) of the Income Tax Assessment Act 1936-1943 for £325 10s. bi the amount of tax payable upon £350 representing the infant share of the dividends. The sum of £325 10s. was stated in assessment to be the amount by which the tax actually payable the settlor on his own taxable income was less than the tax whic would have been payable by him if he had received the income that portion of the trust which was in favour of the two infant sot

An objection on various grounds made by her in respect o! t assessment having been disallowed the appellant appealed to #l High Court.

Further facts and the relevant statutory provisions are set for in the judgment hereunder. :

BE. J. Hooke and O'Meally, for the appellant.

'Leslie, for the respondent.

Wiuiams J. delivered the following written judgment —T appellant Grace Marie Nicholas is the sole trustee of a deed dai 12th March 1941, whereby her husband David Thomas Nic settled 4,000 shares in F. W. Williams & Co. Pty. Ltd., as to o fourth upon trust for her absolutely, and as to the other three-fo upon trust until his death to divide the income equally amon; such of his children as should be living at the time of the said income being received and on his death upon trust to divide the capi amongst his children and their issue as therein mentioned,

The settlor is still alive and has three sons one of whom was 0 twenty-one and the other two were under twenty-one and unma in 1943. During the year of income ended 30th June 194: appellant received £750 in dividends from the trust fund whic was divisible under the deed £175 to herself, £175 to the adult st

OF AUSTRALIA.

£175 to each of the infant sons. She was assessed as the of the deed under s. 102 (1) (b) of the Income Tax Assessment

um of £325 10s. was stated in the assessment to be the amount

'taxable income was less than the tax which would have gale by him if he had received the income of the portion ¢ » trust which was in favour of the two infant children. The

'on the appeal. was submitted that the appeal should succeed on the grounds t (1) A trustee cannot be assessed under s. 102 because the ature has failed to declare a rate of tax in respect thereof. (2) ction 102 (1) (b) does not apply to the income of a trust where e beneficiaries comprise adults as well as children of the creator the trust who are under the age of twenty-one and unmarried. ) If s. 102 (1) (6) was intended to apply to such a trust it cannot ite because there is no machinery for caleulating the share of et income of the trust on which tax is to be paid in the absence x ny rovision for the apportionment of bic net income, (4)

5 there must, sss bean apportionment of the income between such children and the trustee must be assessed separately of me income of each such child.

under this Act. Section 17 provides that income tax at | declared by the Parliament shall be levied and paid for lyear + upon the taxable income derived during 'of income by any person. The Income Tax Act 1943 'that i income tax is imposed at the rates declared by this i provides that the rate or rates of tax payable shall be as set out in the sixth schedule to this Act. edule prescribes the rates of tax payable by a trustee stee is liable to be assessed and to pay tax pursuant to 98 or s, 99 of the Income Tax Assessment Act. as submitted that the assessment under appeal must fail tax on the £350 was payable by the appellant asa d no rates were declared upon the taxable income of

hich the tax actually payable by David Thomas Nicholas on

H. ©. or A. 1947. ed

NiIcHoLas

'TAXATION.

Williams J.

H. C. or A.

1947. — Nicuonas . FreperaL Comatis- SIONER OF TAXATION.

Williams J.

HIGH COURT

trustees by the Income Tax Act except where trustees were to pay tax pursuant to ss. 98 or 99. The Income Tax Assessme Act is not an Act which imposes a tax or declares the rates of tax The tax is imposed and the rates are declared by the Income T Act. But s.3 of the Income Tax Act provides that the Income 1 Assessment Act shall be incorporated and read as one with this

terms :— "+ 102—(1) Where a person has created a trust in respect o' income or income-producing assets, and— a (a) he has power, whenever exercisable, to revoke or alter th trusts so as to acquire a beneficial interest in the inco derived during the year of income, or the assets producing

(b) income is, under that trust, in the year of income, pa

to or accumulated for, or applicable for the benefit of a

child or children of that person who is or are under t

age of twenty-one years and unmarried, a

the Commissioner may assess the trustee to pay income tax, this section, and the trustee shall be liable to pay the tax so ass (2) The amount of such tax shall be the amount by which the actually payable on his own taxable income by the person created the trust is less than the tax which would have been pay by him if he had received the net income of the trust estate, much thereof as is attributable to the beneficial interest, a: case may be, in addition to any other income derived by him. (3) Where this section is applied to the assessment of the ine of a trust estate or part thereof derived in the year of income, beneficiary shall be assessed in his individual capacity in respect 0 his individual interest in the income or part to which this sect has been so applied, and the trustee shall not be assessed in ri of that income or part otherwise than under this section." This section forms part of the Income Taa Assessment Act separate Act and also forms part of the Income Tax Act because | Income Tax Assessment Act is incorporated in the Income Taa . The second schedule to the Income Tax Act prescribes the rat tax in respect of taxable income derived from property and third schedule the rates of tax in respect of taxable income deriv partly from personal exertion and partly from property. es two schedules contain all the rates of tax required to calcula' amount of tax payable by a trustee under s. 102 whether the i of the creator of the trust is derived from property only or from personal exertion and partly from property. Section

A 4 ake

OF AUSTRALIA.

imposes a tax because that section is incorporated in the Income Taz Act, and the rates in accordance with which the amount of tax is to be calculated are declared by the Parliament because they are in the second and third schedules to the Income Tax Act. The tax is imposed on the trustee by s. 102 in an analogous

for by ss. 104 and 105 of the Income Tax Assessment Act is imposed 'on private companies. This tax is imposed by the incorporation of these sections in the Income Tax Act. Section 5 (9) of the Income Tax Act provides that the rates of income tax payable by a company shall be as set out in the seventh schedule. This schedule does not "contain the rates at which a private company is to be taxed under 104 and 105. But the rates for the purposes of these sections like the rates for the purposes of s. 102, to be found in the md and third schedules: Cadbury-Fry-Pascall Pty. Ltd. v. eral Commissioner of Taxation (1). (2) and (3). Prior to the amendment of the principal Act by the Income Tax Assessment Act 1941, s, 102 (1) only applied to the e of revocable trusts. Section 102 (2) then provided that amount of tax should be the amount by which the tax actually

e had received so much of the net income of the trust estate as attributable to the beneficial interest which he had power so 'acquire, in addition to any other income derived by him. The

Act of 1941 added the second class of trusts now defined by s. (1) (). At the same time s, 102 (2) was amended by omitting words "so much of "' before the words " the net income of the estate" and by omitting the words " which he had power so wequire." It is clear that Parliament intended to amend s. 102 } so that the section would apply where the whole net income of the trust estate or only part thereof is subject to the power of cation, and where the whole net income of the trust estate or 'part thereof is payable to a child or children of the creator 'the trust who is or are under twenty-one and unmarried. It 'not disputed that the words "the net income of the trust " apply not only where the whole of such income is subject power of revocation but also where the whole of such income e to this class of children. But it was submitted that words "so much thereof as is attributable to the beneficial " refer exclusively to the beneficial interest mentioned |) (a), and do not include the case where only part of

(1) (1944) 70 C.L.R, 362.

_- manner to that in which the tax on undistributed profits provided

H. C. or A. 1947. cae

NicHoras

v Feperau Comais-

Williams 5.

H. C. or A.

1947. Se Nicnoras v. Feperat Commis- SIONER OF TAXATION,

Williams J.

HIGH COURT

the income of an irrevocable trust is payable to children twenty-one and unmarried. It was therefore submitted — s, 102 (2) can only operate in relation to the trusts defined

and unmarried, and the whole net income of the trust estate « be added to the income of the creator of the trust. Ifs. 102. had not been amended by the Act of 1941, there might have he no answer to this submission. But when the sub-section amended in 1941, care was taken to omit the words limiting beneficial interest to an interest which the settlor had power acquire by the exercise of a power of revocation. Before

trust fund, namely interests subject to revocation. By the amend ment the words were enlarged so as to cover these interests

interests of children of the creator of the trust who are undei twenty-one and unmarried. Section 102 (3) clearly intends ¢] the section is to be applied to the assessment of either the whole or part of the income of a trust estate whether such income is inco defined by s. 102 (1) (a) or (4), and that there can be benefici having individual interests in the whole or in that part of the ti estate to which the section applies.

(4) Section 102 treats the income to which it applies, wh it be the whole net income of the trust estate because it is subj to the power of revocation or all the beneficiaries are children of the creator of the trust under the age of twenty-one and unmarri or part only of that income because only part of the income is subj to the power of revocation or only some of the" beneficiaries ari this category, as a single taxable fund, and taxes this fund in hands of the trustee at an amount by which the tax actually payabl by the person who created the trust is less than the tax which woul have been payable by him if he had received this fund in additic to any other income derived by him less all allowable deductions

For these reasons I am of opinion that the appellant fails o grounds, and I order that the appeal be dismissed with costs. a

Appeal dismissed with costs. Solicitors for the appellant, Pigott, Stinson, Macgregor & Palme

Solicitor for the respondent, H. F. E. Whitlam, Crown S for the Commonwealth.