B. Baker v. Archer-Shee in Unit Trusts

So far, the position is this. With regard to the number of beneficiaries, the effect of Nelson v. Adamson and New Zealand Insurance Co. Ltd. v. CPD is that Baker is not limited to trusts with one beneficiary and the existence of a number of beneficiaries, whether in successionor concurrently, does not affect their respective claims to proprietary interests in the subject matter of a trust. Ironically, the expansive application of Baker was achieved in New Zealand Insurance only at the price of admitting that a beneficiary may not have a proprietary interest in the trust assets in some fixed trust situations, such as where the beneficial interest is ‘a specified sum to be provided out of an unidentified part of a body of assets‘. This may be significant in assessing the true meaning of Baker. At this juncture this is still a matter of conjecture as the Scottish tax cases are only indicative of what Baker does not represent and do not define the boundaries of Baker. In any event, New Zealand Insurance has cleared the hurdle for Baker’s application to unit trusts, if the number of beneficiaries should ever be an issue.

FundsIn Charles v. FCT, the trust was a fixed investment trust governed by a declaration of trust which limited investments to securities of specified companies. After the manager caused to be vested in the name of the trustee securities authorized for investment by the trust deed, units were issued by the trustee to certificate holders nominated by the manager. In selling the units, the manager added 7.5 per cent as a service charge, out of which it paid all expenses of administration as well as the trustee’s remuneration. The trustee was not entitled to have any remuneration paid out of the trust fund. A certificate holder of a certain number of units had a right to exchange his units for a proportionate part of the underlying securities. The deed contained no power to traffic in securities. The manager could request the trustee to realize or vary some investments in certain circumstances but the trustee had absolute discretion as to the request. The evidence accepted was that at no time were securities acquired for the purpose of resale at a profit, and sales were normally made when the manager anticipated a fall in the value of shares. A certificate holder received in the tax year a sum representing (a) dividends of securities and (b) profits on the sale of securities and rights of shares held by the trustee, and profit on the distribution on a winding up of a company in which the trustee held shares. Component (a) was accepted by both the taxpayer and the Commissioner of Taxation as income from properties. The question under appeal was whether component (b) was profits from business or profits arising from the carrying on or carrying out of a profit-making scheme so that it possessed the character of income from personal exertion. The High Court of Australia held that the conclusion from the evidence accepted was that the profits from realization of securities were from transactions effected in the course of performing a fiduciary duty to preserve for beneficiaries as far as practicable the assets comprising the trust fund which might appear to be in jeopardy. Accordingly, component (b) was not taxable as income in the hands of the certificate holder.

The High Court was therefore applying Baker in a subtle way for it was in effect saying that in determining the character of income in the hands of a beneficiary in a fixed investment trust, the interposition of the trust can be ignored so that the beneficiary can be equated with the trustee: the trust is not a company. In the joint written judgment of Dixon CJ, Kitto J, and Taylor J, the court said:

. . . [A] unit held under this trust deed is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property. . . . [A] unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed: Baker v. Archer-Shee; so that the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made.

This statement is important for it has often been quoted for a general principle that it does not represent. Charles has been quoted as the authority establishing that a unitholder in a unit trust has an interest in the underlying assets. But their Honours were very careful to confine the statement to the unit under the trust deed before them, namely, a fixed investment trust. Moreover, when the case was heard, the Commissioner had already agreed to treat that portion of the distributed fund which came from dividends received by the trustee as the income of the certificate holder derived from property. The question whether a unit is an item of property, and consequently income from it is indivisible, was therefore not raised. Had it been raised, the applicability of Baker would be a more vexed question. By accepting the dividend component to be property income, the Commissioner was admitting the effect of Baker in that component, i.e., that income in the hand of the trustee had the same character in the hand of the beneficiary. In respect of the remaining portion of the distribution, the court had little room to manoeuvre, as the fixed investment trust was a fixed trust with all the beneficial interest ascertained, making it very difficult to argue that Baker was not applicable.

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The Rights of a Unitholder in Underlying Assets (the first proposition) (B)