Murdoch v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1959 of 2007)
Judgment date: 28 May 2008
Date published: 23 July 2008

Summary of decision:
Outlines the Tax Office response to this case which concerned the characterisation as income or capital of an amount paid by trustees of a trust to a beneficiary entitled to income for life in consequence of a claim made for an amount as recompense for moneys not had as a result of breach of fiduciary duty by the trustees.

Overview of facts:
Under various trusts, the taxpayer was the income beneficiary for life (the 'life tenant') and her son the only corpus beneficiary (the 'remainderman'). The taxpayer claimed that the investment policy maintained by the trustees (one of whom was the corpus beneficiary) had exposed both beneficiaries to risk. She contended that the corpus beneficiary had been adequately compensated for that risk through the resultant increase in value of the corpus but that she as income beneficiary had not been adequately compensated. In the result, she claimed a specified amount from the trustees to recompense her for moneys not had as a result of their failure to act impartially between the successive beneficiaries. She undertook to release the trustees and the trust assets from further claim on receiving the trustees' undertaking to pay the amount sought. | The amount paid to the taxpayer was sourced from a selective reduction of share capital on some of the shareholding which constituted each trust estate. | The amount received by the taxpayer was characterised and assessed by the Commissioner as ordinary income, being an amount received by an income beneficiary under a claim for money not had as income beneficiary. | Issues decided by the court | The Full Federal Court noted that the amount received should be characterised by the claim given up. The characterisation of the receipt as income or capital therefore depended on the characterisation of the particular claim. | The Court saw the claim of the taxpayer as a Phipps v Boardman claim against Mr Murdoch personally in respect of a fiduciary duty owed to the life tenant independently of the trusts rather than, it would seem, as a claim against the trustees for their breach of trusts or for the proper performance of the trusts. | The rule in Phipps v Boardman (which the Court saw as forming part of the law in Australia following the decision of the High Court in Chan v Zacharia ) is that a person who is under a fiduciary obligation to another must account to that other for any profit or gain the first person obtains or receives in circumstances of conflict or opportunity arising in relation to the fiduciary duty. | The claim was thus seen as a claim to a windfall gain accruing to Mr Murdoch on capital account rather than for the supplementation or enforcement of the taxpayer's rights to income as income beneficiary.

Issues decided:
The Full Federal Court noted that the amount received should be characterised by the claim given up. The characterisation of the receipt as income or capital therefore depended on the characterisation of the particular claim. The Court saw the claim of the taxpayer as a Phipps v Boardman claim against Mr Murdoch personally in respect of a fiduciary duty owed to the life tenant independently of the trusts rather than, it would seem, as a claim against the trustees for their breach of trusts or for the proper performance of the trusts. The rule in Phipps v Boardman (which the Court saw as forming part of the law in Australia following the decision of the High Court in Chan v Zacharia ) is that a person who is under a fiduciary obligation to another must account to that other for any profit or gain the first person obtains or receives in circumstances of conflict or opportunity arising in relation to the fiduciary duty. The claim was thus seen as a claim to a windfall gain accruing to Mr Murdoch on capital account rather than for the supplementation or enforcement of the taxpayer's rights to income as income beneficiary.

ATO view of decision:
The characterisation of an amount received as a result of a claim made by reference to the character of the claim made. | The decision made by the court that the amount received fell to be characterised by reference to the claim made accords with the position put by the Commissioner. A difference in interpretation of the claim made, however, led to the divergence in opinion in applying that principle. | The Tax Office view was that the taxpayer's claim was made by her as income beneficiary against the trustees and the trust assets in relation to money not had as a result of breach of the trustees' fiduciary duty, thereby characterising the amount received as income. | The view of the Court was that the taxpayer's claim was a claim against the corpus beneficiary for an accounting by him to her of an actual capital profit or gain seen by the Court as having been made by him and to an entitlement to a constructive trust over the assets of the trust estate, with the result that the amount received by the taxpayer was not income. | The Tax Office is of the view that the decision is of limited application because of the unique facts of the case.

Administrative treatment:
None required. The case was decided on its facts.

Legislative references: Income Tax Assessment Act 1936 25(1)
Case references: Phipps v Boardman [1967] 2 AC 46 Chan v Zacharia (1984) 154 CLR 178 (1984) 53 ALR 417 (1984) 58 ALJR 353
Subject references: Income tax Characterisation of money received by reference to claim made