The corporate trustee (“Gleewin”) of a discretionary trust resolved to set aside, for the benefit of two beneficiaries (Mr. Bendel and a family company (“Gleewin Investments”)), amounts out of its income to be held on separate trusts. Unlike Mr. Bendel, Gleewin Investments did not call for payment of the amount set aside for it.
The Commissioner assessed on the basis that, by not so doing, Gleewin Investments had made a “loan” to the trust that, thus, was deemed to be a dividend. “Loan” was defined to include:
- “a provision of credit or any other form of financial accommodation” (s. 109D(3)(b) of the 1936 Act); and
- “a transaction (whatever its terms or form) which in substance effects a loan of money” (s. 109D(3)(d)).
The majority first noted (at para. 68) that:
Plainly, Gleewin Investments' forbearance here did not … even meet the substance of such a concept [of loan], as no promise of repayment was ever given.
The majority then stated (at para. 72):
[T]here is no "provision ... of financial accommodation" for the purposes of s 109D(3)(b) when a private company does nothing. The provision of financial accommodation requires some initial or anterior transfer of value or, put in different terms, the supply or grant of some sort of pecuniary assistance, involving some bilateral activity.
In further finding that there was no loan within the meaning of s. 109D(3)(d), the majority stated (at para. 74):
Simply doing nothing, or acquiescing to the retention of funds, is not a transaction which in substance effects a loan. To find otherwise would be to ignore the word "transaction", which by its ordinary meaning refers to some interchange or interaction between entities. That conclusion is buttressed by the fact that the relationship between Gleewin as trustee and Gleewin Investments remained one of trustee and beneficiary and not one of debtor and creditor. Moreover, if the Commissioner were correct, it would mean that a private company beneficiary in the position of being able to invoke the rule in Saunders v Vautier would be taken to have made a loan to a trustee for the purposes of s 109D(3) for the period during which the beneficiary could have called for the trust to be terminated, but did not. That is a highly improbable outcome.
In her dissenting reasons, Jagot J stated (at paras 177, 180):
[T]he reasoning in Fischer v Nemeske Pty Ltd confirms that: (i) "no action at common law for money had and received lies against a trustee in respect of its equitable obligations even if those obligations extend to the payment of money"; and (ii) if, however, a trustee admits to a beneficiary that the trustee has appropriated a sum as payable to the beneficiary, the character of the relationship is changed so that the trustee is liable in law to the beneficiary for the payment of that sum, which obligation the beneficiary could vindicate by an action for money had and received against the trustee. …
[I]rrespective of the fact that Gleewin determined to "set aside" portions of Trust income rather than to "pay" such portions, Gleewin was immediately bound by the resolutions either to pay a beneficiary its entitlement (as and when calculated) or to credit the amounts payable in its books of account whether or not a beneficiary required it to do so. It was only if Gleewin took the latter option in respect of a beneficiary's entitlement that the beneficiary could either accept that Gleewin could continue to hold those amounts or require Gleewin to pay those amounts to it.
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