BEGG & ORS V THE COMMISSIONER OF INLAND REVENUE HC WN CIV-2007-485-2129

BEGG & ORS V THE COMMISSIONER OF INLAND REVENUE HC WN CIV-2007-485-2129 28 February 2008IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2007-485-2129IN THE MATTER OF the Estate and Gift Duties Act 1968 and the Tax Administration Act 1994 BETWEEN MARION ELIZABETH BEGG JOHN HINMAN JACKSON NANCY JOSEPHINE JACKSON Plaintiffs AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 20 February 2008 Counsel: I R Millard QC and J Donovan for plaintiffs H W Ebersohn and H Lee for defendant Judgment: 28 February 2008JUDGMENT OF DOBSON J Introduction[1] These proceedings challenge the stance adopted by the defendant ("the Commissioner") towards deeds purporting to make intra-family gifts, but deferring payment of the cash amounts involved until the sale of the donor's last home or, in certain circumstances, on the donor's death. [2] The two sets of plaintiffs originally commenced challenges to disputable decisions of the Commissioner in the Taxation Review Authority and, by consent, the proceedings were consolidated and transferred to this Court.[3] An agreed statement of facts annexed the two forms of Deed of Gift and Declaration of Trust which I take to be variations on a form produced by the Public Trust for clients of that organisation. In the first case, Mr and Mrs Jackson, by Deed dated 28 November 2001, recorded their wish to each make a gift of $27,000 to their four children as tenants in common in equal shares. [4] Clause 2 of the operative provisions of the Deed provided:2. The Recipients accept these two gifts of $27,000 on these conditions: (a) Each gift takes effect immediately but will not be paid immediately. (b) Each gift will be paid from the proceeds of the sale of the home, at the first point of time when either: (i) Both the Donors have died; or(ii) The Donors sell (or that one of them who is then living sells) the home without buying a replacement home within three months; or(iii) The Donors sell (or that one of them who is then living sells) a replacement home without buying a further replacement home within three months. (c) From the time each gift takes effect it will be vested in the Recipients and will constitute an interest-free debt owed by that Donor to the Recipients. (d) Ownership of the home (or any replacement home purchased by the Donor or the surviving Donor) will remain in the name of the Donors (or the surviving Donor) who will hold it as trustees or trustee for the Recipients and the Donors or Donor to the extent of their respective interests from time to time, including (where one of the Donors has died) the full amount previously gifted under this Deed by that Donor. (e) If the Recipients (or any of them) ever request either Donor to do so, the Donors or surviving Donor will give the Recipients a valid mortgage in a form able to be registered over the title to the home, to secure the amount from time to time owing under the provisions of this Deed.[5] There were slight differences in the terms of Mrs Begg's Deed dated 20 February 2002 made in favour of her three children, in that the gift is to be paid from the proceeds of sale of the Donor's existing home, if sold during her lifetime without buying a replacement home within three months, or from the Donor's estate.Clause 2(d) of her Deed was simplified because of the absence of any requirements to provide for the situation after one of the Donors had died. [6] The terms of the deeds facilitate subsequent gifts merely by completion of a schedule to the original deed, and could accordingly be used to advance the "gifting" over time of potentially all equity that the donors had in their respective properties. In both the present cases, there had been a number of subsequent, annual gifts of $5,000. [7] I was informed that these are examples of a substantially larger number of such deeds entered into by clients of the Public Trust. The apparent purpose of such arrangements is to enable the donors to reduce the extent of assets they have to acknowledge ownership of, such as was a real issue at least in 2001 and 2002, when asset-testing applied to subsidised residential care. If effective, such deeds would enable the donors to reduce the extent of their assets by the extent of these commitments to pay family members sums out of the equity of their homes, at later points in time. [8] The donors have not provided mortgages which could be required of them by clause 2(e) of the deeds. I understand that the current equity in each of their homes would be sufficient to pay the gifts provided for. I was advised by Mr Millard QC for the plaintiffs that the initial gifts of $27,000 were at a level that would have to be advised to Work and Income, but that subsequent provisions for $5,000 were below the level that required any disclosure in the context of declarations as to assets. Such declarations, at least in the context of Government support for residential care for the elderly, had greater significance at the time of these deeds, than is presently the case. [9] The Commissioner's stance is that the promises to make gifts arise out of future property, and did not constitute gifts at the time the deeds were executed, for the purposes of the Estate and Gift Duties Act 1968 ("the Act"). The structure of such arrangements are designed to avoid any actual gift duty liability arising - $27,000 per donor per annum conforms with the present upper limit of gifts which do not incur any actual gift duty liability, but the Commissioner's concern is that, unless the point is clarified, donors under such arrangements will unwittingly incur a liability to gift duty when they perfect the combined commitments of the initial gifts, plus gifts made in subsequent years, to the extent that that results in one payment formore than the $27,000 maximum exemption from gift duty. The Commissioner considers that principles of voluntary compliance require him to take the stance now, to avoid public disquiet over apparent unfairness later, when the "perfecting" of such arrangements would constitute assessable gifts, contrary to the expectation of the donors involved. [10] For the Commissioner, Mr Ebersohn advised that he was not aware of any other concern over the use of such deeds. In particular, the Crown Law Office had no instructions to challenge the deeds because of concerns, such as by Work and Income or the Ministry of Health, that such arrangements constituted a device to avoid the intended effect of asset-testing, provided for in schemes such as the state subsidy for elderly residential care.Relevant provisions of the Act[11] The relevant portion of the definition of a dutiable gift in s 63 is as follows:(1) Subject to this Act, a dutiable gift shall include and consist of – (a) All the property, wherever situated, comprised in any gift made by any donor to any donee, where the donor is domiciled in New Zealand at the date of the gift, or is a body corporate incorporated in New Zealand: [12] Then s 64 addresses when voluntary contracts will be deemed to be gifts:(1) A disposition of property made in performance or satisfaction of a voluntary contract shall be deemed to be a gift, whether the contract or disposition was made before or after the commencement of this Act. (2) A voluntary contract, whether made before or after the commencement of this Act, shall not in itself constitute a gift, but shall become or be deemed to have become a gift so soon and so far as it has attached to and affected the legal or equitable title to any property to which it relates.[13] The definition of "disposition of property" in s 2(1) is as follows:Disposition of property means any conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity; and without limiting the generality of the foregoing provisions of this definition, includes –(b) The creation of a trust. The definition of "voluntary contract" in s 2(2) is as follows:means any contract entered into, whether with or without an instrument in writing, without fully adequate consideration in money or money's worth: Provided that where the consideration in money or money's worth is inadequate, the contract shall be deemed to be voluntary to the extent of that inadequacy only.[14] The plaintiffs argued that the notion of "attach[ing] to and affect[ing] the legal or equitable title to any property to which it relates" in s 64(2) turns largely on common law and equitable decisions on gifting. [15] On the basis of classic authorities from the 1860s, the plaintiffs submitted that gifts may be made in two ways. First, by transferring legal ownership, which requires the donor to do everything necessary in order to transfer the property, and render the settlement binding on him. Secondly, to declare a trust in respect of the property being gifted, so that it is either transferred to trustees for this purpose, or declared to thereafter be held by the donor, subject to a trust for that purpose (seeMilroy v Lord (1862) 4 DeG F&J 264 at 274; 45 ER 1185, and Richards v Delbridge(1874) LR 18 Eq 11). [16] The plaintiffs argued that the terms of the deeds were effective to make the gifts by both these means. [17] The primary argument for the Commissioner was that the deeds relate to future property, not yet in existence, and therefore not capable of being the subject of a present gift for the purposes of the Act. Although there were overlaps in these arguments about the inability to deal with future property preventing a gift by either of the recognised legal or equitable means, they had greater cogency as an argument against the deeds operating to effect any transfer or settlement of legal interests. [18] There was a range of additional points raised against these deeds effecting gifts for the purposes of the Act, and I shall deal with those later in the judgment. [19] The case most heavily relied on for the plaintiffs was that of Perry v Commissioner of Stamps (1913) 32 NZLR 1194 where the positions were opposite to those in issue here, in that the Commissioner sought to characterise a very similartransaction to those involved in the present proceedings as assessable for gift duty, whereas the taxpayer denied that it had been effected to an extent that rendered the arrangement assessable for gift duty. [20] That case was decided under the Death Duties Act 1909, s 39 of which defined "disposition of property" in a somewhat different way to the 1968 Act. The relevant parts of s 39 provided:39. In this Act the term "disposition of property" means – (a) any conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity: (b) the creation of a trust[21] It can be seen that in this earlier Act, what has become the principal element of the definition, with inclusive examples set out thereafter, was simply the discrete definition in (a) of what might constitute a disposition, without the linking words "and, without limiting the generality of the foregoing provisions of this definition includes -". The definition in the earlier Act had the activity of "creation of a trust" as a separate, stand-alone activity that qualified as a disposition of property. [22] The deed in Perry purported to assign to trustees the sum of £25,000 to issue out of and be charged on specified land. The settlor covenanted to pay the £25,000 to the trustees out of proceeds of sale, provided the sale netted sufficient after other commitments were met. During her lifetime, the settlor had discretion as to when the sale would occur, and after her death the trustees were to determine the timing of a sale. The settlor appointed the trustees as her attorney to execute a mortgage securing the sum of £25,000 against the land. No such mortgage had been completed. [23] The only ground advanced for the Commissioner in Perry was that there had been a settlement or alienation of property in terms of s 39(a). A full Court of five Judges of the then Supreme Court all rejected this contention. It was held that the gift was incomplete until the mortgage had been executed, and accordingly the settlement did not operate as an alienation of property within s 39(a) (Stout CJ, p 1201, Edwards J, 1206, Sim J, 1211).[24] However, without it being argued, all Judges were prepared to characterise the terms of the deed as an effectual creation of a trust with regard to the sum of £25,000, bringing it within s 39(b) of the 1909 Act. Justice Edwards treated the law as stated by Jessel MR in Richards, citing from a passage in the earlier case in the following terms:A man may transfer his property, without valuable consideration, in one of two ways: he may either do such acts as amount in law to a conveyance or assignment of the property, and thus completely divest himself of the legal ownership, in which case the person who by those acts acquires the property takes it beneficially or on trust, as the case may be; or the legal owner of the property may, by one or other of the modes amounting to a valid declaration of trust, constitute himself a trustee, and, without an actual transfer of the legal title, may so deal with the property as to deprive himself of the beneficial ownership, and declare that he will hold it from that time forward on trust for the other person. It is true he need not use the words "I declare myself a trustee," but he must do something which is equivalent to it, and use expressions which have that meaning; for, however anxious a Court may be to carry out a man's intention, it is not at liberty to construe words otherwise than according to their proper meaning.[25] On this basis, Edwards J reasoned that the settlor had created herself a trustee of the lands, upon the trusts reflecting the commitments she made in the deed. Sim J found that if she sold the land and did not pay £25,000 to the trustees, then they could sue to recover that sum. Similarly, after her death, the trustees could call on her executors to perform. On this reasoning, the trust created by the terms of the deed could be enforced when those later circumstances occurred. [26] Both aspects of the reasoning in Perry are relevant in present circumstances. In terms of the steps necessary to transfer legal ownership, where it is contended that a gift of money has been made, then the steps required before it could be perfected rendered it incomplete in the conveyancing sense. Mr Ebersohn accepted that if the mortgages provided for were executed in the present case, then that would have the donors completing all steps they could, and a disposition would occur. Until that time, however, the gift has not been perfected. It relates to property not yet in existence, but a form of which would be created by the execution of a mortgage. [27] The law on gifting is consistent in requiring completion of the steps to be taken by a donor. So, according to the nature of the property gifted, the donor has to have done everything required to transfer the property. It is also relevant that such an incomplete gift may be revoked at any time – see eg Laws of New Zealand, Gifts,para 63, which observes that there is nothing dishonest on the part of an intending donor who chooses to change his or her mind any time before the gift is complete. [28] Cases cited in argument included Williams v Commissioner of Inland Revenue [1965] NZLR 395. In that case, a deed of assignment provided that an assignor assigned by way of gift, for religious purposes, the first £500 of the net income that would accrue to the assignor from a family trust each year for a defined period. The Commissioner denied that the assignment was effective, and had assessed the assignor as liable for income tax upon the income. The judgment of Turner J in the Court of Appeal included the following:But while equity will recognise a voluntary assignment of an existing equitable interest, it will refuse to recognise in favour of a volunteer an assignment of an interest, either legal or equitable, not existing at the date of the assignment, but to arise in the future. Not yet existing, such property cannot be owned, and what may not be owned may not be effectively assigned: Holroyd v Marshall (1862) 10 HLC 191, 210; 11 ER 999, 1006 per Lord Westbury LC. If, not effectively assigned, it is made the subject of an agreement to assign it, such an agreement may be good in equity, and become effective upon the property coming into existence (ibid, 211; 1007) but if, and only if, the agreement is made for consideration (as in Spratt v Commissioner of Inland Revenue [1964] NZLR 272), for equity will not assist a volunteer: In re Ellenborough, Towry Law v Burne [1903] 1 Ch 697.[29] The reasoning in Williams found "the first £500 of net income" to be future income, there being uncertainty as to whether the trust would produce that amount in any given year. It was found that the assignor could have assigned entitlement to a portion of his right to income – say the first 25% - but that the different assignment of a set amount which might not arise in any year was an assignment of money that was not presently owned by the assignor. [30] The Commissioner also relied on the judgment of Windeyer J in the High Court of Australia decision of Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, at 24:As it is impossible for anyone to own something that does not exist, it is impossible for anyone to make a present gift of such a thing to another person, however sure he may be that it will come into existence and will then be his to give. He can, of course, promise that when the thing is his he will make it over to the intended donee. But in the meantime he may change his mind and when the time comes refuse to carry out his promise, even though it were by deed. A court of law could not compel him to perform it. A court of equity would not.[31] Both of these decisions refer to the requirements for a gift, as effected either at law or in equity. They certainly support the requirement for completion by the donor of everything possible to effect a transfer in respect of the property gifted. However, they may not apply in the same way to the proposition in respect of the second mode of creating a gift, namely by the establishment of a trust in respect of the gifted property. [32] Reverting then to the reasoning in Perry on the second mode of gifting, namely by creating a trust which would qualify as a disposition of property for the purposes of s 63. The relevant clauses in the present deed are cast in terms that conform with the judgment in Perry, in that they explicitly acknowledge that the property out of which the gifts will be paid is henceforth held on trust for the respective interests of donor and recipient. [33] I do not accept the Commissioner's argument that this is ineffectual because of the reservation of an interest in the property by the donors. That is implicit inPerry, because the commitment was for less than the present and projected value of the land. Also, it did not lack effect because of the prospect that the gift might ultimately fail if the property did not realise sufficient to make the payment. There might nonetheless be a trust in respect of the existing property, which reflected obligations assumed, and to be discharged in circumstances that would arise later. [34] However, Mr Ebersohn argued that the definition of "disposition of property" has changed in a material way. The form of the definition in the 1909 Act survived through a number of re-enactments, including the 1955 Act, and the current form was used for the first time in the present, 1968, Act. The argument is that for the creation of a trust to qualify as a disposition of property, it no longer stands on its own where it would be analysed by reference to general law of trusts as to what is effectual to create a trust. Rather, it is argued for the Commissioner that the requirements are qualified by having to constitute activity that comes within the principal aspect of the definition. Accordingly, on this argument it would have to be the creation of a trust that involved a conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property. [35] This approach to the interpretation of the expression "disposition of property" is a conventional one. Where the draftsman uses "includes", the specific examplesthat follow are to be taken as examples of the activity in the definition that has preceded such examples. The words "without limiting the generality of the foregoing provisions" recognises that the list of instances is non-exhaustive, and that other modes of conveyance, transfer, etc not coming within the sub-set identified may also qualify. [36] The contrary argument is that any activity coming within the types set out in the lettered sub-paragraphs will, simply by virtue of such inclusion, constitute sufficient activity to be treated as a conveyance, or one of the alternatives, for the purposes of the primary element of the definition. This would give a primacy to that list of examples creating a potential inconsistency between them and the principal element of the definition. I accordingly accept the approach to interpretation urged for the Commissioner. [37] This leads to the question whether the terms of the deed purporting to create a trust do constitute a "settlementof propertyin equity". Mr Ebersohn argues there has not been any such settlement. I am inclined to agree with Mr Millard that the trusts created by clauses 2(d) of the deeds do settle the homes on the donors as trustees, for the respective rights and interests of the recipients to the extent of the accumulated gifts under the deeds, and of the donors as to the balance (after taking into account any other indebtedness charged against the properties). [38] The next consequence of the "creation of a trust" now being a sub-set of the principal definition of "disposition of property" is that there has to be a coincidence between the disposition constituting a gift, and the subject matter of the property in respect of which there has been a settlement of legal or equitable interests. This requirement is implicit in the definition of "disposition of property" itself. It is supported by the temporal focus, and requirement for the conduct to attach to the gifted property that is inherent in ss 63(1)(a) and 64(2). Under the former section, a dutiable gift consists of all the property comprised in any gift made by any donor to any donee where the donor is domiciled in New Zealand at the date of the gift. That contemplates the subject matter being identifiable and in existence so as to be the subject of the gift. The latter section provides that concluding a voluntary contract (such as these deeds are) does not itself constitute a gift, but becomes a gift when and to the extent that it attaches to the property to which the gift relates. Thatcontemplates that creation of an equitable interest by the second possible mode of gifting will "attach" to the gifted property, in this case, cash. Section 64(2) would apply, for instance, if the donor had a $100,000 term deposit and wished to gift $27,000 of it. She or he could declare that they henceforth held the deposit subject to a trust to pay the donee $27,000 on maturity of the deposit. [39] Here, the subject matter of the trusts is the homes, but they are not the subject of the gifts. Rather, consistently with the offers to secure the promise of legal transfer of cash at a later date by mortgage, the subject matter of the trust is real property, out of which it is proposed the gift might later be paid. [40] I am conscious that this is a narrow basis on which to distinguish Perry, a decision of a very strong Court. It appears the decision has been relied on in only three later cases, and then only on the negative finding as to the incomplete nature of the gift for the purposes of effecting a transfer of legal interests: see Commissioner of Stamps v Erskine [1916] GLR 641, Commissioner of Stamps v Halliday [1922] GLR 196 and Taylor v Commissioner of Stamps [1923] GLR 701. [41] In Perry, there is a sense that the Court considered the matter had not been adequately argued. The judgments all determine the case in favour of the Commissioner on a provision in the section that was not argued at all. It is easy to infer that their Honours were concerned at a transaction, the structure of which could lead to avoidance of duty in situations where it should be payable. Mr Millard did accept that if the gifts did only relate to future property, then there could not be a disposition in respect of them. However, he argued that the present situation is the same as in Perry, and that the Court there was not concerned at any lack of capacity to create a trust because the property to which it related was not in existence. However, the more material point is that the Court in Perry was not concerned at any mismatch between the existing property that was made the subject of the trust, and the cash sum which the donor committed to paying at an undefined point in the future. If I am correct in treating the scheme of the 1968 Act as requiring conformity between the subject matter of the trust, and the property gifted, then this is a point that simply did not arise in Perry. [42] That requirement for conformity does not extend to absolute matching. Rather, the trust has to be declared in relation to existing property, some or all ofwhich is to constitute the gift, and be held on trust for the donee. As instanced, it could be $27,000 out of a $100,000 deposit, or a quarter share of a block of land declared to be held on trust. The necessary connection is broken when the property vested in the trust is different to the subject matter of the gift and is subjected to the trust only to provide the source of a later payment when it is anticipated that the property will be transformed, and produce sufficient to honour the promise to the donee. [43] The form of relief sought in each of the Notices of Claim filed in the Taxation Review Authority was to uphold the taxpayers' challenges to the Commissioner's disputable decision that the terms of the deeds did not constitute gifts for the purposes of the Act. For the reasons outlined, I would uphold the Commissioner's decisions. Accordingly, the plaintiffs' challenges to those decisions are declined.Costs[44] The Commissioner is entitled to costs, according to scale, on a 2B basis. He is also entitled to disbursements which, if necessary, are to be fixed by the Registrar. _________________Dobson JSolicitors: Public Trust, Lower Hutt for plaintiffs Crown Law Office, Wellington for defendant