Introduction

[13.1] Questions that are considered under this heading concern the tax consequences for assignor and assignee where the assignor has transferred to an assignee his interest in future receipts that would have been income of the assignor had he not transferred his interest in them. It is assumed that the assignor has effectively transferred his interest so that at least an equitable remedy will be available to the assignee. In this assumption certain aspects of the operation of a substantial body of the general law are taken as given. That law draws, and attributes significance to, a number of distinctions. Thus there is a distinction between property upon which an interest in future receipts may be attendant, and the interest in those future receipts. There may be land the subject of a lease under which rent has not yet become receivable: the land may be seen as property upon which an interest in future receipts of rent is attendant and the interest in future receipts as the right to, or the expectancy of, those future receipts. Rent arises in the sense now intended when an absolute right to receive arises. At that time it ceases to be a future receipt.

[13.2] A distinction is assumed in the last paragraph between an expectancy of and a right to future receipts. And the reference to future receipts assumes that there are receipts that are not future. The distinction explains the decisions in Norman (1963) 109 C.L.R. 9 and Shepherd (1965) 113 C.L.R. 385. In Norman the lending of money gave rise only to an expectancy of future receipts of interest, because the borrower might repay the money borrowed at any time. While the borrowing relationship subsisted interest could arise. The expectancy of future receipts would, on such arising, give place to rights to receipts, that are no longer appropriately described as future receipts. In Shepherd the licensing of another to exercise patent rights gave rise to a right to future receipts because the licensee could not by his own act terminate the relationship of licensor and licensee. While the licensor-licensee relationship subsisted—it might have been dissolved by the agreement of both parties—royalties arose when the licensee made use of the patent rights he had been licensed to use. The right to future receipts at that time gave rise to rights to receipts.

[13.3] The distinction between expectancy of future receipts, found by the majority in Norman, and right to future receipts, found in Shepherd, may in other circumstances be difficult to draw. But this is a task of the general law and not of income tax law. The income tax law in regard to assignments assumes the distinction drawn by the general law and attributes tax consequences which give significance to the operation of the general law. Thus, the conclusion of the general law may be that there has not been an assignment but merely a promise by a person to pay a sum of money calculated in a way that refers to a future receipt by that person. If this is so, then the promisor will be assessed on those receipts when they arise. Income tax law in relation to assignments will not result in the promisee also being taxed. However, the promisee may be taxed on other grounds. For example, in Just (1949) 23 A.L.J. 47, the High Court attributed the character of income—as an annuity—to the receipts by the taxpayer. The origin in receipts of rent by the promisor had a bearing on this characterisation ([2.206] above). But the taxpayer did not derive income as the assignee of rents.

[13.4] The income tax law will attribute tax consequences which will recognise a possible principle of the general law, that an assignment which is not framed in terms of an assignment of a right to future receipts but in terms of an assignment of the future receipts themselves, can operate only to the extent that an assignment of an expectancy of future receipts will operate. Such a principle has not yet been adopted in any case, though the possibility has been suggested.

[13.5] It will be helpful for the purposes of the discussions that follow to identify the concepts that emerge from the general law. The words “underlying property” identify land subject to a lease, or the patent rights subject to a licence. The words “expectancy of future receipts” identify the interest yet to arise in Norman. The words “rights to future receipts” identify the royalties yet to arise in Shepherd. The words “rights to receipts” identify interest and royalties that have arisen. The general law in regard to assignments of expectancies of future receipts, of rights to future receipts and of rights to receipts, is a substantial body of principles. Some aspects only can be the subject of attention here.

[13.6] The assignment of an expectancy of future receipts without an assignment of the underlying property has consequences in equity, though only when there is value. Equity will treat the assignor as a trustee for the assignee of a future receipt when it “crystallises”, “when it is received”, “when it is derived” or “when it comes into existence”. The moment when the trust arises is described by all of these phrases in the judgment of Barwick C.J., Stephen, Mason and Wilson JJ., in the High Court in Everett (1980) 143 C.L.R. 440. The word “arises” is adopted in the present discussion to identify the moment, in order to avoid the confusions that can arise from the use of the word “accrues”. The word accrues is used in statements of equity principles that have distinct functions, for example, in determining the appropriate distribution of trust income between successive life tenants. And the assumption is made that a future receipt “arises”, “crystallises” or “comes into existence” when it becomes presently receivable. Some assumption has to be made, and presently receivable has the advantage of simplicity. Tax law would no doubt follow the general law if the general law were to adopt another test of when a future receipt becomes present property. Tax law and the general law would to this extent become more complex, but would remain expressions of underlying principles that would not need to change.

[13.7] An assignment of an expectancy of future receipts, which may be implicit in an assignment of underlying property, is carried by the assignment of the underlying property. In Everett the expectancy of future receipts of partnership income by the holder of a share in a partnership was held to be carried by the assignment of the partnership share, so that the law in regard to the effect in equity of an assignment of an expectancy of future receipts had no relevance. Barwick C.J., Stephen, Mason and Wilson JJ. said (at 452): “The consequence in the present case is that because the [taxpayer] assigned present property, a chose in action, being a share of his interest in the partnership which carried with in the right to a proportionate share of future income attributable to his interest, the assignment became effective at once and conferred on his wife an immediate equitable entitlement as against the respondent and the other partners to such income referable to the share assigned as might subsequently be derived.” The phrase “right to a proportionate share of future income” is to be understood in the context of the analysis adopted in the judgment which would regard the interest in profit given by a partnership share as an aspect of the rights which make up the partnership share. This analysis explains the view expressed in the judgment (at 450) that “a partner’s entitlement to participate in profits is not separate and severable from the interest of the partner.” Independently of the specified share, an interest in future profits of a partnership is no more than an expectancy.

[13.8] There is considerable discussion in Everett (1980) 143 C.L.R. 440 at 453 and other authorities of a proposition that “income from personal exertion cannot be assigned so that it is not first received as income by the assignor.” The judgment of Barwick C.J., Stephen, Mason and Wilson JJ. insists that the proposition is not a proposition of equity. If an interest in future receipts arising from personal exertion is not an aspect of some underlying property such as a share in a partnership, it will none the less be capable of assignment in equity to the extent that any expectancy is capable of assignment. When the future receipt arises it may be received as income by the assignor, independently of the assignment if he is on an accruals basis of tax accounting in relation to the item, or by the operation of the assignment if he is on a cash basis. But the operation of equity, where there has been value, in making the assignor trustee for the assignee immediately the receipt arises depends on principles of equity, not tax law.

[13.9] Where an assignment operates by equity making the assignor trustee for the assignee immediately a receipt arises, there is a receipt of corpus by the trustee and not a receipt of income. There is therefore no room for the operation of any of the provisions of Div. 6 of Pt III so as to bring on tax consequences for the beneficiary assignee. The authority is an observation in the judgment of Barwick C.J., Stephen, Mason and Wilson JJ. in Everett, made in relation to the judgment of Kitto J. in Stewart Dawson Holdings Pty Ltd (1965) 39 A.L.J.R. 300. The observation made in Everett is (at 452):

[13.10] This observation perpetuates a view of the meaning of “trust estate” in Div. 6 of Pt III, which, in the view of this Volume, is inconsistent with some of the provisions of that Division and has unacceptable consequences ([2.233] and [4.88] above). But in other respects it asserts a principle which is important both for trust law and tax law. The character of a receipt as income must be judged in the circumstances of its derivation by the taxpayer (Proposition 3, [2.34]ff. above). Federal Coke Co. Pty Ltd (1977) 77 A.T.C. 4255 is a strong expression of that principle. There is however an observation in the judgment of Bowen C.J. in that case that may be thought to weaken the principle in the context of non-business receipts. Bowen C.J. said (at 4264):

Bowen C.J. did not assert a principle applicable to all assignments of investment income. The reference to a “gift” indicates he did not have in mind the assignment of an expectancy, for such an assignment has no operation unless there is value. The case that Bowen C.J. thought it might be possible to envisage is the assignment of rights to future receipts. If such receipts, when they arise, do not become income of the assignee, there is a “swallowing” of income which is unacceptable.

[13.11] Where there has been an assignment of a right to future receipts that would have been income of the assignor, receipts by the assignee under the assignment are his income as gains derived from his property, the property being the right to future receipts. If the reasoning appears forced, it is none the less essential to the coherence of income tax law. And it should be noted that the reasoning is at least suggested, if not directed, by the analysis adopted by Kitto J. in Shepherd (1965) 113 C.L.R. 385 to explain why there was an effective assignment in that case, notwithstanding that the assignment was voluntary. He said (at 396):

No doubt the notion of tree fitted the patent rights that were the subject of the licence agreement. But the analysis of Kitto J. supplies the basis in metaphor for a view that future receipts as they accrue to an assignee following an assignment of rights to future receipts are fruit of a tree that is now the property of the assignee. In any case a view of the appropriateness of the metaphor should not control consequences in tax law: the question is whether the receipts that arise can be income of the assignee and, conceptually, that depends on them being gains derived from his property.

[13.12] Where the assignment of rights to future receipts of an income nature is a consequence of the assignment of underlying property—patent rights for example—receipts that arise after the assignment will clearly be income of the assignee. In this instance there can be no question but that the circumstances of derivation by the assignee give an income character.

[13.13] There is, however, a difference where receipts have already arisen at the time of the assignment. A derivation by the assignee of such a receipt under an assignment which is an aspect of an assignment of underlying property, or for that matter an assignment of rights to future receipts, will not be income as a gain derived from property, though it might be income for some other reason—the assignee may have taken the assignment of receipts already arisen as a reward for services. Even when the assignee is on a cash basis, an actual receipt is no more than a derivation of a payment of a debt in which he has acquired the property by assignment: the actual receipt is not a gain derived from property. Where the assignee is on an accruals basis there is no accrual to him that would constitute a derivation by him. On the facts assumed, there would already have been a derivation by an assignor who is on an accruals basis. An assignor on a cash basis would have derived by the operation of the assignment. There is no principle that the same item cannot be derived as income by two distinct taxpayers. One may derive as a gain from property and another as a reward for services. But it does not contribute to the coherence of the law if assignor and assignee are both taxed on the same item as income derived from property.

[13.14] The above discussion has drawn a distinction between the operation of the general law where an assignment of an expectancy of future receipts is made, and its operation where an assignment of rights to future receipts is made. The assignment of an expectancy has effect under the general law to the extent that when a receipt arises equity will hold the assignor to be a trustee of the receipt for the assignee. Equity will hold the assignor to be a trustee only when the assignment was made for value, irrespective of whether the assignment was made by a declaration of trust or in any other manner.

[13.15] The assignment of a right to future receipts may be made without value. The manner of an effective assignment depends on whether the right is a legal or equitable chose in action. If it is a legal chose in action it may be assigned to the extent and in the manner provided at law. Where no manner of assignment is available at law, a legal chose in action is assignable in the manner required for an equitable assignment. Where a manner of assignment is available at law, but an attempted assignment in that manner is imperfectly made, equity will treat the assignment as effective in some circumstances. Thus in one formulation of principle, equity will treat the assignment as effective if the assignor has done all that needs to be done by him to effect an assignment at law. Where a manner of assignment is available at law, but has not been complied with in an attempted assignment, equity will in any case treat the assignment as effective if there is value. In these propositions in regard to legal choses, assignment is understood in a sense that does not include a declaration of trust. A declaration of trust of a legal chose in action is effective in equity even though no value is given.

[13.16] An equitable chose in action may be assigned by declaration of trust or other manner of equitable assignment, and it is not necessary that value has been given.

[13.17] Where an assignment is attempted, not of an expectancy of, or a right to future receipts, but of underlying property, which carries the expectancy of, or the right to future receipts, as explained in [13.6] above, the manner of an effective assignment will be determined by the general law in regard to assignment of property of the relevant kind. The underlying property may itself be a chose in action, for example a debt on which interest arises.

[13.18] Whether the assignment is of underlying property, the expectancy of future receipts or a right to future receipts, the manner of an effective assignment may involve the intervention of a trust. The effective assignment of an expectancy, save where it is carried by an assignment of underlying property, must always involve the intervention of a trust. And in some instances the assignment of underlying property will require the intervention of a trust. Thus the assignment of a partnership share requires the intervention of a trust. Everett (1980) 143 C.L.R. 440 is authority that the assignor partner becomes trustee for the assignee.

[13.19] A partial assignment of a legal or equitable chose in action requires the intervention of a trust. An assignment of a legal chose in action that is defective in law but is effective in equity requires the intervention of a trust.

[13.20] The preceding discussion has been an endeavour to isolate the general law as to the effectiveness of an assignment from the tax law, and raise some questions as to their interrelations. Much of the general law has been made in cases where the issue is a tax liability. Norman (1963) 109 C.L.R. 9, Shepherd (1965) 113 C.L.R. 385 and Everett (1980) 143 C.L.R. 440 are the prime examples. Everett, at least, may indicate that the general law and the tax law tend to merge in language that is not always helpful. For example, the following proposition in Everett is not helpful (at 450): “[a partner’s interest] is not capable of division by assignment so that the right to participate in partnership profits which is inherent in the interest is hived off from the rest of that interest.” It is proposed in what follows under a number of specific headings to assess the consequences in tax law of assignments which are effective at general law and to make observations where appropriate on the tax consequences of an attempted assignment that is not effective. The arrangement of headings assumes a distinction between what are called “passive” or “investment” income situations, and “active” income situations. The conclusion however will be that a distinction of this kind is unnecessary, which may be fortunate having regard to the difficulty that would be involved in drawing it. It is enough to explain the distinction by illustration. Dividends, interest, rents and royalties are passive income. Gains from business or from the supply of property or services are active income: they might be said to arise, at least in some degree, from “personal exertion”—a phrase that is featured in a number of observations in Everett. The discussion of tax consequences under the immediately following headings puts aside the possible operation of Div. 6A of Pt III (Alienation of Income for Short Periods), which may affect radically the tax consequences that would otherwise follow. Div. 6A is considered in [13.82–13.97] below.

The Assignment of an Item Presently Receivable by a Taxpayer who is on a Cash Basis

[13.21] When a receivable arises there is a new right, whether the antecedent state was an expectancy or a right to future receipts. The assignment of that right will preclude any actual receipt by the taxpayer, but the operation of the assignment will bring about a constructive receipt by the taxpayer who assigns. The assignor derives in the process of assignment. Constructive receipt is an aspect of the notion of derivation by ordinary usage. The taxpayer assignor has appropriated the receivable in the act of assignment. The matter is considered in [11.144–11.149] above. It is unnecessary to call on s. 19 to find a derivation by the assignor, but that section supports the conclusion. In the case of the shareholder who assigns a dividend that has been declared, there is a difficulty posed by the language of s. 44 in its reference to “dividend paid”. Those words should be held to be satisfied by the act of assignment.

[13.22] There is a question of the amount that should be taken to be derived on the assignment. A view that the amount derived is the value of the receivable at the time of the assignment has the virtue of avoiding a difference in the treatment of a taxpayer on a cash basis and a taxpayer on an accruals basis. A taxpayer on accruals holds receivables as revenue assets when they are items that should be brought to account as income. They will be brought to account in their amounts, not their values. But he may be entitled to a deduction for a write-off, if the receivable is a bad debt. And on the assignment of a receivable he may have a deduction for a loss then realised. It is suggested in [11.41] above that a cash basis taxpayer who assigns a receivable may be put in a situation comparable to that of an accruals basis taxpayer if the amount he derives on the assignment is taken to be the value of the receivable at that time—the amount he might fairly have expected to receive had there been an actual payment to him. The value of the debt will determine the amount of income derived by the assignee if the debt is income in his hands, for example as a reward for services. If the assignee subsequently disposes of the debt, or receives payment of it, in circumstances where he is subject to tax on any profit, the value at the time of the assignment to him will generally be the cost to him for purposes of calculating the amount of his profit. The matter of cost is the subject of comment in [12.78–12.88] above.

[13.23] Whatever the amount taken to be derived, it is the assignor who derives. The receivable has an income character in the hands of the assignor as a gain derived from his property—shares, debt, land or patent. The receivable does not have an income character in the hands of the assignee. The assignee simply becomes entitled to the payment of debt. Such a circumstance will not give a derivation an income character unless the assignee receives the debt as a reward for services, or in exchange for a revenue asset, or in other circumstances which concern the assignee. The character of the debt in the hands of the assignor is not retained on its assignment to the assignee. In any event, if the assignee is on an accruals basis in relation to the receivable, there is no derivation by him because there is no accrual to him. The notion of accrual for this purpose requires the arising of a receivable which, at the moment of arising, is receivable by the assignee. The assignee who is on a cash basis may derive on ultimate cash receipt, but what he derives does not have an income character.

[13.24] Support for these propositions is to be found in the judgment of Latham C.J. in Gair (1944) 71 C.L.R. 388. The case concerned the assignment of a debt—underlying property—and accrued interest. The issue raised was the income character of a receipt by the assignee in satisfaction of rights that had been assigned to her. Latham C.J. held that the receipt could not be income derived by the assignee as a receipt of interest on the debt. At the same time he expressed a view (at 393-4) that the assignment would have brought about a derivation of interest income by the assignor, who was assumed to be on a cash basis in relation to a receipt of interest:

[13.25] The statements of principle made by Latham C.J. are made stronger by the circumstance that the assignee had taken an assignment both of the debt for interest and of the debt for money lent—the underlying property. The debt for interest had arisen while the underlying property was the property of the assignor—it thus had the character of a gain derived from property. It lost that character on assignment. Thereafter the link with the underlying property was historical only, and it was irrelevant who had title to that property.

[13.26] Latham C.J. explained derivation by an assignor on a cash basis in the Gair circumstances in terms of the operation of s. 19. The section has such an operation unless it is read narrowly. But there is no need to call on s. 19. There is a derivation within the ordinary usage notion of derivation in the appropriation that is implicit in the assignment. The assignment gives rise to a constructive receipt.

[13.27] It will be noted that Latham C.J. confined his statement of tax consequences for assignor and assignee to circumstances where interest has “fully accrued due before the transfer (as distinct from interest accruing during a current period but not having become due)”. Presumably he would not find any derivation by the assignor in the act of assignment in respect of interest referable to a current period. This would be derived in due course as interest income by the assignee. Latham C.J. thus adopts a notion of a receipt arising, both for the general law and the tax law, which is assumed in [13.6] above.

[13.28] An observation in the judgment of Williams J. in Gair rejects in part the analysis of Latham C.J. Williams J. said (at 404): “But I think it is clear that, where there are arrears of interest, the whole of the arrears are income of the recipient in the year in which they are subsequently paid (Leigh v. Inland Revenue Commissioners (1928) 1 K.B. 73; cf. Champney’s Executors v. I.R.C. (1934) 19 T.C. 375, at 383, 387, where Finlay J. and Lord Hanworth M.R. respectively expressed the opinion that Leigh’s case was rightly decided; Dewar v. I.R.C. (1935) 2 K.B. 351, at 365–376, 369–372).” The observation is apparently intended to apply to arrears received by the creditor or by an assignee of the creditor. The references to United Kingdom authority do not establish the observation in its application to an assignee. Latham C.J. (at 395) said of Leigh v. I.R.C. that “The only question which arose was whether … the moneys were chargeable only when actually received”. Of another United Kingdom case, Lambe v. I.R.C. [1934] 1 K.B. 178, Latham C.J. said (at 396): “This decision does not support the contention that if a sum of money is payable at interest to A and the sum of income is in fact paid to B it follows that the money is received by B as part of his income”. Of Dewar v. I.R.C. he said (at 396): “It leaves untouched the question whether a sum of money preserves its character as interest to whomsoever it is paid.”

[13.29] Gair (1944) 71 C.L.R. 388 was decided at a time when it would have been assumed that interest will always be accounted for on a cash basis. National Bank of N.Z. Ltd v. C.I.R. (N.Z.) (1977) 77 A.T.C. 6001 accepts that for some taxpayers, accounting for interest on an accruals basis is appropriate. If an assignor is on an accruals basis in regard to interest, and he assigns accrued interest, a result that is wanting in good sense will follow on the analysis of Williams J. There will have been a derivation of income by the assignor on the arising of the interest, and a further derivation by the assignee on the actual receipt by him.

[13.30] An attempted assignment may fail for want of compliance with general law requirements for a valid assignment, for example an attempted voluntary assignment of a legal chose may be defective in the manner of the assignment to a degree that is beyond the power of equity to correct. The attempted assignment cannot have any of the tax consequences so far examined. However an aspect of an attempted assignment may be a mandate given to the debtor to pay the amount of the debt to the assignee. If that mandate is acted on by the debtor there will be a derivation by the would-be assignor at the time of payment to the assignee. A derivation by the assignee will not have an income quality in his hands for reasons explained in relation to a receipt under an effective assignment, unless there is some aspect of the circumstances of the receipt which will give it an income quality beyond the circumstance that an actual receipt by the would-be assignor would have been income in his hands. There is a derivation by the would-be assignor in the constructive receipt by him or by the operation of s. 19. The derivation occurs at the time of payment by the debtor to the would-be assignee. There is thus an important difference between the time of derivation in this situation and the time of derivation where there is an effective assignment. The amount derived by the would-be assignor will be the actual amount received by the assignee, which may be less than the amount of the debt. Where there is an effective assignment the amount derived by the assignor will be the value of the debt if the analysis in [13.22] above is accepted.

The Assignment of an Item Presently Receivable by a Taxpayer who is on an Accruals Basis

[13.31] The differences that may follow where the assignor is not on a cash but is on an accruals basis in relation to the receivable have been adverted to incidentally under the last heading. Where the assignor is on accruals there will have been a derivation by him at the time the receivable arose. Or, indeed, at some earlier time if, in this context, tax law will hold that there is a derivation in advance of present receivability. A subsequent assignment by him has no tax consequences for him. The assignee will not derive any amount that is his income save where there are additional circumstances which may involve the derivation by him of income, for example, as a reward for services or as a profit from business. The fact that there will have been a derivation, prior to assignment, by the assignor who is on accruals, reinforces the conclusion that the assignee of a receivable that has arisen does not derive income on actual receipt, simply because he is assignee.

The Assignment of Rights to, or an Expectancy of, Future Receipts by a Taxpayer who is on a Cash Basis

[13.32] Shepherd (1965) 113 C.L.R. 385 is authority that where there is an effective assignment of rights to future receipts, there will be no derivation of income by the assignor, either at the time the receipt arises or at the time when the receipt is translated into an actual receipt. It is irrelevant whether the assignor is on a cash or on an accruals basis in relation to the receipt.

[13.33] There is no authority on the question of derivation of income by the assignee. There is a policy reason why the assignee should be held to derive income, if he is on accruals, when the receipt arises, and if he is on cash, when he actually receives. If there is no derivation by the assignee, flows of income will in effect be swallowed—they will not be brought to tax in anyone’s hands. There is a basis of distinguishing the situation of an assignee of a receivable that has arisen, who does not derive income, and the situation of an assignee of a right to a future receipt that thereafter arises. In the latter situation, property, in the form of the rights to the future receipts, has been assigned to the assignee, and the circumstances of derivation by the assignee give an income character to each receipt as a gain derived from that property. This analysis is supported by the analysis offered by Kitto J. in Shepherd to explain the difference between an assignment of expectancies and an assignment of rights to future receipts. The assignment of rights to future receipts attracts the metaphor of a tree that bears fruit as receipts subsequently arise.

[13.34] An attempted assignment of rights to future receipts that fails for want of compliance with the general law requirements for a valid assignment, will leave the rights in the would-be assignor who will derive income on the subsequent arising of a receivable, if he is on an accruals basis in relation to that receivable. If, as an aspect of an attempted assignment, a mandate has been given to the debtor to pay the amount of the debt to the would-be assignee, action by the debtor on that mandate subsequent to the arising of the receivable will not have any tax consequences for the assignor. If the assignor is on a cash basis, however, the action by the debtor will give rise to a constructive receipt that is a derivation, or to a derivation by force of s. 19. The would-be assignee will not derive income on payment to him.

[13.35] The assignment of an expectancy of future receipts by a taxpayer who is on a cash basis in relation to those receipts raises difficult issues. There is authority that the assignment will not prevent the derivation of income by the assignor at the time the receipt arises. Norman (1963) 109 C.L.R. 9 is not direct authority. The case is simply a decision that the attempted assignment was ineffective under the general law, because there had been an attempt to make a voluntary assignment of the expectancy. But observations in the case suggest that if there had been value, the assignor would yet have remained subject to tax on receipts as they arose. The cases referred to in Everett (1980) 143 C.L.R. 440 at 453 holding that the assignment of employment income will not prevent derivation by the employee are relevant authorities (Spratt v. C.I.R. (N.Z.) [1964] N.Z.L.R. 272; Peate (1964) 111 C.L.R. 443 at 446; Parkins v. Warwick (1943) 25 T.C. 419 at 424; Kelly v. C.I.R. (N.Z.) (1969) 1 A.T.R. 380 at 384). The analysis that warrants the conclusion that an assignor who has effectively assigned remains subject to tax on receipts as they arise is not immediately evident. The analysis has to be drawn out from an observation by Dixon C.J. in Norman and another by Barwick C.J., Stephen, Mason and Wilson JJ. in Everett. The observation by Dixon C.J. in Norman (at 15–16) relates to an attempted assignment of an expectancy of future receipts of dividends:

The observation is a blend of argument in policy—“It would become impossible if”—and an argument that rests on the “structure of s. 44”. Save where the shareholder is a trustee of his shares, when Div. 6 of Pt III will operate, s. 44 directs that a dividend paid to a shareholder is income of the shareholder. The direction is not, however, to be seen as some special provision in regard to dividends from which may be drawn an inference that a contrary principle may apply in regard to other expectancies. The direction reflects a principle applicable to any expectancy. The principle is recognised in the judgment of Barwick C.J., Stephen, Mason and Wilson JJ. in Everett where it is said that (at 449–450):

“Right” may not be the appropriate word when a reference is made to the interest of a person to share in the income of a partnership. But the import of the judgment is clearly that an assignment of an interest of a person to share in income of a partnership without an assignment of the partnership share is an assignment of an expectancy of a receipt that cannot prevent a derivation of income by the assignor when the receipt arises, at which time there is an actual or constructive receipt by him.

[13.36] The manner of operation of an effective assignment of an expectancy, be it an expectancy of a dividend, a profit of a partnership or any other, is the fixing of a trust on the item when it arises so that the assignor holds as trustee for the assignee. Where the assignor is on a cash basis the fixing of a trust under the assignment has the same tax consequence as the operation of an assignment of an item that has already arisen. That operation, it was explained in [13.21] above, is to bring about a derivation by the assignor within the ordinary usage meaning of derivation, supported by s. 19. A distinction could be drawn between an assignment of an item that has already arisen, and an assignment by the fixing of a trust that occurs at the very moment of arising of an item. But there is no reason for drawing the distinction. The fixing of the trust may be seen as bringing about a derivation of an item that has arisen in circumstances which give it an income character, whether the fixing is seen as occurring subsequent to the arising or contemporaneous with the arising.

[13.37] If the assignment of an expectancy is taken to give rise to the same tax consequences for an assignor as the assignment of a receipt already arisen, it must follow as a matter of ensuring the coherence of the law that the assignment is taken to give rise to the same consequences for an assignee as the assignment of a receipt already arisen. The assignee’s derivation when the amount receivable is paid to him does not have an income character unless additional circumstances give it that character, for example as a reward for services.

[13.38] The assignment of an expectancy must operate by the intervention of a trust. The assignment of a receipt already arisen may not. But the intervention of a trust does not affect the ultimate tax consequences. An argument might be made, in the case for example of an assignment of future dividends, that it will be the shareholder who receives the dividend, albeit in trust for the assignee. And the conclusion might be asserted that there is a derivation by the trustee that has an income character because it arises from his shareholding. The argument confuses the status of the shareholder as an individual and his status as trustee. The operation of the assignment does not make him a shareholder as trustee. The determination of net income of the trust estate for purposes of s. 95 requires that the trustee be treated as a taxpayer, but only, it would be argued, with the qualities he has as trustee. He is not a shareholder in his capacity as trustee. It follows that the dividend received by the trustee is not income of the trust estate, either by force of s. 44 or the ordinary usage principle in regard to income derived from property. It is a receipt of corpus by the trustee, and is not income for tax purposes. Reference was made in [13.9] above to a passage from the judgment of Barwick C.J., Stephen, Mason, Wilson JJ. which refers to the judgment of Kitto J. in Stewart Dawson Holdings (1965) 39 A.L.J.R. 300. The view there expressed is that where there is an assignment of an expectancy and a receipt arises, to which a trust is fixed, the receipt is “the subject matter or corpus of the trust, not the fruit of it”.

[13.39] The view of the tax consequences of the assignment of an expectancy taken in preceding paragraphs is in some conflict with a dictum of Bowen C.J. in the Federal Court in Everett (1978) 78 A.T.C. 4595 at 4600:

[13.40] The view of this Volume would not accord with the dictum in its application to an assignment where the “character of the income is such … that the assignee becomes the immediate beneficial owner of it the instant it is ascertainable”, if the intention in these words is a reference to the assignment of an expectancy. With respect, the equating by Bowen C.J. of assignments of rights to future receipts and assignments of expectancies cannot stand with the judgment of the High Court on the further appeal in Everett (1980) 143 C.L.R. 440. The judges of the High Court were at pains to explain that it was not significant that income of a partnership in which individual interests may arise might in some sense be described as income from personal exertion. They were responding to a proposition put to them by counsel that “income from personal exertion cannot be assigned so that it is not first received as income by the assignor”. Their further comments on that proposition afford at least a strong basis of inference that where there is no more than an expectancy of a future receipt arising from personal exertion, an assignment will involve a derivation of income by the assignor. Everett was not such a case.

[13.41] Where an attempted assignment of an expectancy of future receipts fails to have effect—it may have been voluntary—the attempted assignment may none the less operate as a mandate. The tax consequences are those that attend a defective assignment of a right to future receipts which may operate as a mandate. They are considered in [13.34] above.

The Assignment of Rights to, or an Expectancy of, Future Receipts by a Taxpayer who is on an Accruals Basis

[13.42] An assignment of rights to future receipts will prevent a derivation of income by the assignor on subsequent arising of receipts, whether the assignor is on accruals or cash. An assignment of an expectancy of future receipts where the taxpayer is on accruals will have the same consequences, in substance, as an assignment by a taxpayer on cash. Where the taxpayer is on accruals, there will be a derivation of income by him on the arising of a receipt irrespective of the immediate operation of the assignment to fix a trust on that receipt. The fixing of the trust does not involve a further derivation.

[13.43] Where there is a defective assignment there will be a derivation by the would-be assignor the moment a receipt arises. The fact that action is taken thereafter on a mandate that was an aspect of the attempted assignment, will not produce tax consequences for the assignor.

The Assignment of Active Income

[13.44] The distinction between passive income and active income was drawn in broad terms in [13.20] above. In the view of this Volume it is unnecessary for present purposes to draw a precise distinction, since tax consequences are affected not by the passive or active character of the income, but by the general law character of the subject of the assignment expressed in terms of receipts that have arisen, rights to future receipts, expectancy of future receipts and underlying property. The fact that an item of receipt might be described as active income has significance only in the resulting likelihood that, if it is a future receipt, it is an item about which there can only be an expectancy. There can only be an expectancy of future wages. There can only be an expectancy of a future receipt in respect of services or goods supplied by a taxpayer engaged in business. There can only be an expectancy of a future receipt, that may be income to the extent of a profit, in respect of the disposition of property.

[13.45] The principles explained in preceding paragraphs as applicable to passive income are thus the principles applicable to active income. There may be very little room for principles that relate to rights to future receipts where the income is active income. But there may be some. The taxpayer in London Australia Investment Co. Ltd (1977) 138 C.L.R. 106 may be said to have been deriving active income in the form of interest on debentures. At least in the view of Gibbs J., it was engaged in a business of switching investments to secure the maximum return in dividends and interest. The tax consequences of assignment of that interest, if the debentures were not subject to the debtor’s privilege to repay the loan as in Norman (1963) 109 C.L.R. 9, would be the tax consequences of the assignment of a right to future interest.

[13.46] There is a good deal of judicial authority on what is referred to as the assignment of “personal exertion” income. Some of that authority tends to suggest that the quality of receipts as receipts for personal exertion precludes the making of an assignment that will prevent the receipt being income derived by the person who engaged in the personal exertion. Where the personal exertion is performed in the context of a contract of employment, the authority comes near to expressing a public policy that salary and wages cannot be assigned. One would have thought that any policy of that kind would be a policy of the general law and not of tax law, though the judgment of Barwick C.J., Stephen, Mason and Wilson JJ. in Everett (1980) 143 C.L.R. 440 approaches it as a policy of tax law. If it is the latter, it is curious indeed. It would assert that the Commissioner can afford the loss of revenue that may flow from income splitting by assignment of income by the self-employed, but not the much greater loss if the mass of the employed were to be able to engage in income splitting in relation to their wages and salaries. Thus employees must be discriminated against.

[13.47] The High Court in Everett did not definitively reject a principle that would reflect such a policy. But it explained the distinction between those cases where such a principle seems to have been expressed and the circumstances of Everett, in a way that justifies the view taken in this Volume. That view is that the only relevant distinction is one drawn between an assignment of an expectancy of future receipts, and an assignment of rights to future receipts or of underlying property on which future receipts may attend. The court said (at 454):

[13.48] The propositions asserted in [13.44] above that there can only be expectancies of, and never rights to, future wages, future receipts for services and future receipts for goods supplied, calls for explanation. There is one factor common to all these receipts. None of them will arise unless some affirmative action is taken by the person who will be entitled to the receipt. The arising of a receipt is contingent on that affirmative action. A conclusion that this factor ensures that the receipt can only be an expectancy may be drawn from the passage just quoted from the judgment in Everett.

[13.49] The law which will determine whether a future receipt is a matter of right or expectancy is by no means definitive. It is not enough to make a future receipt an expectancy that the contract under which it may arise may be terminated by the bilateral action of the parties. A power in the person on whom the correlative liability will rest to terminate the contract under which the liability may arise otherwise than by repudiation, will, it seems, be sufficient to make the receipt an expectancy only. Norman (1963) 109 C.L.R. 9 may be taken to have decided as much. But a power in the person on whom the liability will rest to prevent an arising of a receipt by abstaining from action within the contract, will not make the receipt an expectancy. Shepherd (1965) 113 C.L.R. 385 is authority for this proposition. If the proposition in the last paragraph is accepted, affirmative action by the person in whose favour the receipt will arise will have different significance from the failure to act by the person on whom the liability will rest.

The Assignment of Dividend Income

[13.50] The preceding general discussion will have indicated the issues that arise in relation to the derivation of a dividend in circumstances where (i) a dividend that has arisen has been assigned, either separately or together with the shares; (ii) an expectancy of a future dividend has been assigned; and (iii) shares, carrying the expectancy of future dividends have been assigned. The resolution of these issues will be affected by the operation of the provisions of the articles of association of the company in regard to the payment of dividends. The articles may be drafted in such a way that a dividend may arise on the ascertainment of profits without any exercise of discretion by the directors or by the general meeting to declare or pay a dividend. Most often the articles will provide for the declaration of a final dividend, by the directors or by the general meeting, in which case the dividend will arise on the making of the declaration. In the case of an interim dividend, the articles will give the directors power to pay a dividend. Such a power is exercised by the actual payment and not by a declaration, so that the arising of the dividend must wait on actual payment (Brookton Co-operative Society Ltd (1981) 147 C.L.R. 441).

[13.51] The resolution of issues in relation to the derivation of a dividend will also be affected by the operation of s. 44 of the present Act which provides that: “The assessable income of a shareholder in a company … shall … include dividends paid to him by the company …” The consequences of this drafting were the subject of some comment by Dixon C.J. in Norman (1963) 109 C.L.R. 9. The comment is quoted in [13.35] above. It is supported in that paragraph, though perhaps not explained, by pointing to the fact that there can be no more than an expectancy of a dividend where it has not yet arisen—Norman is authority for this. Any assignment made before arising can operate only on the arising of a dividend, and the manner of operation will be the crystallising of a trust so that the assignor will hold the dividend in trust for the assignee. The arising of the dividend and the crystallising of the trust is a derivation of the dividend by the assignor. There is no derivation of income by the assignee who is the beneficiary of the trust that receives the dividend as corpus. It must, however, be conceded that s. 44 poses difficulties for this analysis. The words “paid to a shareholder”, which on their face require action by the company, must be given a wide construction if they are to include an ordinary usage derivation by a shareholder by way of a constructive receipt. The word “paid” is given an extended meaning in s. 6, by which “ ‘paid’ in relation to a dividend includes credited or distributed”. But the act of declaration of a dividend standing alone is not, it seems, a crediting. If it were all taxpayers would in effect be on an accrual basis in regard to dividends.

[13.52] If a narrow construction is given to the words “paid to [a shareholder]”, and they are treated as determining exclusively when a dividend is to be taken to be derived by a shareholder, an assignment of an expectancy of a dividend may achieve an income swallow. There will be no derivation of the dividend by the assignor, because the dividend will not at any stage be paid to him in his own right, unless the dividend is an interim dividend which arises only on actual payment to the shareholder. In the interim dividend situation payment to the assignor in his own right might be said to occur at the same moment as the trust crystallises in favour of the assignee. But payment of a final dividend that has been declared will be made to the shareholder as trustee for the assignee, and this is not a derivation by the shareholder in his own right. A payment to the shareholder as trustee is not a payment of a dividend to the trust estate. The view taken in this Volume is that the trustee receives payment of a debt owed to the trustee as a consequence of the assignment and the receipt is a receipt of corpus by the trust.

[13.53] There is an evident need for the redrafting of s. 44 so that it will refer to dividends derived by a shareholder. The ordinary usage notion of derivation will thus govern. The meaning of “paid” in the definition in s. 6 for purposes of the phrase “paid out of profits” in s. 44, should be extended to include declared, and the language of the definition of dividend in s. 6 should be reframed so that it will embrace a declaration. The meaning of paid for the purposes of the making of a sufficient distribution (s. 105A) should not be extended. Indeed it is already too wide. If crediting is not enough to constitute a derivation by a cash basis taxpayer, there is a prospect of action by a company that will be a sufficient distribution though there is no derivation by shareholders on a cash basis.

[13.54] It may now be appropriate to state the consequences of an assignment in the situations listed in [13.50] above on the assumption that the redrafting of the specific statutory provisions for which there is an evident need, has been made. Where a dividend that has arisen—a dividend validly declared—is assigned by a taxpayer on a cash basis, whether separately or together with the shares, there will be a derivation of income by the assignor in the operation of the assignment. The operation of the assignment will follow that appropriate to a right to a present receipt. There will be no derivation of income by the assignee.

[13.55] Where an expectancy of a future dividend has been assigned without the shares, there will be a derivation of income by the assignor when a dividend arises. There will be no derivation by the assignee.

[13.56] Where shares carrying an expectancy of future dividends are assigned there will be no income derived by the assignor. Future dividends as they arise will be income of the assignee. In this situation there is a prospect that a dividend will arise and be paid to the assignor before the assignee has been entered on the register as a shareholder. In these circumstances the assignor should be treated as a trustee for the assignee, in relation both to his status as shareholder and to the derivation of the dividend. There will thus be income of the trust estate, that is income of the assignee under s. 97.

The Diversion of Income by a Stipulation for a Payment to be made to Another

[13.57] The general law implications of a stipulation in a contract entered into between A and B, whereby it is provided that B will make a payment or payments to C, remain less than firmly settled. The most recent United Kingdom and Australian decisions raising the implications on a wide front are Beswick v. Beswick [1968] A.C. 58, and Coulls v. Bagot’s Executor & Trustee Co. Ltd (1967) 119 C.L.R. 460. Those cases may justify the following statement of principle:

• (1) Where A contracts for himself and not as trustee for C, and the stipulation is not to be construed as a revocable mandate given by A to B, neither A nor C is entitled to recover the amount that B has agreed to pay to C. A may be entitled to recover damages from B, if B fails to pay to C, but in most circumstances the amount of damages will be nominal. A may obtain an order for specific performance of B’s promise to pay C. A might agree with B to modify, compromise or discharge further performance by B, and C would have no right to complain. If A in fact receives a payment from B, he must account as trustee to C.
• (2) Where A contracts as trustee for C, A as trustee may recover the amount B has agreed to pay to C, and is bound to recover. He must account to C for what he recovers. A has no right to modify, compromise or discharge further performance by B.
• (3) Where the stipulation is construed as a revocable mandate given by A to B, A may revoke the mandate and recover from B, and is not bound to account to C.

[13.58] It may in theory be possible to construe a stipulation as one that embodies two transactions, a contract for a payment by B to A which may give rise to an expectancy of, or a right to a payment in A, and an assignment of the expectancy or right to that payment to C. Such a construction was suggested to the court but not adopted in Coulls v. Bagot’s Executor. If it is a proper construction, the discussion of assignment situations in previous paragraphs becomes relevant. The principles and conclusions will not differ from those applicable where an assignment is made of an already existing expectancy of, or right to, future receipts.

[13.59] Where the stipulation is within (3) above—it is taken to be a revocable mandate given by A to B authorising a payment by B to C of an amount owed by B to A—the consequences are those already explored in relation to assignments. If the person giving the mandate is on accruals in relation to the item, there will be a derivation by him at the time of accrual, and there will be no further derivation when the mandate is acted on and a payment is made to C. If the person giving the mandate is on cash in relation to the item, there will be a derivation by him at the time the mandate is acted on by B in making a payment to C. C will derive on receipt of the payment, but the income character or otherwise of his receipt must be determined in the circumstances of that receipt. It is irrelevant what the character may be of A’s receipt in A’s hands.

[13.60] The issues that arise when the stipulation is not to be construed as an assignment or as a revocable mandate cannot be resolved so easily. The issues that arise where A does not contract as trustee for C may be dealt with first, though, it will be seen, the issues where A contracts as trustee for C may not be materially different.

The tax consequences of a stipulation by A that B will make a payment to C

[13.61] It will be assumed in the discussion that follows that the circumstances are such that a derivation by A of the item that is the payment to C would have an income character in A’s hands. Thus A may grant a lease of property to B on terms that B will make payments to C. If the lease had provided for payments to be made to A, the receipts of those payments by A would have involved the derivation of income by him. Another illustration may be drawn from the facts in Federal Coke Co. Pty Ltd (1977) 77 A.T.C. 4255. Reliance on Heavy Minerals Pty Ltd (1966) 115 C.L.R. 512 might support a conclusion that a derivation by Bellambi of the amount paid to Federal Coke as a result of the stipulation by Bellambi, would have been income if derived by Bellambi, as proceeds of the realisation of a revenue asset—the supply agreement between Bellambi and Le Nickel.

[13.62] The issue now raised is whether the stipulation can be seen to bring about a derivation by A, notwithstanding that the stipulation cannot be construed as an assignment by A to C of an expectancy of, or right to, the payments that are made to C. Federal Coke is authority that the character of the receipt by C under a stipulation of the kind now considered must be determined by the circumstances of C’s receipt. The decision in the case was that the receipt by Federal Coke was not income in its hands. Which emphasises the prospect that there will be an income swallow if there is no derivation by A. In the other illustration of a lease under which payments are made to C, the receipts by C would not be income of C as receipts in the nature of rent, though they might be income of C as periodical receipts.

[13.63] In Federal Coke the facts disclosed a tender of payment by Le Nickel, under what the latter took to be an earlier agreement between itself and Bellambi, the consideration for which was a relinquishment by Bellambi of its rights under the agreement for the supply of coke to Le Nickel. Bellambi refused to accept the payment, in effect claiming there had not been any such agreement. Thereafter an agreement was entered into under which payments were to be made to Federal Coke. If there had in truth been an earlier agreement, and the Commissioner had sought to assess Bellambi there would have been issues as to the income character of the amounts payable to Bellambi, and as to the derivation of those amounts. It might have been argued by the Commissioner that Bellambi was on an accruals basis in relation to the item, and had derived the whole amount provided for in the agreement on the making of the agreement. The Commissioner might alternatively have advanced arguments in terms of derivation by constructive receipt, on the assumption that Bellambi was on a cash basis in relation to the item. One of these arguments might have been made in relation to the payment refused by Bellambi, and the scope and authority of the views expressed by Gibbs J. in Brent (1971) 125 C.L.R. 418 would have been raised. Another argument might have been that the whole amount receivable under the agreement was derived by Bellambi in the making of the new agreement with Le Nickel. That new agreement was at once an appropriation by Bellambi of the amount receivable from Le Nickel and an application of it as consideration for a new agreement under which Le Nickel agreed to make payments to Federal Coke.

[13.64] The judgments in Federal Coke (1977) 77 A.T.C. 4255 proceed on the assumption that there had not been an earlier agreement under which payments were to be made to Bellambi. There is, however, an observation by Bowen C.J. (at 4262) on the possible tax consequences for Bellambi in having entered into the agreement by which payments were to be made to Federal Coke:

The observation raises the possibility of a construction of the agreement in regard to the payment to Federal Coke so that it constituted a revocable mandate given by Bellambi to Le Nickel, with the consequence that on payment to Federal Coke there was a derivation by Bellambi. That construction of a stipulation by A that B pay to C was adverted to in [13.59] above. It is an unlikely construction. Federal Coke offers no assistance on the tax consequences of a stipulation that is not construed as a mandate, though it is evident that members of the Federal Court were conscious of the matter. Nimmo J. said at the conclusion of his judgment (at 4272):

Brennan J. said (at 4274):

[13.65] The difficulty in finding a derivation by constructive receipt, or by s. 19, in the operation of the stipulation, lies in the principle recognised by all members of the House of Lords in Beswick v. Beswick [1968] A.C. 58 that a stipulation which cannot be construed as a revocable mandate gives no right to A to recover the amount of the payment, if B does not in fact make the payment to C. He may recover in damages what in most circumstances will be a nominal sum, or may obtain an order for specific performance so as to compel B to pay to C. But at no stage is A able to obtain the payment for himself. If there is in fact a receipt by him, he will hold in trust for C. Where he has not contracted as trustee for C—the situation presently being considered—he might agree with B to modify, compromise or discharge further performance by B. If he receives an amount under such an agreement he will, presumably, be entitled to retain it against C. But such an agreement will require the assent of B. It would be a significant extension of the notion of constructive receipt to find that A has derived an amount that B is under an obligation to pay to C, because he might, for some payment to himself, have discharged B from his obligation to pay C.

The tax consequences of a stipulation by A as trustee for C that B will make a payment to C

[13.66] There is difficulty in finding a derivation of income by constructive receipt where A has contracted as trustee for C. It is necessary to distinguish a contract under which the consideration is provided by A in his capacity as trustee, and a contract under which it is not. A trustee, A, may grant to B a lease of trust property on terms that require the payment of a premium to C, the beneficiary of the trust. It will be assumed for purposes of this discussion that, by the operation of s. 26AB, the amount of the premium would have been included in net income of the trust estate under s. 95 had the lease called for payment to A, and the premium had been in fact paid to A. The prospect in these circumstances is that the stipulation for payment to C will be construed as a revocable mandate, and the payment to C treated as a derivation by A that will be net income of the trust estate. C will be taxed on the amount of the premium under s. 97 as a presently entitled beneficiary, or the trustee will be taxed under s. 98 in respect of C. Even if it is not construed as a revocable mandate, A’s right as trustee to recover the amount of the payment, if it has not been made to C, may justify a conclusion that there has been a derivation by A that is net income of the trust estate.

[13.67] Where the consideration is not given by A as trustee for C, the difficulties in finding a derivation by constructive receipt are no less than those considered in relation to circumstances where A does not contract as trustee for C. A may grant a lease of property that is not held as trust property, for a premium to be paid to C. The fact that A has a right as trustee to recover the amount of the premium if it has not been paid to C will not justify a conclusion that there has been a derivation by A that is net income of the trust estate. A receipt by A as trustee will not be given an income character by circumstances that relate to A, not to A as trustee. This is a special application of the principle in Federal Coke (1977) 77 A.T.C. 4255. The circumstances that may give an income character to a receipt by a trustee are only those circumstances which concern the trustee as trustee. When s. 95 requires the determination of “net income of a trust estate as if the trustee were a taxpayer” there is to be implied in the hypothesis that the hypothetical taxpayer has only those qualities that the trustee has as trustee. These do not include the holding of the property subject to the lease.

[13.68] If there is to be a derivation of income arising from the stipulation by A as trustee for C, it must be a derivation by A in his own right, and the difficulties in finding such a derivation are perhaps greater than where he does not contract as trustee. It is true that A who contracts as trustee in regard to the promise of payment by B, may recover from B if B does not pay C. But whatever he recovers he holds in trust for C. And he is not free to modify, compromise or discharge further performance by B.

The possible tax consequence that there is no derivation of income by any person

[13.69] There is then a prospect that a stipulation requiring payment to another may be held, in some circumstances, to achieve an income swallow. What would have been income of the person making the stipulation, had the stipulation provided for payment to that person, is in the outcome not the income of any person. There is need of express provision to bring about a derivation of income, either by the person who makes the stipulation or by the person who receives the payment. The express provision would have some affinity with s. 26(e), with which indeed it would need to be correlated. Where A renders services to B in return for a promise of payment to C, s. 26(e) will treat as income the value to A of any benefit that A enjoys as a result of the payment to C. Section 26(e) is considered in [2.367]ff. and [4.38]ff. above and in a number of other contexts. Its operation in precluding an income swallow is limited by the need to show benefit to the taxpayer who makes the stipulation. This benefit is likely to be confined to a saving of expense, for example in the maintaining of a wife or child, that may be regarded as resulting from the fact that money is paid to another person—the child’s school or the wife herself. Section 26(e) has no operation where the payment to another as a result of a stipulation by the taxpayer does not involve a benefit to the taxpayer, where, for example, the relative to whom the payment is made is adult and living independently of the taxpayer. Section 26(e) is in any case limited in its operation to benefits that are the product of services rendered by the taxpayer, and what protection it affords against income swallows is therefore available only on a narrow front.

[13.70] There is need of a wider provision. That provision might in one respect follow the model of s. 26AAC, to which reference is made in [4.85] above. That section displaces the principle in Federal Coke (1977) 77 A.T.C. 4255 and may give an income quality to the receipt by the person to whom the payment was made: an acquisition of shares or options over shares may be income derived by a taxpayer, where the acquisition was “in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by … a relative of the taxpayer” (s. 26AAC(1)). The wider provision should extend to all circumstances where the derivation by a person may be said to be in respect of or for or in relation to any process that would have given an income quality to a like derivation by another. It would, however, be limited to the excess of the amount of the derivation, over the value any benefit from that derivation that is income of that other. The wider provision should not be applicable where the derivation is a consequence of an assignment of a right to or an expectancy of a future receipt or of a receipt that has arisen.

[13.71] Section 26AAC is not confined to circumstances where the shares or options acquired by the taxpayer were acquired under a stipulation in a contract of employment, or a contract for the rendering of services, entered into by a relative. The wider provision now proposed should follow s. 26AAC in not being confined to stipulation situations. The wider provision should be drafted so as to overcome the narrow interpretation of the words “allowed given or granted… in respect of, or for or in relation directly or indirectly to, any employment of or services rendered” in s. 26(e), which would appear to flow from Constable (1952) 86 C.L.R. 402. Payments in that case by an employer could not be traced into receipts by an employee when there was an intervening exercise of discretion by the trustee of a superannuation fund.

The Tax Consequences of a Purported Assignment of “Net” Receipts

[13.72] A purported assignment of the “net rents” from a building owned by the taxpayer must relate to some defined period, possibly a period of one year. If it cannot be related to a defined period, it is difficult to see what operation might be given to the purported assignment. If it does relate to a defined period, the most likely construction is that the taxpayer has promised to pay a sum of money calculated in a particular way. There is no assignment of an expectancy of, or a right to, future receipts. In the view of Owen J. such a construction was attracted by the words used in Shepherd (1965) 113 C.L.R. 385 though other members of the court found that there had been an assignment. In Shepherd the words used expressed a stated fraction of future gross receipts. Where the words used refer to “net” receipts and thus require the subtraction of expenses over a period to determine the amount of receipts to which the would-be assignee is entitled, a construction that the taxpayer has merely promised to pay a sum of money calculated in a particular way is compelling. A view of the transaction that it is an assignment of part of the future receipts is not open, since the determination of the amount of any receipt that is assigned must wait on the expiration of the period. Only then call all the expenses be known. The subject matter of the trust that must intervene in the operation of an assignment of part of a right to future receipts, or on the assignment of an expectancy of future receipts, cannot be identified in the circumstances of a purported assignment of “net rents”. What is true of “net rents” must be equally true of any other purported assignment that relates to “net” future receipts.

The Effect of an Assignment of Underlying Property

[13.73] A person assigns a debt bearing interest at a time when interest on the debt has not yet become presently receivable. The assignment of the debt will carry the claim to future interest. Whether the claim was an expectancy of future interest or a right to future interest, there will be no derivation of income by the assignor when interest arises. The arising of interest will involve a derivation of income by the assignee if he is an accruals basis of return. If he is on a cash basis, there will be a derivation by the assignee on the actual receipt of the interest. These observations in regard to the assignment of a debt have their parallels in regard to the assignment of property subject to a lease, under which rent may arise, or the assignment of a patent subject to a licence under which royalties may arise, or the assignment of shares on which dividends may arise.

In relation to a share in a partnership

[13.74] The foregoing has a bearing on the tax consequences of an assignment of a share in a partnership. Everett (1980) 143 C.L.R. 440 has treated such an assignment as an assignment of underlying property which carries with it a claim to future profits that would be no more than expectancies if the claim to them were severed from the underlying property.

[13.75] Where a right to profits has already arisen because a date at which profits are required to be determined has arrived before assignment of a partnership share, income will already have been derived by the assignor partner. The assignment will presumably carry the assignor’s right to profits that has already arisen. There will not be a derivation of income by the assignee. A distribution to the assignor partner will be received by him as trustee. The receipt will not however be net income of the trust estate. The receipt in the distribution is corpus of the trust estate.

[13.76] Where a right to profits arises after the date of the assignment, there will not be a derivation of income by the assignor partner. So much is decided by Everett (1980) 143 C.L.R. 440. And Everett and Galland (1984) 84 A.T.C. 4890 are authority that generally no arising of a right to profits occurs in the act of making the assignment. There will be an arising in the act of assignment, which would bring about a derivation of income by the assignor partner only where the moment of assignment is a time for the taking of an account. It will be such if the assignment is associated with an agreement to dissolve partnership at the time of the assignment. This would appear to be the explanation of the Federal Court decision in Rowe (1982) 82 A.T.C. 4243. There was an assignment and a dissolution operative at the same moment. An agreement to dissolve requires the taking of an account. But an assignment alone is not an occasion for the taking of an account.

[13.77] Everett is not a decision on the question whether rights to partnership profits arise progressively over the period between partnership accounts. There would appear to be no basis for a conclusion that they do. A number of judicial statements bear on the matter. Thus, in Peterson (1960) 106 C.L.R. 395 at 405, Windeyer J. said:

The statement in Hughes v. Fripp to which Windeyer J. refers is the following statement of Starke J.:

A view that the assignment of a partnership share between partnership accounting dates will prevent the assignor deriving income representing profits since the last accounting date, is at least suggested by Williams J. in Happ (1952) 9 A.T.D. 447. The case concerned an agreement by which two partners assigned their shares to the two other partners, and all the partners agreed to a dissolution of partnership operative at a date some time before the agreement. Williams J. held these circumstances gave rise to an arising of rights to profits in all four partners at the date of the agreement to dissolve. In this there is an assertion of the principle that an agreement to dissolve requires a partnership account and is a moment of arising of rights to partnership profits. The provision for retrospective dissolution did no more than effect a disposition of the assigning partners’ interests in profits referable to the period from the date of the asserted retrospective dissolution to the date of the agreement. But it had no tax consequences. Williams J. said (at 451):

The judgment is at least consistent with a view that rights to partnership profits arise only when a partnership account falls to be taken. If there is an assignment of a partnership share prior to that time, rights to profits will arise in accordance with the shares in the partnership obtaining at the date at which the account is taken (Galland (1984) 84 A.T.C. 4053, 4890).

[13.78] The consequences of assignment of a partnership share ought not to be any different from the consequences of an agreement between partners which will effect changes in their partnership shares. There is a redefinition of underlying property which ought not to be distinguished from the assignment of underlying property in Everett (1980) 143 C.L.R. 440. The circumstances are different from an assignment of an interest in an expectancy of future profits which, it was agreed in Everett, would not prevent a derivation by the assignor on the taking of the next accounts.

[13.79] The consequences of assignment of a partnership share ought not to be any different from the consequences of a definition of a partnership share which the partnership agreement leaves to a governing partner. A governing partner may have power to fix the interests in profits of members of the partnership. Rights to partnership profits will arise in partners on the next date for the taking of accounts in accordance with the interests so determined.

[13.80] There is a difference between an assignment of a partnership share between partners, or a redefinition of partnership shares by agreement between partners, or a definition of partnership shares by a governing partner—all of which are concerned with the relative shares of persons who are partners—and an assignment of a partnership share to a person who is not a partner. Where rights to partnership profits arise at the next accounting date the derivation of income by partners will be governed by s. 92, so that there is a derivation of income at the moment rights to partnership profits arise. But the derivation of income by an assignee of a share of a partnership who is not a partner raises some difficulty. It is true that the derivation of income by the assignee will be through a trust, of which the assigning partner is trustee: Everett is authority that the assignment must operate through the intervention of a trust where the assignee is not a partner. But the partner trustee holding the partnership share in trust is not a partner as trustee, so that in determining the derivation of the net income of the trust estate, and derivation of income by the assignee under s. 97, there is no room for the operation of s. 92. If s. 92 does not operate, derivation by the partner trustee of net income of the trust estate may require actual receipt by the trustee. Moreover the item of income receipt will be the amount of partnership profits actually distributed, not the amount of “net income of the partnership” calculated under s. 90. And there is another consequence. If the occasion of taking a partnership account subsequent to the assignment is a dissolution of the partnership, the actual receipt will not have an income quality. It will not be a receipt derived from the partnership share. It will be a receipt in satisfaction of the partnership share itself.

[13.81] There is perhaps room for a qualification on the assertion in the last paragraph that s. 92 cannot apply in determining the derivation of net income of a trust estate, where a partner is trustee of a partnership share for an assignee of that share who is not a partner. The qualification would raise the possibility that the partner who is trustee is a partner as trustee in a partnership which subsists for tax purposes only. It will be noted that the definition of partnership in s. 6 of the Assessment Act includes persons in receipt of income jointly. It might be argued that the partner who is a trustee is a partner as trustee in the receipt of income jointly with others who are general law partners, so that s. 92 is applicable. The argument might be met by a response that they are not in receipt of income jointly—that those words are inappropriate where income is generated by business activity.

The Operation of Division 6A of Part III—Alienation of Income for Short Periods

[13.82] The discussion so far has assumed that Div. 6A has no application to any facts being considered. If Div. 6A does apply it will radically alter the tax consequences of an assignment. The general law consequences of the assignment remain, however, unaffected. The central operative provision of Div. 6A is s. 102B(1):

Right to receive income from property” is defined in s. 102A(1) so that it means

The “prescribed date” is defined in the same subsection:

Two limitations on the operation of s. 102B(1) are imposed by s. 102B(2) which provides:

[13.83] The effect of s. 102B(2) (b), in the language that has been adopted in [13.5] above for purposes of statements of the general law and tax law in regard to assignments, is that Div. 6A has no application to an assignment of underlying property that may carry with it expectancies of, or rights to, future receipts. Thus Div. 6A could have no application to an assignment of a partnership share that carries expectancies of future receipts of partnership profits.

[13.84] A consequence of the definition of “right to receive income from property” in s. 102A(1) is in any case to exclude the operation of Div. 6A on an assignment of an expectancy of future receipts. The reference to an “owning” of a “right” by a person could not be taken to describe an expectancy. In any case, as the law has been stated in [13.32]-[13.43] above, an assignment of an expectancy of future receipts will not prevent the derivation by the assignor of a receipt when it arises. The function of Div. 6A to defeat an income shift is not called for when an expectancy is assigned. Division 6A is thus relevant only when a right to future receipts has been assigned. It is applicable to the situation found in Shepherd (1965) 113 C.L.R. 385, but not in Norman (1963) 109 C.L.R. 9.

[13.85] The definition of prescribed date, and the operation of s. 102B(1) on a transfer “for a period that will, or may … terminate before the prescribed date”, pose a number of questions. Thus it may be asked whether it is a consequence that Div. 6A must operate, specific exceptions aside, where a loan of money, a lease of property or the licensing of patent rights extends for a period less than seven years and future receipts of interest, rent or royalties are assigned. On one view it must operate regardless of the drafting of the terms of the assignment. In particular, it must operate though the period of the assignment is expressed to be seven years from the date on which income from the property is first paid to, or applied or accumulated for the benefit of, the transferee. This view is not directly supported by any words of Div. 6A. As a matter of analysis, it requires an interpretation of s. 102B(1) such that a period of assignment terminates when all receipts to which the assignment relates that can arise have arisen.

[13.86] This interpretation, however, produces the absurd consequence that at the time of an assignment it will never be possible to say of a period of assignment that it cannot terminate before the prescribed date, so that, specific exceptions aside, Div. 6A will operate on any assignment. The prescribed date is the day preceding the seventh anniversary of the date on which income from property “is first paid to, or applied or accumulated for the benefit of” the assignee. These words do not embrace a simple arising of a receipt. They contemplate a derivation by the assignee that will qualify as an actual or constructive receipt by a cash basis taxpayer. It will be evident from the discussion in [11.122]ff. above and the decisions in Brent (1971) 125 C.L.R. 418, St Lucia Usines & Estates Co. Ltd v. Colonial Treasurer of St Lucia [1924] A.C. 508 and Permanent Trustee (1940) 6 A.T.D. 5 that such a moment of derivation may be indefinitely deferred. At the time of the assignment, it cannot be said when a derivation of income that will commence the running of the period to the prescribed date will occur. Indeed, it cannot be said for certain that it will ever occur. As a matter of analysis it must follow that, save where the lending, the lease or licence is for an infinite period, the last arising of income may occur before the expiration of the prescribed period.

[13.87] An alternative interpretation would leave the possibility of some discrimination in the operation of Div. 6A. It would focus only on the period for which the right to receive income from property is expressed to be assigned. If that period is expressed so that it is for seven years or more from “the date on which income from property is first paid to, or applied or accumulated for the benefit of the [transferee]”, and that period is not subject to termination by a revocation by the assignor, the assignment is immune from the operation of Div. 6A.

[13.88] The alternative interpretation may not appear to express the policy of the Division. It will allow an assignment to be effective for tax purposes notwithstanding that the right assigned may give rise to receipts for only a short period. At least, however, it does not produce an absurd result. And there will be some achievement of the policy of the Division where the right assigned can give rise to receipts for a longer period but the assignor has chosen to assign for a period that may be a short period.

[13.89] The policy of Div. 6A is not in any case very evident. The broad purpose is presumably to place a control on income shifting, most commonly income shifting within a family. Under an individual unit system of income taxation imposing tax on a progressive scale, which is at least predominantly the system of income taxation in Australia, there will be an advantage for a family group if income is spread as evenly as possible over members of that group. Division 6A may be seen as directed to denying that advantage, if one member of the group has assigned income to another member of the group. The assignment for a short period presumably establishes that he wanted the tax advantage for the group that would follow. And on the kind of reasoning that underlies most of the provisions of the Assessment Act which are directed against “tax avoidance”, including the provisions of Pt IVA considered in [16.22]ff. below, a taxpayer who sets out to obtain a tax advantage should be denied it. One can understand, even agree with, a policy that would say that income of a member of a family group should be taxed with regard to the total income of members of the group—a system of family unit taxation—but a regime such as is imposed by Div. 6A reflects some primitive, and perhaps unworthy, motive to defeat any action that may be taken with a tax advantage in mind. Tax advantages that happen to people are acceptable, those that are sought after are not.

[13.90] It will be evident from the definition of “the prescribed date” that an assignment for a period of seven years from the date of the assignment will attract the operation of s. 102B. The period of the assignment may terminate earlier than the day before the seventh anniversary of the “date on which income from the property is first paid to, or applied or accumulated for the benefit of, the other person by reason of the transfer”. Though the language may suggest that the income character of an item can be found in circumstances that are independent of a person’s derivation of it, the provisions must be interpreted in the context of the principle in Federal Coke Co. Pty Ltd (1977) 77 A.T.C. 4255. Interpreted in this way, the reference is to the first receipt by the assignee of an item derived from the property, that is income in his hands. It follows that a form of words that describes the period of an assignment as seven years from the first receipt by the assignee of “interest”, “rent” or “royalties” may attract the operation of s. 102B. Thus there may be interest, rent or royalty receipts that have already arisen, and are already income derived by the assignor before the assignment, or will become income derived by him by the operation of the assignment. The assignment may include such receipts. If it does, there will, arguably, be a receipt by the assignee on the receipt of the item under the assignment that will be a receipt of interest, rent or royalties, but is not a receipt by the assignee of an item that is income in his hands. It will follow that the period of the assignment will terminate before the prescribed date, and s. 102B will be attracted.

[13.91] When s. 102B operates, “any income derived from the property that is paid to, or applied or accumulated for the benefit of the other person by reason of the transfer, being income that, but for the transfer, would have been included in the assessable income of the transferor, shall be treated for the purposes of [the] Act as if the transfer had not been made”. The deeming in the closing words may be thought less than is necessary to ensure a derivation of income by the transferor. There is no express provision which deems a derivation by the transferor to have occurred, though the clear intention is that the assignor should be taken to have derived. Indeed, s. 102C in para. (b) assumes that s. 102B has operated to bring about a derivation by the assignor. It refers to an amount that is, by virtue of s. 102B, to be included in the assessable income of a person other than the assignee.

[13.92] Section 102C specifies the consequences which will affect deductibility by the assignor and the derivation of income by the assignee, that follow when s. 102B has operated. Thus the assignor by s. 102C(c) is deemed to have paid to the assignee an amount equal to the amount paid to, or applied or accumulated for the benefit of the assignee, and to have paid it to the assignee, at the time it was paid to, or applied or accumulated for the benefit of the assignee, for the purpose for which the assignment was made. The assignment may have been made by way of rewarding the assignee for services the assignee had performed for the assignor. If a payment of wages or salary to the assignee would have been deductible by the assignor, the assignor will be entitled to deductions of the amounts paid to, or applied or accumulated for, the benefit of the assignee.

[13.93] The operation of s. 102B(1) is to prevent those receipts by the assignee which will now be treated as income of the assignor, also being treated as income of the assignee. But the assignee may derive income by the operation of s. 102C(d). This paragraph sets up an hypothesis that an amount would have been included in the assessable income of the assignee if the assignment had not been made, and the assignor had made a payment to the assignee equal to the amount in fact derived by the assignee under the assignment, the payment having been made for the purpose for which the assignment was made. If the hypothesis is satisfied, the amount is income of the assignee by virtue of s. 102C(d). In the result receipts that are income as rewards for services, may be imputed to the assignee, where the assignment was made to reward the assignee for services.

[13.94] It will be recalled ([12.25]–[12.28] above) that, in the absence of Div. 6A. an assignment of rights to future receipts made to reward an assignee for his services may involve two levels of derivation of income by the assignee. He may derive income on assignment in the amount of the value of the rights assigned, and he may derive income in the amount of each receipt as it arises and is derived by him. The assignor does not, however, derive income either on assignment or as receipts arise. The consequence of the operation of s. 102B is that the assignor derives income as each receipt arises, and, if he is on cash, is received. The assignee, however, has only one level of derivation of income, presumably as each receipt arises and is derived by him.

[13.95] An assignment of a right to future receipts may have been made for purposes of providing the assignee with “an income” in the sense of those words that emerges from the decision of the High Court in Dixon (1952) 86 C.L.R. 540 ([2.175]ff. above), so that the receipts by the assignee may be income as income derived from property and as an annuity. The fact that an item has more than one basis of income character will not make it income more than once over. And if the assignment is effective, there is no derivation of income by the assignor.

[13.96] The consequence of the operation of s. 102B where the assignment has been made for the purpose of providing another with an income, may be to create two levels of derivation of income, the one by the assignor and the other by the assignee, where, if the assignment had been effective, there would have been only one. There will be derivations imputed to the assignor, and further derivations imputed to the assignee, by force of s. 102C(d). Moreover, where the purpose in the provision of an income to another is not such that s. 102C(c) will give a basis of entitlement to deductions, the assignor will not be entitled to deductions that would have effectively cancelled the imputation of income to him.

[13.97] Section 102B(4) needs to be seen against this background. Section 102B does not apply where there has been an assignment of income and by reason of the proviso to para. (1) of s. 23, the income derived by the assignee would not be exempt from tax under that paragraph. Paragraph (1) prevents two levels of assessable income, the one on the husband and the second on his wife or former wife where she receives from him periodical payments in the nature of alimony or maintenance. It thus gives favoured treatment to periodical payments to a wife or former wife. The proviso to para. (1) is, however, intended to ensure that the favoured treatment does not allow what might be seen as an income swallow. In the absence of the proviso, if the husband assigns rights to future receipts as a way of providing an income to his wife the receipts arising would not be income taxed to husband or wife. The proviso ensures that there is one level of income brought to tax. The purpose of s. 102B(4) is to preserve this outcome even though the assignment is one to which s. 102B is prima facie applicable. None the less the method of drafting creates a tangle to unravel. Where a husband, for the purpose of making periodical payments of alimony or maintenance to his spouse or former spouse, has divested from himself income upon which he would otherwise have been liable to tax the proviso to para. (1) denies to the spouse or former spouse the exemption otherwise accorded by the paragraph. For this purpose, if circularity is to be avoided, the effectiveness of the diversion must be judged without the operation of Div. 6A. Section 102B(4) then prevents an operation of s. 102B and s. 102C which would defeat the purpose of requiring only one level of tax. Those sections would result in two levels of tax. Some income shifting by a short term assignment in favour of a spouse or former spouse is thus rewarded by a successful income split. Income shifting by short term assignment is denied in other circumstances where an attempt is made to provide another with an income: in those circumstances it is penalised by the creation of two levels of income, not simply the defeat of the shift. The meaning of the words “by way of alimony or maintenance” is, therefore, of considerable importance. The Commissioner will wish to deny that the words are satisfied in circumstances where there is an amiable arrangement between husband and wife.