Dixon, Re [1991] QSCFC 76 [1994] 1 Qd R 7

IN THE SUPREME COURT OF QUEENSLAND FULL COURT O.S. No. 1125 of 1990 BETWEEN : PETER MARTYN CHISHOLM DIXON. DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as Trustees of the PETER DIXON FAMILY TRUST (Applicants) Respondents AND : PETER MAXWELL LAURANCE (Respondent) Appellant SHEPHERDSON J WILLIAMS J de JERSEY J Reasons for judgment delivered by Shepherdson, Williams and de Jersey JJ on 18 July 1991. Williams J agreeing with the order proposed by Shepherdson J. de Jersey J dissenting . "APPEAL DISMISSED WITH COSTS AND THE DECLARATION CORRECTED TO READ AS FOLLOWS: DECLARE THAT PURSUANT TO THE DEED OF INDEMNITY DATED 30TH JUNE 1980 IN EVIDENCE IN THESE PROCEEDINGS PETER MAXWELL LAURANCE IS OBLIGED [1991] QSCFC 76 -- 1 of 55 -- TO INDEMNIFY PETER MARTYN CHISHOLM DIXON IN HIS OWN CAPACITY AND AS TRUSTEE OF THE PETER DIXON FAMILY TRUST IN RESPECT OF NOTICES OF REASSESSMENT AND ASSESSMENT ISSUED UNDER THE INCOME TAX ASSESSMENT ACT DATED 2 3RD OCTOBER, 1986 (FILE NO. 480 248 404) 1 5TH MAY 1987 (FILE NO. 760 35738/1 ) 15TH MAY, 1987 (FILE NO. 760 35738/3) AND 1ST SEPTEMBER 1987 (FILE NO. 760 35738/2) AND THAT THE SAID PETER MAXWELL LAURANCE IS OBLIGED TO INDEMNIFY DIANA S DIXON IN RESPECT OF THE NOTICE OF AMENDED ASSESSMENT ISSUED UNDER THE INCOME TAX ASSESSMENT ACT DATED 19TH MAY 1987 (FILE NO. 475 776764) THE AMOUNTS OF ALL SUCH ASSESSMENTS AND REASSESSMENTS TOTALLING $1,668,679.76." -- 2 of 55 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT O.S. No. 1125 of 1990 Before the Full Court Mr Justice Shepherdson Mr Justice Williams Mr Justice de Jersey BETWEEN: PETER MARTYN CHISHOLM DIXON . DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustees of the PETER DIXON FAMILY TRUST (Applicants) Respondents - and - PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - SHEPHERDSON J. - FULL COURT Delivered the 18th day of July, 1991 CATCHWORDS Counsel: Keane Q.C. with him Wolfe for the Appellant Russell Q.C. with him P. Stephens for the Respondents Solicitors: Hopgood & Ganim for the Appellant Hawthorn Cuppaidge & Badgery for the Respondent Hearing Date: 17th May, 1991 -- 3 of 55 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT BETWEEN: O.S. No. 1125 of 1990 PETER MARTYN CHISHOLM DIXON . DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustees of the PETER DIXON FAMILY TRUST (Applicants) Respondents - and - PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - SHEPHERDSON J. - FULL COURT Delivered the 18th day of July, 1991 On 13th December, 1990 Derrington J. sitting as a Chamber Judge declared "That upon the true construction of a Deed of Indemnity made on 30 June, 1980 between the following parties THAT Peter Maxwell Laurance is liable to indemnify Peter Martin (sic) Chisolm (sic) Dixon, Diana Dixon and Peter Martin (sic) Chisolm (sic) Dixon as former trustee for the Peter Dixon Family Trust pursuant to the provisions of the said Deed of Indemnity in respect of Income Tax Assessments issued 23 October, 1986, 15 May, 1987, 19 May, 1987 and 1 September, 1987 referred to in the Affidavits filed herein and totalling ONE MILLION SIX HUNDRED AND SIXTY EIGHT THOUSAND SIX HUNDRED AND SEVENTY NINE DOLLARS AND SEVENTY SIX CENTS ($1,668,679.76) and levied against the said Peter Martin (sic) Chisolm (sic) Dixon, Diana Dixon and the trustee of the Peter Dixon Family Trust." The appellant has sought to have that declaration set aside. The application for declaratory relief was made under 0. 64, r. 1 A of the Rules of the Supreme Court which reads "1 A . Any person claiming to be interested under a deed, will, contract or other written instrument, may -- 4 of 55 -- 2 apply by originating summons for the determination of any question of construction arising under the instrument and for a declaration of the rights of the persons interested." With that rule must be read 0. 64, r. 1E which says:- "1E. A question of construction under Rule 1A or 1B or a question of law under Rule 1BB hereof shall be determined having regard to the events that have happened but the Court or a Judge shall not be bound to determine any such question if there is any substantial dispute of fact or if for any other reason in their or his opinion it ought not to be determined on originating summons." It thus appears that the present matter, being the determination of a question of construction arising under a written instrument, was to be determined by the learned Chamber Judge having regard to the events which had happened. His Honour and this Court however have a discretion set forth in r. 1E as to whether or not in certain events the question ought to be determined. The deed of indemnity referred to in the originating summons is quite a short document. Omitting the schedule and execution thereof it read:- " A DEED OF INDEMNITY made the Thirtieth day of June, 1980 BETWEEN PETER MAXWELL LAWRANCE (sic) of Perth, Western Australia with his executors and administrators called P.M.L. of the One Part AND the persons whose names and descriptions appear in the Schedule hereto of the Other Part with their and each of their executors and assigns called "the shareholders". WHEREAS (1) The shareholders have been asked by the said P.M.L. to sell their several shareholdings in Rhonvale Pty. Ltd. to Churchill Industries Pty. Ltd. which they have agreed to do provided P.M.L. executes the indemnity in their favour hereinafter appearing. NOW THIS DEED WITNESS 1. P.M.L. doth hereby agree to indemnify the shareholders and each of them and keep them indemnified against all suins which may be assessed -- 5 of 55 -- 3 against them or any of them under the Income Tax Assessment Act (1936 as amended) in respect of the unappropriated profits of the said Rhonvale Pty. Ltd. and the profits for the current year ending with today of Rhonvale Pty. Ltd. and in respect of the unappropriated profits and current year's profit of Rhondda Collieries Pty. Ltd. a subsidiary of the said Rhonvale Pty. Ltd. 2. In the event that any of the shareholders are assessed for income tax as aforesaid the shareholders concerned covenant to give prompt notice of any such assessment to P.M.L. and assign to P.M.L. all rights to object and prosecute such objection through successive courts of appeal or in the alternative will do all such acts and sign all such documents as may be reasonably required of them by P.M.L. in order to lodge an objection and prosecute appeals; provided however P.M.L. hereby agrees to indemnify and keep the shareholders so assessed indemnified against all costs and expenses incurred in connection with such objections or appeals. IN WITNESS WHEREOF the parties hereto have executed this Deed under seal on the day and year first mentioned." The Schedule to the deed was headed " THE SCHEDULE to the Deed of Indemnity between Peter Maxwell Lawrance (sic) and the undermentioned shareholders of Rhonvale Pty. dated 30th June, 1980." Then followed three columns. The left hand column contained names and addresses, the centre column listed a money sum beside the name (omitting the dollar sign) and the right hand column listed a number of figures. This right hand column was totalled in the schedule and the total was 40,000. Two of the "shareholders" in the Schedule read:- "DIXON, Peter Family Trust 76 Huntingdale Street, PULLENVALE Q. 1,750,000.00 4000 DIXON, Peter Martyn Chisholm 76 Huntingdale Street, PULLENVALE Q. 63,875.00 146" ‘ The recital to the Deed of Indemnity mentioned an agreement by the shareholders described in the schedule to sell to -- 6 of 55 -- 4 Churchill Industries Pty. Ltd. their several shareholdings in Rhonvale Pty. Ltd. The recital also said that the shareholders had agreed to so sell provided Laurance (the appellant) executed in their favour the indemnity later appearing in the deed. In undisputed affidavit evidence before the learned Chamber Judge it was said that Laurance was the principal of Churchill Industries Pty. Ltd. at that time. Exhibited before the learned Chamber Judge was a photocopy of an uncompleted "Deed of Agreement" in respect of the sale and purchase by Churchill Industries Pty. Ltd. from the shareholders of Rhonvale Pty. Ltd. ("Rhonvale") of their shares in Rhonvale. That agreement was said to have been dated 30th June, 1980. Also exhibited were what are called the accounts referred to in that agreement. Rhonvale had 40,000 issued shares. The vendors named in the agreement held all the issued shares and Rhonvale carried on business as a Colliery proprietor operator and had one wholly owned subsidiary - Rhondda Collieries Pty. Ltd. ("Rhondda"). One of the vendor shareholders described in the. schedule to the Deed of Agreement was "Dixon, P.M.C. - Pullenvale - 146". Another was "Peter Dixon Family Trust - Pullenvale - 4000". That schedule listed the total number of shares held by shareholders as 40,000. The total sale price for the shares was shown in the Deed of Agreement at $17,500,000.00 and to be paid on 30th June, 1980 in exchange for properly executed transfers of the shares sold in Rhonvale and Rhondda together with relevant scrip. The Deed of Agreement set out other obligations of the vendors on settlement. Certain named persons were also parties to the Deed of Agreement as the only directors of Rhonvale. Among the several covenants -- 7 of 55 -- 5 and warranties given by the vendors and the directors contained in the Deed of Agreement were the following in cl. 4:- "(e) That the Company beneficially owns all the issued shares in the capital of the subsidiary; (f) That the Company and the subsidiary have each duly completed and lodged for assessment an income tax return for the year ended 30th June 1979 and has otherwise complied with all provisions of the Income Tax Assessment Act up to the date hereof; (g) That the Company and the subsidiary have each made a sufficient distribution in relation to all years of income up to and including the year of income ended on 30th June 1979 within the meaning of Section 105A of the Income Tax Assessment Act and it is expressly warranted that a certain objection lodged in respect of the assessment of income tax against the subsidiary for the year ended 30th June 1978 will be allowed; (h) That the total amount of tax payable by the Company and the subsidiary for the year ended on 30th June 1979 is to the best of the Vendor's knowledge and belief and the Directors ' knowledge and belief as set forth in the said Financial Statements calculated on the basis of forty-six cents (46<fc) in the dollar of taxable profit for the said period subject to allowable rebates as in the said Income Tax Assessment Act provided." "The Company" referred to in these clauses was Rhonvale and the Financial Statements appear to be the accounts I have already mentioned. The sale and purchase was completed on 30th June, 1980. The accounts of Rhondda and Rhonvale at 30th June, 1980 disclosed 1 . Rhondda had sold its assets to certain named companies with the result that its assets at 30th June, 1980 were represented by cash or cash equivalents totalling $19,252,527.00 and its only liability was $1,012,433.00 owing to Rhonvale. -- 8 of 55 -- 6 2. Rhonvale ' s only assets were in effect the $1,012,433.00 owing by Rhondda plus its shares in Rhondda. As a result of the sale Churchill Industries Pty. Ltd. in effect gained control of all these cash and cash assets. The Peter Dixon Family Trust which I have already mentioned was created by a Deed of Trust made on 1st January, 1976 between Edward Lionel Dixon as settlor and Peter Martyn Chisholm Dixon as trustee of the other part. That deed declared in para. 2 the trusts and the range of beneficiaries of the trust. The range of beneficiaries was:- "for Peter Martyn Chisholm Dixon's intended wife, Diana Suellen Carter; for his children and grandchildren who may be born hereafter, his step-children, that is to say, the children of his intended wife, Diana Suellen Carter, adopted children, and for his nephews and nieces now living or who may be born hereafter (being children of Peter Martyn Chisholm Dixon's sister, Joel Chisholm Benjamin) and for the spouses, widows and widowers of any of them in such shares (to the exclusion of any of them) as Peter Dixon directs ..." Clause 4 of the Deed of Trust set out the trustee ' s powers and under cl. 4(g) the trustee at his discretion might from time to time apply the whole or any part of the income or capital of the trust fund for or towards the maintenance, education or benefit in life of any minor who is a beneficiary or an object of the trusts .... The definition section of the deed included the following "'Peter Dixon Family Trust' means the Trust Fund and the trust powers and provisos upon which the same is for the time being held." -- 9 of 55 -- 7 '"Trust Fund' means [the settled property] any property into which it is converted, any accretions thereto and any other funds or property coming into the Trustee's hands for the purposes of or to be held and administered upon the trusts hereof including income thereof ." On 26th June, 1980 P.M.C. Dixon as trustee of the Dixon Family Trust made the following resolutions:- " APPROPRIATION OF INCOME FAMILY TRUST : It was resolved that the net income of The Dixon Family Trust available for distribution for the year ending 30 June, 1980 be applied pursuant to Clause G of the trust deed as follows - (a) By paying to D.S. Dixon a parent of the primary beneficiaries the sum of $30,800. (b) By applying the balance thereof for the benefit of the undermentioned beneficiaries as follows - Beneficiary 1,040 1,040 Balance J. S . Carter M.J. Carter C.D. Carter BENEFICIARIES ACCOUNTS: It was resolved that the net income of the trust for the year ending 30 June, 1980 appropriated to beneficiaries be credited to their loan accounts in accordance with the preceding resolution." The Peter Dixon Family Trust lodged its income tax return for the year ended 30th June, 1980. The statement of distribution of nett income for that year of $47,530.00 (forming part of the tax return) showed "Julie Suellen Carter - born 15.8.62 - $1,040.00 Caroline Diana Carter - born 31.5.66 - $14,650.00 Mitchell John Carter - born 24.1.70 - $1,040.00 Diana Suellen Dixon - $30,800.00." -- 10 of 55 -- 8 In the Income Tax Return Caroline Diana Carter and Mitchell John Carter were shown as being under a legal disability. If the birth date of Julie Suellen Carter was correctly shown she was also under a legal disability at 30th June, 1980 because she was then still 17 years of age. The return however showed she was under no legal disability. Accounts attached to and forming part of that Income Tax Return showed as income of "The Dixon Family Trust" - "profit on sale of shares" - $1,710,897.00. These accounts included "schedule of share transactions" for the trust and showed that 4,000 shares in Rhonvale had been sold on 30th June, 1980 for $1.75 million. The schedule showed as capital profit the sum of $1,710,000.00. This figure was arrived at by deducting $40,000.00 being value of these shares at 30th June, 1979 from the $1.75 million. The following income tax assessments for the year ended 30th June, 1980 later issued. 1. To Peter M.C. Dixon - dated the 17th June, 1982 Taxable Income $79,623.00 Tax due $10,832.64 2. To Mrs . Diana S . Dixon - dated 23 April, 1981 Taxable Income $33,196.00 Tax due $23,529.82 3. To the trustee for Caroline Diana Carter - dated 24th May, 1985 Taxable Income $14,650.00 Tax Due $ 1,402.75 -- 11 of 55 -- 9 On 12th November, 1985 a refund notice was issued by the Australian Taxation Office to "the trustee for Mitchell John Carter". The credit shown was $5,493.00. On 19th March, 1981 the Australian Taxation Office issued to "Miss Julie S. Carter" a notice of credit applied. This document showed certain credits, certain debits and an amount payable of $172.31. When those five assessments and notices issued it was apparent that the Australian Taxation Office had accepted that the profit on the sale of the trust's shares in Rhonvale was capital profit. The picture changed in 1986 and 1987 when the following notices were issued by the Australian Taxation Office. "1. To Peter M.C. Dixon - File No. 480 248 404 Notice of Amended Assessment for year ended 30th June, 1980 - dated 23 October, 1986 Taxable Income $149,027.00 Tax Assessed as due and payable on 25th November, 1986 $ 59,339.02" The tax assessed included $16,954.01 additional tax being a penalty charged because of false or misleading statement or an omission had been made which reduced the tax properly payable. Attached to this assessment was a notice from the Australian Taxation Office which showed that the office had applied s. 260 of the Income Tax Assessment Acts "in pre-tax company profit stripping cases". The notice showed that it had applied that section in the case of P.M.C. Dixon's income. The notice said in part:- "The effect of s. 260, in the context of pre-tax company profit stripping is that the purported sale of -- 12 of 55 -- 10 the company's shares is void as against the Commissioner so that the gross proceeds from the sale of shares are assessable as a dividend. Notices of assessment and adjustment sheets will reflect the inclusion of a dividend in assessable income. Adjustment sheets will detail the calculation of that dividend. The income tax adjustment sheet attached to P.M.C. Dixon's assessment relevantly showed: "Taxable income as previously assessed $ 79623 Attached is a notice of assessment made in reliance of sections 260, 44, 47(2B), 108 of the Income Tax Assessment Act in respect of the sale of shares in * (see below) which took place on or about the 30th day of June 1980. The above amount has been included in your assessable income * Company Former Name Dividend Star Kingdom Rhonvale P/L. 3550 (No. 400 P/L. ) Star Kingdom Rhondda 65854 (No. 401 P/L.) Collieries P/L. Total: 69404 Taxable income as shown in attached notice $149027 2. To the trustee for Caroline Diana Carter - File No. 76 035 738/1 Notice of Amended Assessment for year ended 30th June, 1980 dated 15 May, 1987. Taxable Income $600,716.00 Tax Assessed as due and payable on 17th June, 1987 $497,435.77" This tax included $142,124.50 additional tax being the same type of penalty as imposed in the P.M.C. Dixon Notice of Amended Assessment. -- 13 of 55 -- Attached to this assessment was a notice concerning application of s. 260 together with further separate notices regarding the addition of penalty tax and taxing incomes of specified unmarried persons under 18 years of age. There was one difference in the notice concerning the application of s. 260 in that when the notice in this particular notice of amended assessment referred to "recovery of outstanding tax" it said: "one case involving the issue of assessments to vendor shareholders of pre-tax profit strip companies in reliance on s. 260 was decided in favour of the tax payer by the New South Wales Supreme Court on 19th December, 1986. That case was Gregrhon Investments Ptv . Ltd, and Ors. v. F.C.T. (86 A.T.C. 4906). On legal advice the Commissioner has appealed against this decision." The Income Tax Adjustment Sheet for this assessment showed information almost identical to that in the P.M.C. Dixon Adjustment Sheet save that:- 1. The income from Rhonvale was $29,976.00. 2. The income from Rhondda was $556,090.00. 3. The taxable income increased from that previously assessed - $14,650.00 to $600,716.00. 4. It added - "This amendment is as a result of an increased distribution from the Dixon Family Trust. 3. To the Trustee for Mitchell John Carter - File No. 76035 738/3 Notice of Amended Assessment for year ended 30th June, 1980 dated 15th May, 1987. Taxable Income $42,645.00 Tax Assessed as due and payable on 17th June, 1987 $29,950.28" The tax assessed included $8,557.22 additional tax being the same type of penalty as imposed in the P.M.C. Dixon assessment. -- 14 of 55 -- 12 The notices attached to this assessment were effectively identical with the notices in the amended assessment to the trustee for C.D. Carter save that the adjustment sheet in the Mitchell Carter case showed 1. Taxable Income as returned - $1,040.00. 2. Income from Rhonvale - $2,128.00. 3. Income from Rhondda - $39,477.00. 4. Taxable income increased from $1,040.00 to $42,645.00. "4. To Mrs . Diana S . Dixon - File No. 475 768 764 Notice of Amended Assessment for year ended 30th June, 1980 dated 19th May, 1987 Taxable Income $1,265,334.00 Tax Assessed as due and payable on 19th June, 1987 $1,053,449.42" The tax assessed included $300,983.55 additional tax being the same type of penalty as imposed in the P.M.C. Dixon notice of amended assessment. The notices attached to this assessment were in effect identical with the notices in the C.D. Carter amended assessment save that the notice regarding additional tax and notice regarding taxing income of specified unmarried persons under 18 years of age were missing. The adjustment sheet in the amended assessment for Diana S. Dixon was in effect identical with the adjustment sheet in the C.D. Carter amended assessment save for: 1. The taxable income as previously assessed was $33,196.00. 2. Income from Rhonvale - $63,020. 3. Income from Rhondda - $1,169,118.00 Taxable income increased from $33,196.00 to $1,265,334.00. 4. -- 15 of 55 -- 13 "5. To the trustee for Julie Suellen Carter File No. 76035 738/2 Notice of assessment for year ended 30th June, 1980 dated 1st September, 1987 Taxable Income $42,645.00 Tax Assessed due and payable on 2nd October, 1987 $28,505.27" This assessment included $7,112.21 for penalty of the same type as that imposed in the P.M.C. Dixon assessment. The notices attached to this assessment were effectively identical with the notices in the Diana S. Dixon assessment save that the adjustment sheet showed the following: 1. Taxable income as previously returned - $1,040.00. 2. Income from Rhonvale - $2,128.00. 3. Income from Rhondda - $39,477.00. 4. Taxable income increased from $1,040.00 to $42,645.00. After P.M.C. Dixon received his amended assessment in 1986 his solicitors, Hawthorn Cuppaidge & Badgery wrote to Stephen Jaques Stone James who were the Perth solicitors for the appellant. The letter enclosed a copy of the notice of amended assessment together with the income tax adjustment sheet and a form letter which accompanied the notice. The letter after referring to the Deed of Indemnity executed by the appellant concluded:- "Will you please acknowledge receipt and advise your client's intentions in regard to the lodgement of an objection and the holding of our client indemnified against all moneys payable under the assessment." Correspondence ensued between the solicitors. On 13th November, 1986 Stephen Jaques Stone James wrote to Hawthorn, Cuppaidge & Badgery a letter which dealt with a number of former -- 16 of 55 -- 14 shareholders of Rhonvale and Rhondda including P.M.C. Dixon. The letter forwarded certain objections to be signed and lodged at the Australian Taxation Office Brisbane. They were sent without prejudice and the letter contained the following statement - "Our client denies any liability to your clients". After the other amended assessments and assessments to which I have referred were received Hawthorn, Cuppaidge & Badgery made further requests to the appellant's Perth solicitors for indemnification. A letter dated 3rd July, 1987 concluded "Will you please confirm that your client accepts liability under the Deed of Indemnity and as all rights of objections and appeal were assigned to your client by the deed will you please let us know what arrangements your client is prepared to make for lodgement of objections by the due dates." Among the correspondence between the parties is a letter dated 23rd July, 1987 from Mallesons Stephen Jaques which said:- "As previously advised, our client repudiates any liability whatsoever to your clients herein on the grounds, firstly, that no Indemnity was given to your clients and, secondly, on the grounds set out in previous correspondence . We presume that you have duly lodged the objections in the form set out and await confirmation thereof." The Commissioner of Taxation invited settlement offers. Correspondence ensued between the solicitors. By letter dated 18th July, 1990 sent by facsimile Hawthorn, Cuppaidge & Badgery set out settlement figures for each of the assessments with which this Court is concerned. The settlement figures totalled $301,998.05 against tax assessed at $1,668,679.76. The letter went on to say:- "Further to your letters to us of 20 July 1989 denying liability under the Deed of Indemnity, maintaining that no tax was properly payable under the assessments, and not consenting to any release of -- 17 of 55 -- 15 rights of objection and appeal the Commissioner has agreed to accept the sum of $300,000.00 from our client Peter M.C. Dixon and the Peter Dixon Family Trust in full settlement of the outstanding tax under the Section 260 assessments. Details appear above. Our clients are satisfied that this is a reasonable basis for a final settlement. The settlement amount represents the tax which would be payable if only Division 7 profits were properly assessible (sic) by recourse to Section 260. It takes no account of the tax which would be payable on the elements of the proceeds of sale represented by current year profits and capital profits. You will have noted Mr. Bloom's opinion already furnished to you as to our clients' prospects of succeeding in an appeal to the Court against the Section 260 assessments. Will you please advise by 28th instant any reasons your client may have why the Commissioner's offer of settlement should not be accepted by our clients. If we do not hear from you by then with reasonable objections by your client or with reasonable alternative proposals our clients intend to settle with the Commissioner and forthwith proceed against your client for recovery pursuant to the Deed of Indemnity. Will you please let us have a reply." The Perth solicitors faxed a reply dated 30th July, 1980 in which the respondent denied any liability under the Deed of Indemnity, continued to maintain that no tax was properly payable under the assessments, did not consent to any release of the rights relating to objection and appeal and was not prepared in any way to be a party to or to consent to the agreements which Hawthorn, Cuppaidge & Badgery's clients had either entered into or proposed to enter into with the Commissioner of Taxation. It is not necessary to refer in further detail to that letter save to -mention that the appellant apparently had counsel's opinion that the assessments under s. 260 were not legally valid and that the appellant required the Brisbane solicitors' clients to prosecute appeals to the Federal Court and if necessary to the High Court -- 18 of 55 -- 16 of Australia if the objections which had been lodged were disallowed. It is apparent from the correspondence between the Brisbane and Perth solicitors that the appellant continued to insist that he was not liable to indemnify the Brisbane solicitors' clients. The Brisbane solicitors had obtained a joint opinion from counsel and I shall mention this later. The appellant's attitude provoked the originating summons which resulted in the making of the declarations and this appeal. In this Court the appellant has argued 1 . The right to an indemnity arises on payment of the liability to which it relates and not before citing Port of Melbourne Authority v. Anshun Pty. Ltd. (1981) 147 C.L.R. 589 at 595. 2. The right to indemnity is predicated upon a valid assessment. 3. It is more probable than not that the notices of assessment and assessments in respect of which indemnities are sought will be set aside. 4. That no indemnity was ever given to the applicant Diana Dixon. 5. That the application was not appropriate for disposal pursuant to 0. 64, r.1A. POINT 1 - WHEN RIGHT OF INDEMNITY ARISES It is correct to say that in Port of Melbourne Authority v. Anshun Ptv. Ltd, (supra) Gibbs C.J., Mason and Aickin JJ. in their joint judgment said (at p. 595):- " ... the right to an indemnity arises on payment of the liability to which it relates and not before ...." -- 19 of 55 -- 17 Anshun was concerned with litigation in which an indemnity was sought by one defendant from another. The full text of their Honours ' remarks shows that the prior payment of the liability is not an essential prerequisite in all cases where a right to indemnity is claimed. Their Honours in fact said:- "Although the right to an indemnity arises on payment of the liability to which it relates and not before, this is a not a bar to the litigation as between a defendant and a third party, or as between defendants, of a claim based on an indemnity in respect of a liability in negligence asserted by the plaintiff in his action." Anshun was also not concerned with equity's approach where a right to indemnity is claimed and the liability in respect of which indemnity is sought has not been paid. The distinction between the approaches of the common law and equity was pointed out by Lord Brandon of Oakbrook in his speech in Firma C-Trade S.A. v. Newcastle Protection and Indemnity Association (1990) 3 Weekly Law Reports 78 at p. 86 when he said:- "There is no doubt that before the passing of the Supreme Court of Judicature Acts 1873 and 1875, there was a difference between the remedies available to enforce an ordinary contract of indemnity (by which I mean a contract of indemnity not containing any express 'pay to be paid' provision) at law on the one hand and in equity on the other. At law the party to be indemnified had to discharge the liability himself first and then sue the indemnifier for damages for breach of contract. In equity an ordinary contract of indemnity could be directed to be specifically performed by ordering that the indemnifier should pay the amount concerned directly to the third party to whom the liability was owed or in some cases to the party to be indemnified. Johnston v. Salvage Association (1887) 19 Q.B.D. 458, 460, per Lindley L . J .; British Union and National Insurance Co. v. Rawson [1916] 2 Ch. 476, 481-482, per Pickford L.J. There is further no doubt that since the passing of the Supreme Court of Judicature Acts 1873 and 1875 the equitable remedy has prevailed over the remedy of law." -- 20 of 55 -- 18 Apart from that authority I mention also a decision of Street C.J. in Equity in Travers v. Richardson (1920) 20 S.R. N.S.W. 367 in which His Honour held that the Court of Equity had jurisdiction specifically to enforce an implied agreement for indemnity on an executory contract for the sale of goods. His Honour at p. 371 cited with approval certain text book authority and the following decision of Cozens-Hardy the Master of the Rolls in Re Richardson (1911) 2 K.B. 705 and particularly at p. 709 where the Master of the Rolls had said:- "Equity has always taken a wider and more liberal view of these rights of indemnity than the old Common Law Courts did. It is settled at common law that, given a contract of indemnity, no action could be maintained unless actual loss had been incurred. The common law view is first pay and then come to the Court under your agreement to indemnify. In equity that was not the view taken. Equity has always recognised the existence of a larger and wider right in the person entitled to indemnity." In McIntosh v. Dalwood (No. 3) (1930) 47 W.N. N.S.W. 85 Harvey C.J. in Equity in dealing with a demurrer to a statement of claim on the ground that the facts alleged did not disclose any equitable right and that the plaintiff was not entitled to any equitable relief said (at p. 86):- "It is obvious that the remedy at common law of obtaining damages after the damage has been suffered, does not really give the indemnified party the benefit of the agreement to which he is entitled. Equity can, by ordering the indemnifying party to pay the money direct to the creditor relieve the other party from sustaining those damages. It is a more satisfactory and proper remedy to make available to the plaintiff then requiring him to sustain the loss and then seek such damages at law as he is entitled to under his contract with the defendant . In other words the Court of Equity can give him what a court of law cannot give and that may be the reason which has induced the court to interfere by way of specific relief in these contracts of indemnity. That seems to be the principle in Travers v. Richardson .... -- 21 of 55 -- 19 There is no reason why the same principle should not apply to indemnity. The cases show that a plaintiff can call upon the debtor to pay the debt under his contract of indemnity from the principal debtor before he has actually paid the liability. In my opinion the same principle exactly applies to a contract of indemnity against the payment of a liability. The cases to which I have been referred show that the liability must have crystallised into an actual present and enforceable demand before the indemnifier (sic) can come into court to get relief. As long as it remains a contingent liability which may or may not arise, the court will not entertain any proceedings but where it has become: an actual present demand which the contracting indemnifier has contracted to pay the court of equity will order specific performance of the contract by ordering the indemnifier to pay it instead of leaving the indemnified merely to a remedy for damages after he may have been ruined ... It would be exceedingly hard if it were not so and the court were obliged to follow what is the common law rule that a man must ruin himself before he can get the benefit of a contract into which he has entered." The matter went on appeal - McIntosh v. Dalwood (No. 4) (1930) 30 S.R. N.S.W. 415 when the appeal was dismissed. Street C.J., with whose reasons Owen and Long Innes JJ. concurred said (at p. 418):— "The true ground of the jurisdiction to entertain suits for specific performance is still, as it has been from ancient days, the insufficiency of Courts of Law to provide a complete remedy and to give adequate relief. If an award of damages will be commensurate to the injury sustained by a breach of contract, the party injured will be left to his remedy at law. If not, if an order for specific performance is indispensable to justice, and if the contract is not from its nature of such a kind that the Court cannot enforce its performance, it will interfere to enforce it and will, if necessary, interfere before the plaintiff has actually been damnified. The suggested distinction between contracts of simple indemnity and other classes of contract has in my opinion no basis either of authority or of principle. The test is always the same. In every case the contractual obligation must first be ascertained in order that it may be seen whether an adequate remedy exists at law in the event of a breach. If the obligation is merely an obligation to indemnify a person, in the sense of repaying to him a sum of money after he has paid it, no equitable relief is needed. Damages will provide -- 22 of 55 -- 20 an adequate remedy. If. however, the obligation on its true construction is an obligation to relieve a debtor by preventing him from having to pay his debt. equity will in such a case give relief in the nature of quia timet relief, and, instead of compelling the party indemnified first to pay the debt, and perhaps to ruin himself in doing so. will specifically enforce the obligation by ordering the indemnifying party to pay the debt ." I have underlined part of His Honour's reasons because in my view those words are relevant to the case in hand. If at the end of the day this Court decides that on the true construction of the deed of indemnity the obligation on the appellant is to relieve the applicant respondents by preventing them from having to pay the tax as assessed then, the fact that the taxes assessed have not yet been paid will be no bar to declaring the respondents' right to an indemnity. I note in passing the following comments of Lord Goff of Chieveley in Firma C-Trade S . A. (supra) at p. 93:- "Equity does not mend mens bargains; but it may grant specific performance of a contract, consistently with its terms, where the remedies at law are inadequate. This is what has happened in the case of contract of indemnity. As a general rule, -'indemnity requires that the party to be indemnified shall never be called upon to pay* (see In Re Richardson (1991) 2 K.B. 705, 716 per Buckley L.J.); and it is to give effect to that underlying purpose of the contract that equity intervenes, the common law remedies being incapable of achieving that result." POINT 2 - THAT RIGHT TO INDEMNITY IS SAID TO BE PREDICATED UPON A VALID ASSESSMENT There was before the learned Chamber Judge a joint opinion dated 13th September, 1989 by D.H. Bloom Q.C. and A.H. Slater. This opinion was obtained by Hawthorn, Cuppaidge & Badgery acting for the beneficiaries under the Peter Dixon Family Trust. The opinion was sought "on the question whether the tax payer would be likely to be successful in disputing the assessments issued -- 23 of 55 -- 21 to them under s. 260 and in distinguishing Gregrhon1 s case should they choose not to 'make' the offers of settlement suggested". I should at this stage point out that the Commissioner of Taxation succeeded in his appeal to the Federal Court in Gregrhon and maintained that success when the High Court refused leave to appeal . The joint opinion of Messrs. Bloom and Slater canvassed the relevant facts and law and concluded: "In the result, we think it more probable than not that a Court, properly instructed, would distinguish this case from the Gregrhon Investments Case , and conclude that the vendor shareholders were not party to any arrangement struck down by s. 260. However, we must emphasise that this is a conclusion on the balance of probabilities, and that it is certainly possible that a Court might adopt a different interpretation of the events from that which appeals to us. We do not feel sufficiently confident of the outcome to recommend challenging the assessments in preference to making the offers which the Commissioner has invited." Whatever view one takes of the likely outcome of challenges to the amended assessment and assessments, it seems to me with respect that prospects of success of such challenges are irrelevant in dealing with this question of construction. I say that because of a number of provisions in the Income Tax Assessment Act . First there is s. 208. Under that section, income tax, which includes additional tax under s. 207 or Part VII, when it becomes due and payable shall be a debt due to the Commonwealth and payable to the Commissioner in the manner and at the place prescribed. While it is true that the Commissioner has in the present case deferred present payment of the tax as assessed the application of s. 208 will require the applicants to pay the tax as assessed long before any challenge by way of -- 24 of 55 -- 22 appeal is heard and determined. One also must have regard to the effect of ss. 175 and 177(1) of the Income Tax Assessment Acts . the first of these dealing with the validity of any assessment and the second which reads:- " (1) The production of a notice of assessment or of a document under the hand of the Commissioner, a second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part V on a review or repeal relating to the assessment, that the amount and all the particulars of the assessment are correct ." In my view Mr. Keane's second point fails. POINT 3 - THAT IT IS MORE PROBABLE THAN NOT THAT THE ASSESSMENTS OR AMENDED ASSESSMENTS IN RESPECT IN WHICH INDEMNITIES ARE SOUGHT WILL BE SET ASIDE In my opinion the argument based on this submission also fails. As I have sought to demonstrate the amounts assessed became debts due to the Commonwealth; they were initially payable on specified dates and despite deferral the liability to pay lies on the parties assessed. If the indemnity has the construction contended for by the appellant then it would really be quite valueless if it were held to operate only upon final determination (after appeal) of the validity of the assessments and not when the assessments which created the liability against which indemnity was given, are made. When the assessment was made the debts thereunder became due and payable shortly thereafter. POINT 4 - THAT NO INDEMNITY WAS EVER GIVEN TO MRS. DIANA DIXON It is true that the name of Diana Suellen Dixon does not appear in the schedule to the Deed of Indemnity. Nor is she a shareholder in Rhonvale. Mr. Russell Q.C. for the respondents -- 25 of 55 -- 23 has submitted that Mrs. Dixon was a beneficiary of the Peter Dixon Family Trust and that the only sensible construction of the reference to the Peter Dixon Family Trust in the schedule to the deed is one which protects all who may become liable to tax as a result of the operation of the terms of the trust. The deed of indemnity shows that the appellant agreed to indemnify "the shareholders" they being "the persons whose names and descriptions appear in the schedule hereto ... with their and each of their executors and assigns". Mrs. Dixon's name does not appear in that schedule . Mr . Dixon ' s name does but obviously in his own right. The name "Peter Dixon Family Trust" also appears. The Family Trust is not a "person" in the sense that person means a legal entity. In "Principles of the Law of Trusts" by Ford & Lee (2nd Ed.) at p. 41, the authors say:- "... when a trust is created it is not accorded legal personality. The trust is no more than a collection of duties, disabilities, rights and powers in relation to some specific property imposed upon or accorded to an existing legal person, the trustee." The deed of trust whereby the Peter Dixon Family Trust was created showed that, as I have already pointed out, Peter Dixon Family Trust meant the trust fund (as therein defined) and the trusts powers and provisos upon which the same is for the time being held. From the material before the learned Chamber Judge and this Court it may fairly be assumed then that Peter Dixon Family Trust was shown as a shareholder in the records of Rhonvale. Given that the trust by this name had no legal personality who then did the parties to the deed of indemnity intend to indemnify? The trust imposed on the trustee Peter Dixon duties, disabilities, -- 26 of 55 -- 24 rights and powers in relation to the Rhonvale shares. These shares were part of the trust fund. The only sensible meaning as to the person intended to be indemnified as a shareholder when Peter Dixon Family Trust was shown in the schedule is then Peter Dixon as trustee. The 1980 Income Tax Return for Peter Dixon Family Trust disclosed the beneficiaries to whom income was distributed in that year. Diana Dixon was not under a legal disability. Despite the apparent nomenclature in the Rhonvale share register the legal person holding the shares was Peter Dixon as trustee. On 26th June, 1980 he had resolved how the nett income from the trust for the year ended 30th June, 1980 should be applied pursuant to "Clause G" (sic) of the trust deed. Peter Dixon as trustee had an absolute discretion to be exercised pursuant to cl. 4(g) of the trust deed to apply the whole or part of the income to an object of the trust set out in the deed. Diana Suellen Dixon was one such object. The problem is that although she only became entitled to income -from the trust fund after Peter Dixon had exercised his discretion, any assessment of income tax against her is in her name and not in the name of Peter Dixon as trustee for Diana Suellen Dixon. Each beneficiary in whose favour Peter Dixon exercised his discretion became presently entitled to that income (s. 101 Income Tax Assessment Act ) . From the operation of s. 97(1) of the Income Tax Assessment Act Mrs. Diana Dixon being presently entitled under s. 101 and not under a legal disability found that her assessable income included the amount payable to her from the Peter Dixon Family Trust. -- 27 of 55 -- 25 It is quite true to say that the assessments in respect of income of the children Caroline Diana Carter, Mitchell John Carter and Julie Suellen Carter are addressed to "the Trustee for". This no doubt is because under s. 98 of the Income Tax Assessment Act the trustee shall be assessed and liable to pay the tax assessed. Given that at 30th June, 1980 Peter Dixon as trustee of the Peter Dixon Family Trust held the Rhonvale shares and given that he had been assessed as trustee for the three children is it right or fair that Diana Suellen Dixon should not be within the scope of the indemnity simply because she happened to be not under a legal disability at the time the trustee decided to distribute income to her? In my view the words "Peter Dixon Family Trust" appearing in the schedule to the deed of indemnity as a shareholder were intended by the parties to mean the trust of which Peter Dixon was a trustee and any person within the scope of the beneficial objects of that trust in respect of whom Peter Dixon might exercise his discretion to distribute income in the year ended 30th June 1980. I mention at this stage that in applying s. 260 the Commissioner has apportioned what he regards as the profit on the sale of Rhonvale shares among the persons who Mr. Peter Dixon decided on 26th June 1980 were to benefit and in exactly the same proportions as Mr. Dixon did then. Mr. Dixon exercised his discretion four days before there was any sale of the shares. Admittedly his resolution affected "nett income . . . available for distribution for the year ending 30th June 1980". If the effect of s. 260 is to annihilate the intermediate transaction and, as -- 28 of 55 -- 26 the Commissioner has said in the notices accompanying each assessment, treat "the gross proceeds from the sale of shares" as "assessable as a dividend" I should have thought that really the assessment should have been raised against the trustee because when Mr Dixon exercised his discretion he cannot have contemplated it would apply to a s. 260 effect. I shall mention this aspect of the matter later. POINT 6 - CORRECT PROCEDURE Mr. Keane's final point is that 0. 64, r. 1A does not provide the appropriate form of procedure. He has submitted there are substantial issues as to whether there is now or will be any ultimate liability in respect of which the indemnity may be claimed and as to the extent of the indemnity. He relies on cases such as Northern Assurance Co. Ltd, v. Cooper (1968) Qd.R. 46; Lewis v. Green (1905) 2 Ch. 340 at 344 and Brisbane City Council v. Wood Hall Ltd. (1983) 1 Qd.R. 503 at 571. To those cases I would add another unreported decision of this Court - Bowman v . O' Connor (O.S. No. 235 of 1985 - Judgment 9th October, 1985). Mr. Keane in his argument has asked the Court to apply a literal construction to the words "unappropriated profits" and "profits for the current year" and "current year's profits" where they appear in cl. 1 of the Deed of Indemnity. He argues that the indemnity given is against "all sums which may be assessed ... in respect of the unappropriated profits" of Rhonvale "and the profits for the current year ending today of Rhonvale . .. and in respect of the unappropriated profits and current year's profits of Rhondda ...". He submits that the assessments in respect of which the declarations are sought must -- 29 of 55 -- 27 be shown to be in respect of unappropriated profits and current year's profits before declaratory relief can be given. He argues that the assessments are not such assessments and that until further facts are found the application should have been refused under 0. 64, r. 1E. Given the power under O. 64, r. 1E to determine the question of construction having regard to the events which have happened it is in my view quite apparent from the recital to the Deed of Indemnity that the sale to Churchill Industries of all the shares in Rhonvale was conditional upon the respondent executing the indemnity contained in the document. The Court construes the whole document and this, deed contains only two covenants. The first covenant contains the indemnity from the appellant to each of the persons falling within the definition of "the shareholders". The second covenant comes from the shareholders and operated "in the event that any of the shareholders are assessed for income tax as aforesaid". The second covenant contained within it a further covenant from the appellant to indemnify the shareholders so assessed against all costs and expenses incurred in connection with any objection or appeal against an assessment. What had happened was that the assets of Rhonvale and Rhondda were liquidated such that each company's assets became cash or a cash equivalent; the shareholders agreed to sell all their shares in return for cash intending the profit element on the sale of their shares to be treated as capital profit and not taxable. It may well be that against the possibility that the proceeds of sale be treated as assessable income of Rhonvale and -- 30 of 55 -- 28 Rhondda the shareholders sought and obtained the Deed of Indemnity from the appellant as a condition of their sale of all the shareholding in the two companies. During the early 1980's s. 260 and its effectiveness revived (see for example Federal Commissioner of Taxation v. Gulland (1985) 160 C.L.R. 55). In the present case, despite the earlier assessments, the Australian Taxation Office later applied s. 260 against persons who are described as "vendor shareholders of companies stripped of pre-tax profits". It applied s. 260 against Peter Dixon and the Peter Dixon Family Trust. In the case of the trust it applied s. 260 against its beneficiaries in respect of whom Peter Dixon had exercised his discretion on 26th June, 1980. Once the annihilating effect of s. 260 operated the moneys received by the vendor shareholders from Churchill were treated by the Australian Taxation Office as assessable dividends in their hand. I have already voiced my query as to why the Commissioner reassessed and assessed in the manner in which he did. If the shareholders to the Deed of Indemnity were concerned that there was a possibility that the sale profit on the shares would be treated by the Commissioner as income of Rhonvale that profit would not have been distributed as a dividend in the year ended 30th June, 1980. As such the provisions of ss. 104 and 105A of the Income Tax Assessment Act may have applied to those shareholders who were private companies. The use of the phrase "unappropriated profits" in cl. 1 was therefore understandable. It may well have been that the period for distribution referred to in s. 105A would have expired by the time any assessment issued. -- 31 of 55 -- 29 The use in cl. 1 of the deed of the phrase "unappropriated profits ” and "profits for the current year" do not in my view mean that those items must be specifically designated in the income tax assessments as the assessable income. In my opinion this Court should, to use the words of Isaacs J. in Cohen & Co. v. Ockerbv & Co. Ltd. (1917) 24 C.L.R. 288 at 300 read the expressions in the contract "in no narrow spirit of construction, but as the court would suppose two honest businessmen would understand the words they have actually used with reference to their subject matter and the surrounding circumstances". In Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd. (1967-8) 118 C.L.R. 429 Barwick C.J., in speaking of the search for intention of parties to commercial contracts and resolution of uncertainty and the meaning of what they have agreed said "no narrow or pedantic approach is warranted particularly in the case of commercial arrangements". I should add that the evidence before the learned Chamber Judge showed that Peter Dixon Family Trust held 10 per cent of the shares in Rhonvale - 4,000 out of 40,000. The balance sheet of Rhonvale at 30th June, 1980 showed the total value of the assets which included asset re-valuation reserve, capital profits reserve and unappropriated profits to total $972,523.00. The total of the extra assessable income included in each of the amended assessments or assessments which are the subject of this appeal attributable to Rhonvale shareholding was $97,252.00 or 10 per cent of the total value of Rhonvale assets . The balance sheet of Rhondda at 30th June, 1980 showed the total value of the assets to be $18,041,628.00 being the total -- 32 of 55 -- 30 of asset revaluation reserve, capital profits reserve and unappropriated profits. The total of the extra assessable income included in each of the amended assessments and assessments the subject of this application attributable to Rhondda was $1,804,163.00. Again this is 10 per cent of the total. There can in my mind be no doubt that the extra assessable income included in the amended assessments and assessments was, as certain of the adjustment sheets attached to the assessments show, "as a result of an increased distribution of the Peter Dixon Family Trust". Quite clearly, the extra income tax assessed related only to the transactions of 30th June, 1980 involving the shareholdings in both companies and was within the intent of cl. 1 of the Deed of Indemnity. As I have said the evidentiary effect of s. 177 of the Income Tax Assessment Act cannot be overlooked. Nor can I overlook the liability of the person assessed to pay the tax assessed before any appeal is heard. In my opinion, what the parties to the Deed of Indemnity intended was that should there be any later income tax assessment against any of the vendors which treated the profit on the sale of the shares in Rhonvale and Rhondda as taxable income then the respondent would indemnify each shareholder so assessed so that the shareholder would not be called upon to pay the tax assessed and in return the shareholder had, as cl. 2 of the Deed of Indemnity shows, assigned to the appellant the right to object and to prosecute such objection against any assessment. The parties did not intend that the shareholder so assessed should have to pay the tax assessed before the indemnity took effect. -- 33 of 55 -- 31 This is a case where, because of the appellant's solicitors repeated claim that the appellant was not under any liability to indemnify, the respondents were obliged to seek declaratory relief. In my opinion the proceedings under 0. 64, r. 1A were appropriate. The Deed of Indemnity, on its proper construction, does apply in relation to all the assessments mentioned in the declaration. I had considered whether the Court should simply declare that the appellant is liable to indemnify in respect of the assessments without mentioning the total amount of the indemnity. However, it may be that the Australian Taxation Office will insist on a prompt payment of the tax assessed before any resolution of the objections is obtained. In that event the intention of the parties will have been circumvented and the respondents will be obliged to pay the tax at not inconsiderable cost. I should add that an argument was addressed by Mr. Keane to the effect that the additional penalty tax was not covered by the indemnity. The penalty appears to have been assessed under s. 226(2) as it then stood. It falls within s. 208. In Newton v. Federal Commissioner of Taxation (1958) 98 C.L.R. 1 at pp. 11 and 12 the Judicial Committee of the Privy Council said:- "Sir Garfield Barwick sought to raise before their Lordships a further point which was not raised below. The Commissioner assessed the shareholders in the tax due on the moneys received by them and in addition included a sum as a penalty under s. 226(2) of the Act. This penalty amounts to over £600,000. Sir Garfield sought to say that s. 226(2) did not apply because the tax payer could not properly be said to have 'omitted' the income from his return - seeing that it was not income when he received it or when he made his return - but only has become so ex post facto when the Commissioner decided to treat it so. Their Lordships were not disposed to allow Sir Garfield to raise this point as it had not been raised before and -- 34 of 55 -- 32 does not appear in the case of the appellants - but in any case they think it is a bad point. In the events that have happened the money has been determined to be assessable income. As such it ought to have been incfeaded - and has not. The tax payer is therefore liable to the penalty." In my view the declarations should include the penalty tax. I would dismiss the appeal with costs to be taxed but I would correct the declaration so that it reads "DECLARE that pursuant to the Deed of Indemnity dated 30th June, 1980 in evidence in these proceedings Peter Maxwell Laurance is obliged to indemnify Peter Martyn Chisholm Dixon in his own capacity and as trustee of the Peter Dixon Family Trust in respect of notices of reassessment and assessment issued under the Income Tax Assessment Act dated 23rd October, 1986 (File No. 480 248 404) 15th May, 1987 (File No. 760 35738/1 ) 15th May, 1987 (File No. 760 35738/3) and 1st September, 1987 (File No. 760 35738/2) and that the said Peter Maxwell Laurance is obliged to indemnify Diana S. Dixon in respect of the notice of amended assessment issued under the Income Tax Assessment Act dated 19th May, 1987 (File No. 475 776764) the amounts of all such assessments and reassessments totalling $1,668,679.76." -- 35 of 55 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT O.S. No. 1125 of 1990 Before the Full Court Mr. Justice Shepherdson Mr. Justice Williams Mr. Justice de Jersey BETWEEN: PETER MARTYN CHISHOLM DIXON. DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustee of THE PETER DIXON FAMILY TRUST (Applicants) Respondents AND: PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - G.N. WILLIAMS J. Delivered the i ^ day of j / 1991 . CATCHWORDS : Income Tax - indemnity - unappropriated profits - construction of indemnity - Federal Commissioner of Taxation v. Gregrhon (1987) 76 A.L.R. 586 discussed. Counsel: Mr. Keane Q.C. and Mrs. Wolfe for Appellant. Mr. Russell Q.C. and Mr. P. Stephens for Respondents. Solicitors: Hopgood and Ganim for Appellant. Hawthorne Cuppaidge and Badgery for Respondents. Hearing date: 17th May, 1991 -- 36 of 55 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT O.S. No. 1125 of 1990 BETWEEN : PETER MARTYN CHISHOLM DIXON. DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustee of THE PETER DIXON FAMILY TRUST (Applicants) Respondents AND: PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - G.N. WILLIAMS J. Delivered the l-<b day of , 1991 . In essence this appeal involves the construction of a Deed of Indemnity, which is set out in full in the reasons for judgment prepared by Shepherdson J. His Honour has also set out the declaration made by the Chamber Judge and a number of relevant facts. I will not repeat in any detail facts which are set out in the judgments prepared by my brothers Shepherdson and de Jersey. It is clear that the Indemnity was intended to be with respect to income tax assessed pursuant to the Income Tax Assessment Act 1936 (as amended) "in respect of the unappropriated profits . . . and the profits for the current year" of Rhonvale Pty. Ltd. and "in respect of the unappropriated profits and current year's profit" of Rhondda Collieries Pty. Ltd. -- 37 of 55 -- 2 Clearly the Deed of Indemnity was entered into because by a contemporaneous agreement of 30th June, 1980 the shareholders of Rhonvale prior to that date were selling all of their shares to Churchill Industries Pty. Ltd. at the instigation of the appellant. At all times Rhondda Collieries was a wholly owned subsidiary of Rhonvale. The existing shareholders were aware (as was the purchaser) that each company had a tax liability with respect to the year ended 30th June, 1980 for profits made in that year. The shareholders were concerned that if either or both of those companies did not meet its income tax liability, the Commissioner may seek to hold them personally liable. Hence the Indemnity from the appellant. The agreement for the sale of the shares was evidenced by a Deed which incorporated "accounts" of both Rhonvale and Rhondda Collieries for the year ended 30th June, 1980. Those accounts established the "current year's profit" for each of the companies. There can, in my view, be no doubt as to what was intended in the Deed of Indemnity by the expressions "profits for the current year" and "current year's profit". That is so, notwithstanding that in the balance sheet those profits were called "unappropriated profits". The use of the expression "unappropriated profits" in the Deed of Indemnity caused some argument. The phrase is not used in the Income Tax Assessment Act, and its meaning is probably derived from the context in which it is used. Expressions such as "accumulated profits" and "unappropriated profits" are to be found in a number of decisions dealing with liability for income tax consequent upon sales of shares in a company such as occurred -- 38 of 55 -- 3 here (cf. Federal Commissioner of Taxation v. Gregrhon Investments Ptv. Ltd. (1987) 76 A.L.R. 586). In my view the Deed of Indemnity must be read together with the agreement for the sale of shares which is referred to in the recital. That means that the expression "unappropriated profits" must be read in conjunction with the "accounts" which formed part of that agreement. The balance sheet of Rhonvale, after describing the "current year's profit" as "unappropriated profits", referred to "asset revaluation reserve" and "capital profits reserve". Similar expressions were used in the balance sheet of Rhondda Collieries; there "capital reserve" was used instead of "capital profits reserve". When one considers those accounts it seems tolerably clear that the "unappropriated profits" referred to in the Deed of Indemnity were the amounts in the "asset revaluation reserve" and "capital profits reserve". It is not without significance to note, as was the case in Gregrhon (see at 607), that the purchase price of the shares was approximately equal to the total of current year's profits and unappropriated profits of Rhonvale and Rhondda. Though that total was approximately $1.5 million above the purchase price, the purchasers were liable for stamp duty and costs, and there would in all probability have been a promoter's fee payable as well. When those items are brought into account the relativity between the total for current profits and unappropriated profits and the purchase price is more obvious. As the judgments in Gregrhon demonstrate the Commissioner may issue assessments to vendor-shareholders where, after the sale, the company fails to meet its tax liability. In so -- 39 of 55 -- 4 assessing the vendor shareholders the Commissioner may rely on ss. 44, 47, 108 and 260 of the Income Tax Assessment Act. That is precisely the basis on which the Commissioner has issued assessments to the respondents in this proceeding. The real question is whether or not assessments so based fall within the terms of the Deed of Indemnity - "In the event that any of the shareholders are assessed for income tax as aforesaid . . .". The Deed itself contemplated the possibility of the shareholders being personally assessed for income tax with respect to unappropriated profits or current year's profits of the companies. Such a situation could only arise if the Commissioner utilised the deeming provisions found in the Income Tax Assessment Act. In my view it is clear that the assessments in question have issued solely because the companies did not pay income tax as required on unappropriated profits or current year ' s profits as disclosed in the "accounts" forming part of the agreement to which the Indemnity related. I agree generally with the reasons for judgment given by my brothers Shepherdson and de Jersey for arriving at the conclusion that the Indemnity covered the assessments in question. I must deal briefly with some of the other arguments addressed to the court on the hearing of the appeal. The appellant contended that the respondents' claim was premature because the right to the Indemnity only arose on payment of the liability to which it related. Generally I agree with what has been said by Shepherdson J. on this issue. In almost all instances an indemnity is created either by an express or implied contract. Where it is created by an -- 40 of 55 -- 5 express contract the terms thereof determine how and when the indemnity may be enforced. In that regard it is important to note that the Indemnity in this case referred to the assignment by the respondents to the appellant of all rights to object to an assessment and prosecute such objection. Such a provision is inconsistent with the proposition that rights and obligations pursuant to the indemnity only arose after payment by the respondents. I agree with Shepherdson J. that the passage he has quoted from McIntosh v. Dalwood (No. 4) (1930) 30 S.R.N.S.W. 415 at 418 is particularly pertinent to the situation under consideration here. The matter which has caused me most concern is whether or not the respondent Diana Dixon is entitled to a declaration that the appellant is bound to indemnify her with respect to the assessment she has received. The relevant "shareholder" recorded in the Deed of Indemnity is the Peter Dixon Family Trust. Such a trust has no legal identity and by law liability may only attach either to the trustee or to a beneficiary under the trust. The Commissioner does not assess a trust as such; assessments pursuant to the Income Tax Assessment Act are directed either to the trustee (particularly where there is no beneficiary presently entitled) or, where there is a beneficiary presently entitled, to that beneficiary. When the Commissioner applied ss. 44, 47, 108 and 260 of the Income Tax Assessment Act to the facts of this case it resulted in him assessing each of the vendor- shareholders. That, for the reasons I have just given, presented him with a problem when he ascertained that one shareholder was the Peter Dixon Family Trust. The only choice available to him -- 41 of 55 -- 6 was to issue an assessment either to the trustee, or to beneficiaries who were presently entitled under the trust. In the result he issued an assessment to the trustee with respect to the beneficiaries of the trust who were not presently entitled, and a separate assessment to Diana Dixon as a beneficiary presently entitled. The total of those assessments represented the total liability with respect to the shareholding of the trust. In those circumstances the assessments issued to the trustee and to Diana Dixon still retained their character as assessments consequent upon the failure of the companies to pay tax on unappropriated profits and current year profits as at 30th June, 1980. Therefore it seems to me that the indemnity extends to such assessments, including that received by Diana Dixon. The other matter which has caused me some concern relates to the additional penalty tax. As I have previously observed the Deed of Indemnity expressly contemplated that the former shareholders of the companies might be assessed for income tax with respect to unappropriated profits or current year's profits to 30th June, 1980 with respect to the companies. Such an assessment could only be made by the Commissioner in reliance, at least in part, on s. 260 of the Act, and virtually by definition after the time provided for in the Act for the lodging of personal returns by those shareholders. Thus an assessment of the kind contemplated by the Deed of Indemnity must of necessity have been made in circumstances which attracted additional penalty tax. For that reason I am of the view that such additional tax must have been in the contemplation of the parties at the time they executed the Deed of Indemnity. -- 42 of 55 -- For all of those reasons I agree with the orders proposed 7 by my brother Shepherdson J. -- 43 of 55 -- IN THE SUPREME COURT OF QUEENSLAND O.S. No. 1125 of 1990 Before the Full Court Mr. Justice Shepherdson Mr. Justice Williams Mr. Justice de Jersey BETWEEN: PETER MARTYN CHISHOLM DIXON. DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustee Of the PETER DIXON FAMILY TRUST AND: (Applicants ) Respondents PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - de JERSEY J. Delivered the 18th day of July, 1991 CATCHWORDS : Counsel: Keane Q.C. with him Wolfe for the Appellant Russell Q.C. with him P. Stephens for the Respondents Solicitors: Hopgood & Ganim for the Appellant Hawthorn Cuppaidge & Badgery for the Respondent Hearing date: 17th May, 1991 -- 44 of 55 -- IN THE SUPREME COURT OF QUEENSLAND O.S. No. 1125 of 1990 BETWEEN: PETER MARTYN CHISHOLM DIXON. DIANA DIXON and PETER MARTYN CHISHOLM DIXON and/or OCEAN MARINE TRUSTEES LIMITED as trustee Of the PETER DIXON FAMILY TRUST AND: (Applicants ) Respondents PETER MAXWELL LAURANCE (Respondent) Appellant JUDGMENT - de JERSEY J. Delivered the 18th day of July, 1991 A learned Judge in Chambers made a declaration that upon the true construction of a deed of indemnity made on 30th June, 1980, the appellant Peter Maxwell Laurance is liable to indemnify the respondents, Peter Martyn Chisholm Dixon, Diana Dixon, and Peter Martyn Chisholm Dixon as former trustee of the Peter Dixon Family Trust, pursuant to that deed, in respect of income tax assessments issued on 23rd October, 1986, 15th May, 1987, 19th May, 1987 and 1st September, 1987 referred to in the affidavits before him, totalling $1,668,679.76, levied against the said respondents. The respondents and others had sold their shares in Rhonvale Pty. Ltd. to Churchill Industries Pty. Ltd. As part of that transaction, the appellant gave them the deed of indemnity which is in issue in the proceedings. The body of the deed is in these terms ("P.M.L. ” referring to the -- 45 of 55 -- 2 appellant) : "1. P.M.L. doth hereby agree to indemnify the shareholders and each of them and keep them indemnified against all sums which may be assessed against them or any of them under the Income Tax Assessment Act (1936 as amended) in respect of the unappropriated profits of the said Rhonvale Pty. Ltd. and the profits for the current year ending with today of Rhonvale Pty. Ltd. and in respect of the unappropriated profits and current year's profits of Rhondda Collieries Pty. Ltd. a subsidiary of the said Rhonvale Pty. Ltd. 2. In the event that any of the shareholders are assessed for income tax as aforesaid the shareholders concerned covenant to give prompt notice of any such assessment to P.M.L. and assign to P.M.L. all rights to object and prosecute such objection through successive courts of appeal or in the alternative will do all such acts and sign all such documents as may be reasonably required of them by P.M.L. in order to lodge an objection and prosecute appeals, provided however P.M.L. hereby agrees to indemnify and keep the shareholders so assessed indemnified against all costs and expenses incurred in connection with such objections or appeals." I should add that "the shareholders" are those referred to in a schedule to the deed which also specifies the number of shares held. Relevantly for present purposes, that schedule names, among others, Peter Martyn Chisholm Dixon and the Peter Dixon Family Trust. The following notices of assessment, referred to in the declaration made, were exhibited to affidavit material before the learned Judge: (a) Notice of assessment dated 23rd October, 1986 directed to Peter M.C. Dixon, in the amount of $59,339.02. The attached departmental adjustment sheet refers to the Commissioner's reliance on ss. 260, 44, 47(2B) and 108 of the Income Tax Assessment Act in respect of the sale of shares in Rhonvale Pty. Ltd. and Rhondda Collieries Pty. -- 46 of 55 -- 3 Ltd. on or about 30th June, 1980. (b) Notice of assessment dated 15 th May, 1987 directed to "The Trustee for Caroline Diana Carter", in the amount of $497,435.77. The adjustment sheet contains a statement similar to the above. (c) Another notice of assessment dated 15th May, 1987 directed to "The Trustee for Mitchell John Carter", in the amount of $29,950.28. The adjustment sheet again contains a statement in similar terms. (d) A notice of assessment dated 19th May, 1987 directed to Mrs. Diana S. Dixon, in the amount of $1,053,449.42. The adjustment sheet is again in the same terms. (e) Notice of Assessment dated 1st September, 1987 directed to "The Trustee for Julie Suellen Carter", in the amount of $28,505.27 (including "additional tax for incorrect return" in the amount of $7,112.21). The adjustment sheet is in the same terms. The recipients of notices of assessment (b) to (e) are not named as shareholders in the schedule to the deed. There is however an assertion in the respondent's solicitors' letter to the appellant's solicitors of 3rd July, 1987 that Mrs Diana S. Dixon, Julie S. Carter, Mitchell John Carter and Caroline Diana Carter are all beneficiaries of the "Peter Dixon Family Trust", which is so named in the schedule to the deed of indemnity as a shareholder. That assertion was not denied in correspondence or in this court. The respondents sought indemnity from the appellant, but he refused to give it. The correspondence nevertheless -- 47 of 55 -- 4 betrays his anxiety that the respondents should lodge objections and follow through the appeal process, so that he might ultimately benefit from that if liable under the deed of indemnity. The appellant has in terms repudiated liability under that deed of indemnity. Hence the respondents' summons under 0. 64 of the Rules of the Supreme Court for a declaration as to their entitlement. The first question is whether the applicant established before the learned Judge that the recipients of the notices of assessment were parties entitled to the benefit of the indemnity. The recipient of notice (a) above, Peter Dixon, is named in the schedule to the deed, so that there is no question as to his entitlement. However the others - Caroline Diana Carter, Mitchell John Carter, Julie Suellen Carter and Mrs Diana Dixon - are not named in the schedule. What is named is the Peter Dixon Family Trust, which I take, for reasons later expressed, to mean the trustee of that trust. The recipient of each of notices (b), (c) and (e) is actually the trustee of the children, and the adjustment sheet makes it clear that the trust is the relevant family trust, so that one infers that the trustee named in the notices of assessment is the trustee of the family trust of which they are beneficiaries. The notices in respect of the children therefore appear to fall within the scope of the deed. But that was not demonstrated with respect to notice (d) with Mrs Dixon as recipient in her own right, albeit pursuant to a distribution from the family trust. One assumes that the assessment was made against -- 48 of 55 -- 5 Mrs Dixon on the basis that she was presently entitled to the relevant distribution, and was assessed in her own right under s. 97 of the Income Tax Assessment Act. Mr. Russell Q.C., who appeared for the respondents, submitted that "the only sensible construction of the reference to the trust in the schedule to the deed is one which protects all who may become liable to tax as a result of the operation of the terms of the trust", which would include Mrs Dixon. The scope of the reference to the trust is unclear because the trust is not a separate legal entity. Once one acknowledges the fact that the trustee was the shareholder, and the basis of inclusion in the schedule being a party's status as shareholder, (the number of shares is specified in the entry in the schedule), I see no warrant for construing this vague entry in the schedule as extending beyond that trustee. I am however content to leave the matter on the basis that for the purposes of these summary proceedings, the respondent did not establish her entitlement. I am not to be taken as finally determining that she has no entitlement. In summary, I do not consider that it was established that Mrs Dixon was a person entitled to indemnity under cl. 1 of the deed, because she was not a shareholder specified in the schedule to the deed, and because the reference Ln that < schedule to the Peter Dixon Family Trust should be read as extending to its trustee, but not so far as to include its beneficiaries in their own right. The next question is whether it was established that the notices of assessment are, in terms of the deed, in respect of -- 49 of 55 -- 6 unappropriated or current year profits for the two specified companies. Because of my earlier conclusion, this issue is alive with respect to all of the notices of assessment except (d). The learned Judge took account of the references in the adjustment sheets to ss. 260, 44, 47(2B) and 108 of the Income Tax Assessment Act in considering whether it was established that the subject matter of the assessments fell within the indemnity. Mr. Keane Q.C., who appeared for the appellant, referred to other documents accompanying the assessments which mentioned assessing "the gross proceeds from the sale of shares ... as a dividend" . The reference to the above sections did not of itself establish that the notices of assessment were in respect of the specified unappropriated or current year profits. The reference to s. 260 taken alone, in the context of consideration of the proceeds of sale of shares, could raise a possibly wide range of subject matter for the assessments conceivably unrelated to the relevant unappropriated and current year profits. The reference to those sections nevertheless, is not necessarily inconsistent with ass' - ^ went in respect of the relevant profits. ?lr. Russell invited us to go beyond the notices of assessment and accompanying documents to determine whether they relate to the relevant profits. The face of those documents does not, as I have said, clearly spell that out. Mr. Russell did however show, from the material which was before the learned Judge, that the tax assessments related, in the case of each company, to amounts described as -- 50 of 55 -- 7 "unappropriated profits", "capital profits reserve" and "asset revaluation reserve". One may see that clearly with respect to Rhondda Collieries, by reading together the departmental adjustment sheets and the balance sheet as at 30th June, 1980 attached to the share sale agreement. The balance sheet refers to those three types of amount. The next question is whether those three amounts all fall within the category of unappropriated or current year profits, or whether, as Mr. Keane submitted, in the case of two of them, the company's specific description excludes that characterisation. The "unappropriated profits" obviously do fall within the deed. The "capital profits reserve" is shown by the accounts of Rhondda Collieries to comprise "profit from sale of assets" which on the face of the accounts relates to the relevant year, so that that also falls within the deed. The "asset revaluation reserve" also represents profit retained within that company following the sale of the relevant assets . Upon that sale, the reserve constituted a cash item within the company, properly regarded as part of the company's undistributed profit. Similarly with Rhonvale, the only assets of the company were relevantly cash. The material before the learned Judge showed all of that sufficiently with respect to both companies, and there was no dispute as to the accuracy of that material. I am therefore satisfied that, with the exception of amounts included for additional tax for incorrect returns (to which I will now refer), the assessments were in respect of unappropriated and current year profits within the meaning of cl. 1 of the deed of indemnity. -- 51 of 55 -- 8 Each notice included an amount payable, specified against the letter "D", as "additional tax for incorrect return". Mr. Keane submitted that that concerned matters outside the limits set by cl. 1 of the deed. Although there is a broad connection between those components of the assessments and the company profits referred to in cl. 1, one should not conclude that those particular sums were assessed "in respect of" those profits. Notwithstanding the breadth of that expression, these sums were assessed "in respect of" allegedly incorrect returns, and would therefore appear not to fall within the scope of cl. 1 of the deed. (As with the position of Mrs Dixon, however, I am content not to determine this finally against the respondents.) Mr. Keane submitted that the right to indemnity under cl. 1 of the deed arose only when the validity of an assessment had been finally determined by the process of objection and appeal contemplated by cl. 2 of the deed. The right under cl. 1 arose upon the making of an assessment upon a shareholder in respect of the relevant unappropriated or current year profits. It is the making of an assessment on that apparent basis which triggers the indemnity, regardless of the accuracy of the assessment. Otherwise, in view of the statutory provisions to which I will now refer, the indemnity would be of doubtful worth. Tax is "due and payable" in accordance with a notice of assessment (s. 204), and then becomes a debt due to the Commonwealth (s. 208). See also s. 177(1). The intention behind cl. 1 was to give protection to the named shareholders even though the assessment might -- 52 of 55 -- 9 subsequently be successfully challenged. Clause 2 was designed to ensure that the appellant remained able to influence the process of objection and appeal subsequently to payment, notwithstanding his not being the party assessed. Should the appeal process lead to a reduction in the assessment, then refunds and adjustments would have to be made. I am satisfied that on the proper construction of the deed the right to indemnity arose upon the making of the assessments. Mr. Keane also submitted, in reliance on Port of Melbourne Authority v. Anshun Pty. Ltd. (1981) 147 C.L.R. 589, that the right to indemnity does not arise until payment. That depends on the terms of the indemnity. In any case, non-payment does not prevent the court's declaring the existence of the obligation to indemnify, where that is wrongly denied, and that was the relief successfully sought by these respondents. See Port of Melbourne v. Anshun. p. 595. Mr. Keane further relied on the possibility of an ultimately successful challenge to the notices of assessment as being - as I understood his submission - a discretionary ground for refusing a declaration. There would be no justification for declining to grant a declaration, otherwise appropriate, for that reason. It would conflict with the intention of the parties evident from the deed and prejudice the respondents in light of their obligation implicit in ss. 204 and 208. The appellant has repudiated his liability under the deed, and the learned Judge was right to make a declaration as to his obligation. Making such a declaration -- 53 of 55 -- 10 should be of great utility, as His Honour must have recognised. I note Mr. Keane's reference to earlier payment of tax under the Taxation (Unpaid Company Tax) Assessment Act. It is not necessary for me to discuss that because of my construction of the deed, and the evidence which I consider demonstrated that the amounts assessed were within the terms of the deed. I again make it clear that I am not finally deciding that the liability to tax of Mrs Dixon, and the liabilities for additional tax in respect of incorrect returns, are not within cl. 1 of the deed of indemnity. All that I am determining is that on this application the evidence did not sufficiently establish that to justify the making of the declaration in a summary way under O. 64. In the result, the declaration made by the learned Judge was too wide in two respects: because it extended to assessments against Mrs Dixon, and because it covered the additional tax for incorrect returns. There should be a declaration, but limited to exclude Mrs Dixon's liability and the amounts of that additional tax. I would therefore allow the appeal and set aside the declaration and costs order made by the learned Judge. I would make a declaration that pursuant to the deed of indemnity dated 30th June, 1980 in evidence in these proceedings, Peter Maxwell Laurence is obliged to indemnify Peter Martyn Chisholm Dixon in his own capacity and as trustee of the Peter Dixon Family Trust in respect of notices of -- 54 of 55 -- 11 assessment issued under the Income Tax Assessment Act dated 23rd October, 1986 (file no. 480248404), 15th May, 1987 (file no. 76035738/1 ), 15th May, 1987 (file no. 76035738/3), and 1st September, 1987 (file no. 76035738/2) save for the amounts included therein as additional tax against the letter "D" or the heading "additional tax for incorrect return" . As to costs, I would order the appellant to pay one half of the respondents' costs to be taxed both of the proceedings before the Chamber Judge and of the appeal. I consider that that appropriately reflects the respondents ' degree of success. The appellant has on this judgment succeeded in excluding Mrs Dixon and the additional tax from the scope of the declaration. That substantially reduces the appellant's liability in amount as declared to this point, but on the other hand, most of the time of the appeal was taken up with other matters on which the respondents have been successful. -- 55 of 55 --