Practitioners advising on succession duty in relation to inter vivos settlements should note that where a settlor retains powers that effectively control beneficial entitlements, the extinguishment of those powers upon death may constitute a dutiable succession, but only to the extent of the interest that was contingent upon the settlor's exercise of those powers.
Later decisions that cite Commissioner of Stamp Duties (Qld) v Donaldson
The Commissioner of Stamp Duties (Queensland) Respondent, Appellant; and Donaldson and Others Petitioners, Respondents.
H C of A
On appeal from the Supreme Court of Queensland.
15 August 1927
Isaacs A.C.J., Higgins and Rich JJ.
Henchman (with him Walsh), for the appellant.
McGill, for the respondents.
Henchman, in reply,
The following written judgments were delivered:—
Aug. 15
Isaacs A.C.J.
This is an appeal by the Queensland Commissioner of Stamp Duties against a decision of the State Supreme Court on a petition by the present respondent under sec. 50 of the Succession and Probate Duties Acts 1892 to 1918. Some careful attention must be given to the precise question which is raised by the judgment under consideration. The formal order of the Supreme Court is thus stated: "This Court is of opinion that succession duty is not payable in respect of the sum of £20,714 6s. 5d., being the amount referred to in par 19 (b) of the said petition." When the proceedings are examined it will be seen that the judgment really means that succession duty is not payable in respect of the property represented by the sum mentioned—which is the value of the full interest in the property—either to the full extent of that sum, or for any lesser sum representing a limited interest in that property.
John Clark Donaldson died on 19th December 1924 testate. The Commissioner assessed the executors of the deceased for succession duties. For the purpose of determining the rate of succession duty payable, the Commissioner has aggregated so as to form one estate, first, the value of the property passing under the will and, next, the amount of £20,714 6s. 5d., at which he has valued gifts made by the deceased by a deed of settlement on 6th May 1916, and which he claims to have passed on the death of the settlor. The executor's petition contested by its terms the Commissioner's right to include the gifts as succession at all and also contested the amount. The view taken by the majority of learned Judges in the Supreme Court being that the gifts were entirely free from duty rendered it unnecessary for them to enter upon the question of amount or to separate corpus from income or to delimit interests in the property. That is the reason the formal order of the Court is stated in the general negative terms quoted. Webb J., however, from the primary conclusion he formed, naturally pursued the controversy further in order to determine the property on which the duty is chargeable, and came to the conclusion that the corpus was chargeable on its total value, which was represented by the sum of £20,714 6s. 5d. as stated. The arguments before us have raised not merely the question whether the majority view is correct—which would at once end the matter—but also whether, even if it be wrong, the successions chargeable are the total value of the corpus, or some lesser interest in that corpus.
What, then, is the real effect of all this elaborate example of word-spinning? On examination it means that the "B" beneficiaries are entirely at the mercy of the settlor as long as he lives:—He holds the "A" shares and he is the Board of Management, he controls the trustees, he can remove the trustees, he can substitute trustees, he can sell the property on any terms he likes, he takes the profits in any case for five years, he can also take them for sixteen years more, that is, up to 1937, without altering clause 19 (as is seen), he can even alter clause 19 and so extend the twenty-one years, or so as to appropriate to the shares any desired proportion of the profits; he outvotes the "B" shareholders as long as he wants to, that is, as long as he draws all the profits; he may even by alteration of the articles exclude the "B" shareholders from their nominal recognition at a general meeting under clause 24. In short, except for the rule against perpetuities and the ultimately irresistible domination of death, John Clark Donaldson remained after his execution of the deed as much the supreme lord of the property as he was the instant before. He did not in fact choose to alter his original disposition. But he acted upon the 19th clause by extending for a second term of five years, the five years term specified by the clause itself: that definitely attached to himself the equitable right to the profits for the period beginning 6th May 1921 and ending 5th May 1926. While that period was still current, that is, on 19th December 1924, the settlor died. What "property" had the "B" shareholders in the circumstances on 19th December 1924, (1) the instant before the settlor's death and (2) the instant after? There is no doubt that the instant after the settlor's death the "B" shareholders in the events which had happened, had no right whatever to the profits which would arise between 20th December 1924 and 6th May 1926. But they had on 20th December 1924 the absolute right (free from any interest of the settlor) to a proportionate share of the profits which would arise on and after 6th May 1926. They had that absolute indefeasible right in interest, though of course not yet in possession. Whether they had further rights I shall discuss later. But as to their clear and unqualified right to profits as from 6th May 1926 to 5th May 1937 (eleven years) is it accurate to say, as the majority in the Supreme Court have said, that this was vested in the "B" shareholders as much before the settlor's death as after? It is, of course, accurate that the settlor had not passed a resolution and had not therefore assented in writing to a resolution of extension as required by par. (a) of art. 19. But the existing "disposition" gave him the right to do so at any time before 6th May 1926, and this right—so long as he lived—was a distinct "interest" in the settled property, and was itself "property." "By interest in a thing every benefit and advantage arising out of or depending on such thing, may be considered as being comprehended" (per Lawrence J. in Lucena v. Craufurd[7]). It was a fragment of ownership—equitable ownership—which by so much diminished the dominion which the "B" shareholders otherwise would have had in respect of the profit of their own shares in the assets. Lord Langdale M.R. in Jones v. Skinner[8] said: "It is well known, that the word property is the most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have." A little further on, the Master of the Rolls says the "word property ... would carry any interest the testator might have in any property, or over which he had any control." (See also In re Prater; Desinge v. Beare[9].) Now here, Donaldson, being in 1916 the sole owner of certain property, conferred interests, but "subject" to rights and interests and powers which he retained as part of the dominion he originally had, and the part he did not relinquish. It is true he couched his retention of interest in terms requiring the voting of a resolution and the personal assent to it, but at the time of his death it was he who possessed the sole power to pass that resolution notwithstanding any opposition, as well as to assent. The power to vote is itself a property right (Osborne v. Amalgamated Society of Railway Servants[10]). But the power to vote and to assent so as to appropriate profits as a primary and dominant right before anything whatever can be held in trust for others, is a distinct interest in the assets, and altogether beyond a bare power over another person's property. With that right intervening as a paramount interest until the moment of the settlor's death on 19th December 1924, how can it be accurately said that there was nothing vested in the "B" shareholders on 20th December that was not already vested in them before the death on 19th December? It seems to me incontestable that "upon the death" of the settlor there passed to the "B" shareholders the fragment of dominion in relation to the profits for the period 1926-1937 which had up to his death been withheld from them and which had always resided in the settlor and which he had never parted with. A very practical test is suggested in Earl Cowley's Case[11] by Lord Macnaghten, who says: "If property passes you can put a value on it by considering what it would fetch in the open market." The comparative selling values of the "B" shareholders' rights on 18th December and 20th December to the profits for the eleven years' period would be substantially different. Now, what event marked the transition from a chance to a certainty? Nothing but the settlor's death. It was contended that the "event" was the non-exercise of the power to resolve and assent contained in art. 19 (a). It was urged that if either by volition or paralysis or other cause during life there had been a non-exercise of the right, so that sub-clause (a) was not satisfied, the same result would have followed. The obvious answer is that in that case the property would have vested absolutely inter vivos, and therefore not "upon the death," and the conditions of the Act would not have been met. But the fact that the same practical result might have been reached by some other road does not get rid of the legal consequence of its actual attainment by this road. The period being different, the legal consequence is different (Attorney-General v. Noyes[12]). The non-exercise of the power for any period beyond 5th May 1926 was undoubtedly one of the circumstances existing at the time of the death and one of the circumstances on which the disposition operated. By reason of the disposition the "B" shareholders in the existing circumstances succeeded on 20th December 1924 to an absolute unfettered right to the profits beginning eighteen months ahead. But that right arose and was vested completely in interest "upon the death" of the settlor. The beneficiaries did not have to wait until 6th May 1926 to see if the power was not exercised. There could no longer be any existing right or interest to which the exercise of the power could be referred. There could not be any interest residing in a dead man, and his interest while living was personal. At the moment of his death, and by force of his death, the words in art. 19 (b) "subject as aforesaid" were rendered nugatory; so were all the preceding words, that is, as to the eleven years period. I am therefore of opinion there were successions on the death of the settlor by reason of the dispositions of the deed.
The appeal should therefore be allowed, the order of the Supreme Court discharged, and instead thereof it should be declared that succession duty is payable in respect of whatever sum was the value on 20th December 1924 of the income from the "B" shares for the period of eleven years, beginning 6th May 1926 and ending 5th May 1937; and this case should be remitted to the Supreme Court of Queensland to be further dealt with consistently with this judgment.
Higgins J.
I am of opinion that succession duty is payable on a succession, by reason of this settlement, but not on the amount of £20,714 6s. 5d. as claimed by the Commissioner.
The learned Judges of the Supreme Court have addressed themselves to the question whether there was any succession upon the death of the settlor within the meaning of sec. 4, but not to the question as to the amount of the assessment of value for duty if there was such a succession. No argument seems to have been addressed to the Supreme Court as to the latter question; and in his notice of appeal to this Court the Commissioner even treats the amount of the assessment as unquestionable, if there was a succession on the death. The words of the declaration which the Commissioner impugns are "the succession duty is not payable in respect of the sum of £20,714 6s. 5d. being the amount referred to in par. 19 (b) of the said petition"; and, if the amount is wrong, as I think it is, the declaration impugned is literally right, on its face. But it does not follow that it is the proper declaration for the Supreme Court to make under the petition; and this Court has power, under sec. 37 of the Judiciary Act, to give such judgment as the Supreme Court ought to have given in the first instance.
It is necessary therefore for us to deal with the question asked by the petition—"(1) in respect of what assets succession duty should be assessed upon the death of the said deceased." We must face the question, was there any such succession on the death of the settlor; and, if so, in respect of what assets?
That question turns on the meaning and applicability of sec. 4 of the Act. My opinion is that sec. 4 is applicable to the beneficial interests which the beneficiaries took, by reason of the settlement, in the profits of the property as from 5th May 1926 until 5th May 1937 (the expiration of the twenty-one years from the date of the settlement—5th May 1916). But what the Commissioner has assessed duty on is not these profits only but the whole corpus value of the assets in the settlement less the value of the "A" shares which belonged to the settlor at his death (see par. 15 of the petition).
I concur with Webb J. in his view that upon the death of the settlor, 19th December 1924, the "B" shareholders (so called) became entitled beneficially to something which they had not before, and by reason of the provisions of the settlement, but I do not think that they became entitled at that moment, upon that death, to the corpus of the assets in the settlement to the extent of the full 22,000 "B" shares out of the 24,000 shares into which the interests in the assets were deemed to be divided. The "B" shareholders had their interest in the corpus already, before the death of the settlor; but on the death of the settlor they gained the certainty that the profits as from the expiration of the existing period of five years would belong to them. This gain was merely possible previously; but as from the death, and by reason of the terms of the settlement, they became indefeasibly entitled to all the profits from 5th May 1926. They were already indefeasibly entitled to all the profits as from 5th May 1937.
This settlement is of a very unusual character, involving an attempt to apply to a family settlement the machinery of a trading company under the Companies Acts. The "trust premises"—lands, moneys in bank, stocks, &c.—are deemed to be of the value of £24,000, and deemed to be divided into 24,000 shares of £1 each. Of these shares 2,000 are called "A" shares, vested in the settlor himself absolutely; and 22,000 are called "B" shares, and as to 10,500 vested in his adult children and his sister in certain proportions; and as to 11,600, vested in the trustees for the infant children on their attaining twenty-one years. There was to be a register of the shares, and the registered holder was to be deemed to be the absolute owner (clause 4 of third schedule). The trustees were to carry out in every respect the directions of the Board of Management (clause 5 and clause 9); the Board of Management can purchase any property on any terms; and the settlor was the Board of Management until his death (clause 6). The "A" shares were transferable at the will of the holder—the settlor (clause 12); but the "B" shares were not transferable except with the sanction of the Board (the settlor) until the holders became entitled to share in the profits. Under clause 19, the profits were, for a period of five years from 5th May 1916, to be divided amongst the holders of the "A" shares—that is to say, were payable to the settlor; and the period of five years might be extended from time to time up to 5th May 1937 by resolution of the holders of the "A" shares—that is, by resolution of the settlor. But subject to these provisions the profits were to be divided among all the beneficiaries in proportion to their shares. Therefore, the beneficiaries had, independently of the death of the settlor, what one might call a vested estate in remainder—vested in title though not in possession or enjoyment—in the profits accruing from 5th May 1937. The only period as to which the right to enjoy the profits remained uncertain, before the death of the settlor, was the period before 5th May 1937. As to voting powers, so long as the holders of the "A" shares (that is to say, the settlor) were entitled to all the profits, they were entitled to one vote for every share at any meeting of the beneficiaries; whereas the holders of the "B" shares were entitled to only one vote for every 30 shares. The provisions of the articles might be altered by "special resolution"; but a "special resolution" means a resolution passed by a two-thirds majority of the beneficiaries confirmed by a resolution of a majority of the votes of the respective classes of beneficiaries: so that the settlor, being a class in himself, could prevent any special resolution.
Such provisions need no comment. During his life, the settlor had entire control of the whole trust property, and of such property as he chose to substitute therefore.
What happened was that when the first five years were about to expire, the period during which the profits were to be paid to the settlor as the holder of all the "A" shares was extended by him to 5th May 1926; and the holders of the "B" shares had no right to any of the profits before that date; and they might, at the will of the settlor, have no right to any of the profits since that date up to 5th May 1937. The settlor died on 19th December 1924; and from the moment of his death the possible right of the beneficiaries to the profits as from the end of the existing period of five years—5th May 1926—became an actual right. In my opinion, the death of the settlor was the critical moment at which the interest of the beneficiaries included first, for a certainty, the right to the profits as from 5th May 1926; and anyone willing to buy or lend on the security of the interest of a beneficiary would look to a proportion of the profits as from 5th May 1926 to 5th May 1937 as being indefeasibly included in that interest. We have here facts which accurately fit the words of sec. 4—a "disposition of property, by reason of which any person has become ... beneficially entitled to any property or the income thereof upon the death of any person dying ... either immediately or after any interval, either certainly or contingently, and either originally or by way of substitutive limitation."
Personally, I have felt difficulty in bringing the provisions of the settlement within known legal categories. But so far as I can see, without the assistance of argument on the subject, I think that the beneficiaries had—notwithstanding the phraseology as to shares—an equitable interest as tenants in common in the undivided concrete assets in the proportions of their respective shares: e.g., Mrs. Turnbull, the sister, holding 1,000 shares, held 1000/24000 of the settled assets in equity—or 1/24th of those settled assets. It is, therefore, doubtful whether the restrictions on transfer, on alienation, were valid and binding. The analogy as to restrictions on the transfer of shares in a company fails; for it has to be remembered that such restrictions as to a company's shares are the result of an Act of Parliament. The Companies Act (1863 to 1913, sec. 21), following the English Act of 1862, provides expressly that "the shares or other interest of any member in a company ... shall be personal estate capable of being transferred in manner provided" by the articles (English Act, sec. 22). It has been held therefore that the provisions against the transferability of shares contained in a company's articles are not valid under the rule against perpetuities, or are void as being repugnant to the absolute ownership conferred, The articles of a company are expressly made mutual covenants entered into by all the shareholders (sec. 15); and "the contract contained in the articles of association is one of the original incidents of the share" (Borland's Trustee v. Steel Brothers & Co.[17]). But even if we treat the provisions against transfer of shares in this settlement as being invalid, there is no reason for treating the provisions conferring the interest in profits under this settlement as being invalid; and the change in the interest in the profits under this settlement, the change which occurred upon the death of the settlor, from a possibility to a certainty, appears to me to be sufficient to establish a "succession" to the extent of the profits—the income from 5th May 1926 to 5th May 1937.
I am glad to find that in this conclusion—that there was a succession on the death of the settlor to the extent of the income from 5th May 1926 to 5th May 1937—I am in accord with the view of my learned brother Isaacs. But what is to be our order? This Court has not been supplied with the material necessary for saying what is the true value of the income between these dates. The order proposed by my brother Isaacs seems, however, to do substantial justice—Allow the appeal, discharge the order, declare that succession duty is payable on the value of the said income, remit the case to the Supreme Court to deal with the case under the Act (see sec. 50) consistently with the judgment of this High Court.
Perhaps I ought to add that even if the duty ought to be assessed on the corpus as well as on the income (limited as I have stated), I am by no means satisfied that the assessment of the value is not, on its face, unfair to the beneficiaries. To deduct the value of the "A" shares from the value of the concrete assets as a whole is not a fair criterion of the value of individual shares under such a deed as this.
Rich J.
I agree with the judgment of the majority of the Supreme Court, and think the appeal ought to be dismissed.
In this case there was not a disposition of property by which a person became beneficially entitled to property or the income thereof upon the death of any person. The beneficiaries became entitled because the term was extended only to 5th May 1926 and would have become so entitled whether the settlor died or not if for any reason the term was not extended.
Appeal allowed. Order of Supreme Court discharged. Declare that succession duty is payable upon whatever sum was the value on 20th December 1924 of the income from the "B" shares for the period of eleven years beginning 6th May 1926 and ending 5th May 1937. Case remitted to Supreme Court of Queensland to be further dealt with consistently with this judgment.
Solicitor for the appellant, H. J. H. Henchman, Crown Solicitor for Queensland.
Solicitors for the respondents, Macnish & Macrossan.
[1] (1927) S.R. (Q.), at p. 124.
[2] (1898) A.C. 535, at p. 543.
[3] (1899) A.C. 53, at pp. 56, 57, 61.
[4] (1898) A.C., at pp. 543-544.
[5] (1899) A.C. 198, at p. 211.
[6] (1924) A.C. 586, at p. 591.
[7] (1806) 2 B. & P. (N.R.) 269, at p. 302.
[8] (1835) 5 L.J. Ch. (N.S.) 87, at p. 90.
[9] (1888) 37 Ch. D. 481, per Lord Halsbury L.C. at p. 483, Cotton L.J. at p. 486.
[10] (1911) 1 Ch. 540.
[11] (1899) A.C., at p. 213.
[12] (1881) 8 Q.B.D. 125.
[13] (1888) 38 Ch. D. 176, at p. 180.
[14] (1895) A.C. 186, at p. 192.
[15] (1881) 8 Q.B.D. 125.
[16] (1893) 1 Q.B. 293.
[17] (1901) 1 Ch. 279, at p. 288.