Trustees liable to tax on controlled trust income before residue passed to beneficiary under trust obligations.

Trustees of an incorporated trust were treated as assessable to income-tax and super tax on the trust income because the income remained under their control until they discharged the trust obligations first. Under the trust deed and incorporating Act, the income had to be applied to the sinking fund, repair fund, rates, taxes and other outgoings before any residue could be paid to the beneficiary, so the beneficiary had no specific right to the income until those liabilities were met. The statutory scheme did not prevent assessment of trustees in that position, and trustees receiving and applying trust income could be the persons chargeable to tax.

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Issues: Whether the trustees of an incorporated trust were liable to assessment to income-tax and super tax on the income of the trust, including the portion ultimately paid to the beneficiary, on the footing that the trustees were not beneficially interested.

Analysis: The statutory scheme under the Income-tax Act, 1922 treated an assessee as the person by whom income-tax was payable and charged tax on the income of the assessee under the relevant heads. The trust deed and incorporating Act required the trustees to apply the income first to the sinking fund, repair fund, rates, taxes and other outgoings, and only thereafter to pay the residue to the Baronet for the time being. Until those liabilities were satisfied, the beneficiary had no specific right to any part of the interest or property itself; the residue became payable only as money remaining after the trustees had discharged the trust obligations. The existence of provisions dealing with trustees, guardians and agents did not exclude assessment of trustees in other situations, and the authorities relied upon supported the view that trustees in receipt of trust income could be assessable where the income remained under their control and was applied in accordance with the trust.

Conclusion: The trustees were rightly assessed on the trust income, and the assessment could not be disturbed. The issue is decided in favour of the Revenue.

Ratio Decidendi: Where trust income is first chargeable with trust obligations and remains under the control of trustees until those obligations are met, the trustees may be assessed as the persons chargeable to tax, even though the residue is later paid to a beneficiary.

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