Supreme Court New South Wales

• Medium Neutral Citation: Newcastle Airport Pty Ltd v Chief Commissioner of State Revenue [2014] NSWSC 1501
• Hearing dates: 8 and 9 September 2014
• Decision date: 31 October 2014
• Jurisdiction: Equity Division
• Before: White J

Decision

Counsel for the plaintiff to bring in short minutes of order in accordance with reasons.

• Catchwords: TAXES AND DUTIES - payroll tax - assessment for payroll tax - where local councils delegated function of developing and maintaining airport to plaintiff - whether plaintiff's employment of employees or payment of employees' wages for purpose of operating airport were delegated functions or functions incidental thereto - Interpretation Act 1987 (NSW) s 49 - exempt wages - Payroll Tax Act 2007 (NSW) s 58 - whether wages are taken to have been paid or payable by councils because they were paid or payable by plaintiff as councils' delegate and thereby exempt from payroll tax - effect of s 49(6) of Interpretation Act 1987 (NSW); EQUITY - trusts and trustees - powers, duties, rights and liabilities of trustees - trustee's right of exoneration - where plaintiff held moneys on trust for councils - whether wages paid by councils within meaning of Payroll Tax Act 2007 (NSW) s 58 because paid from trust moneys to which councils were beneficially entitled
• Legislation Cited: Church of England (Bodies Corporate) Act 1938 (NSW); Interpretation Act 1987 (NSW); Local Government Act 1919 (NSW); Local Government Act 1993 (NSW); Pay-roll Tax Act 1971 (NSW); Payroll Tax Act 2007 (NSW); Stamp Duties Act 1920 (NSW); Taxation Administration Act 1996 (NSW)
• Cases Cited: Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26; (2012) 16 BPR 30,397; Arjon Pty Ltd v Commissioner of State Revenue [2003] VSCA 213; (2003) 8 VR 502; Baker v Archer-Shee [1927] AC 844; Balkin v Peck (1998) 43 NSWLR 706; Blackpool Corporation v Locker [1948] 1 KB 349 Re Reference under s 11 of Ombudsman Act 1976 (1979) 2 ALD 86; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2003] VSCA 214; (2003) 8 VR 532; CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98; D K L R Holding Co (No. 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510; DCC Holdings (UK) Limited v Revenue and Customs Commissioners [2010] UKSC 58; [2011] 1 WLR 44; Federal Commissioner of Taxation v Comber (1986) 10 FCR 88; Glebe Administration Board v Commissioner of Pay-roll Tax (1987) 10 NSWLR 352; Hardoon v Belilios [1901] AC 118; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 Qd R 576; Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550; Marshall v Kerr (1993) 67 TC 56; New South Wales Land and Housing Corporation v Navazi [2013] NSWCA 431; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Re Transphere Pty Ltd (1986) 5 NSWLR 309; Williams v Singer [1921] 1 AC 65
• Category: Principal judgment
• Parties: Newcastle Airport Pty Ltd (Plaintiff); Chief Commissioner of State Revenue (Defendant)
• Representation: Counsel: M Richmond SC with A Hochroth (Plaintiff); C Leggat SC with A Gerard (Defendant); Solicitors: Herbert Smith Freehills (Plaintiff); Crown Solicitor (Defendant)
• File Number(s): 2013/281117

Judgment

1 HIS HONOUR: This is an application under s 97 of the Taxation Administration Act 1996 (NSW) to review a decision of the Chief Commissioner of State Revenue to assess the plaintiff ("NAL") for payroll tax for the periods from 1 July 2008 to 30 September 2012. Notices of assessment were issued on 8 November 2012 for amounts totalling $622,307.43.

2 NAL claims that the wages in respect of which payroll tax was assessed were not taxable wages, but were exempt wages pursuant to s 58 of the Payroll Tax Act 2007 (NSW). Section 58 provides:

"58 Local and county councils

Subject to section 60, wages are exempt wages if they are paid or payable by a council or county council, within the meaning of the Local Government Act 1993."

3 The Chief Commissioner no longer relies on any part of s 60, which provides for limitations on local government exemptions under s 58.

4 NAL is not a local council. It manages the civil aviation facility at the Newcastle Airport at Williamtown on behalf of the Newcastle City Council and the Port Stephens Shire Council. For that purpose during the relevant period it entered into contracts of employment with various individuals. NAL contends that in doing so it was exercising functions delegated to it by both councils. It relies on s 49(6) of the Interpretation Act 1987 (NSW). That subsection provides:

"49 Delegation of functions

...

(6) A delegated function that is duly exercised by a delegate shall be taken to have been exercised by the delegator."

5 NAL contends that by reason of s 49(6) the wages it paid to employees are taken to have been payable by and to have been paid by the councils. Accordingly, it contends that the wages were exempt wages and not taxable wages.

6 The Chief Commissioner contends that in entering into contracts of employment NAL was contracting personally and not on behalf of the councils and in doing so was not exercising a delegated function. The Chief Commissioner contends that the councils did not delegate to NAL their function of employing staff. The Chief Commissioner also contends that the staff were engaged in NAL's operating the civil aviation facility and the operation of the facility was not a delegated function. The Chief Commissioner also contends that even if in contracting with its employees NAL was duly exercising a delegated function s 49(6) of the Interpretation Act does not have the effect that the wages payable to the employees are to be taken as being payable and as having been paid by the councils within the meaning of s 58 of the Payroll Tax Act.

7 NAL advanced an alternative submission described as a fallback submission. If it failed on its delegation submission, NAL contended that nonetheless the wages paid in the relevant period were paid by the councils because the moneys used by NAL to pay the wages were moneys held on trust by it for the councils.

8 The important issues are:

1. Whether in making contracts of employment with its employees and paying wages NAL was exercising a function delegated to it by the councils, and if so;

2. Whether the effect of s 49(6) of the Interpretation Act is that the councils are taken to be the employers of those workers (either in addition to or in place of NAL) and the wages are to be taken to have been paid or to have been payable by the councils for the purposes of s 58 of the Payroll Tax Act.

3. If no to 1 or 2, whether the wages were paid by the councils for the purposes of s 58 of the Payroll Tax Act because the moneys used to pay the wages were held by NAL on trust for the councils.

9 I have concluded that NAL succeeds on the first two issues. The third issue does not arise. Had the third issue arisen, I would not have upheld NAL's submission on it. Because NAL succeeds on the first two issues, the notices of assessment should be revoked. NAL is entitled to a refund of the tax paid with interest.

Background Facts

10 Newcastle Airport is on Commonwealth land. It housed and houses a RAAF base. On 29 October 1992 the Commonwealth Department of Transport and Communications wrote to the general manager of the Newcastle City Council referring to a meeting with the relevant Commonwealth minister, representatives of both councils and representatives of the Department of Defence in relation to the transferring of responsibility for the civil area of Newcastle Airport to the Newcastle City Council and the Port Stephens Shire Council on a long-term lease. The Department referred to advice provided by both councils that they had agreed to accept the Commonwealth's offer for the transfer of the civil area of the airport to the councils jointly. The Department noted that the councils would be responsible for the operation and maintenance and development of the civil facilities during the term of the proposed 30-year lease.

11 The lease was subsequently entered into between the Commonwealth of Australia as lessor and the Newcastle City Council and Port Stephens Council as lessee for a term of 30 years commencing from 1 July 1994. The term was later increased so that it expires on 31 March 2045. The lease provides:

"13. PERMITTED USE

13.1 The Lessee shall use the Land for the purposes of civil aviation (including the provision of an airport terminal building and other related facilities and activities).

13.2 The Lessee shall at all times during the term of this lease -

13.2.1 operate and maintain the Land for the Permitted Use in accordance with Commonwealth and State law and in particular and without limiting the generality thereof the Lessee shall obtain any necessary licences and approvals to operate the Land for the Permitted Use and shall permit access to the Land to all authorised persons in accordance with all legislation applicable from time to time provided where the Lessor is responsible for the granting of any such licences and approvals the granting of such licences and approvals will not be unreasonably withheld by the Lessor;

13.2.2 be solely responsible for developing, operating and maintaining the Land and the Civil Facilities in accordance with standards prescribed by the Civil Aviation Authority;

..."

12 The area leased to the councils does not include the runway and the airfield. They are on adjacent land also owned by the Commonwealth and operated by the RAAF. The RAAF is responsible for the management of the runway and the airfield. The aprons and the civil aviation terminal are located on land leased to the councils. The land leased also includes roads and car parks that support the airport terminal and aviation precinct in respect of which subleases of offices and hangar space have been entered into. There is a second aviation precinct on land the subject of a lease from the Commonwealth which is currently undeveloped. During the relevant period eight commercial airlines operated from the airport. The RAAF provides all air traffic control services at the airport, is responsible for maintaining and repairing the runways and completing runway inspections and providing fire and rescue services. The airlines are, and during the relevant period were, responsible for checking in passengers, accepting baggage from passengers, undertaking security questioning of passengers, moving passengers onto gangways to board the planes, updating some aspects of the flight information display system such as boarding details, managing their own ground-handling staff and parking their own aircraft.

13 NAL has engaged contractors to provide cleaning services, security services and baggage screening services, to maintain and service car parks, to manage external advertising signage and to manage internal advertising space within the terminal.

14 Whilst NAL employs a contractor to undertake the screening and security processing of baggage, it also employs staff responsible for the security screening of any oversized baggage and for dealing with any issues which arise in relation to the screening of baggage by the contractor. The councils sublease space to airlines and to a company that operates helicopters. The councils also sublease retail space within the airport terminal and sublet desk space within the terminal and rental car parking spaces to car rental companies. NAL manages and during the relevant period managed the contracts with the other businesses that operated the airport including the airlines, retailers, baggage-handling contractors, cleaning services contractors, car park maintenance contractors, advertising signage contractors, car rental companies, shuttle services operating between the airport and Newcastle, limousine services, taxi services and other businesses involved in the operation of the airport.

15 NAL does not undertake any business operations other than its business at the Newcastle Airport.

16 During the relevant period from 1 July 2008 to 30 September 2012 NAL employed 87 individuals. Three individuals are employed in any one day as the Terminal Operations Officer on three overlapping shifts. They are responsible for maintaining security of the airport and undertaking various tasks in connection with the operation of the airport that are unnecessary to describe. There is a Terminal Operations Co-ordinator whose role is to oversee movements within the airport, including the operation of the baggage system, car parks, flight information system and other systems. Again, the role of the Terminal Operations Co-ordinator is for the operation of the airport, such as by controlling the flight information displays in the terminal, allocating bays for commercial aircraft and communicating that information to the airlines, monitoring the car park system and similar operational issues. A Terminal Services Supervisor is responsible for developing standard operating procedures, for co-ordinating training for NAL employees, for apron management and compliance, for liaising with the car park operator and other duties. The Commercial Property Co-ordinator is responsible for managing tenancies within the terminal and the commercial leases in the aviation precincts and the contract with the contractor responsible for maintenance and service of the car park. A project manager is responsible for managing capital works such as terminal construction and the building of new roads. A Facilities Officer is responsible for performing maintenance within the airport terminal. A finance officer is responsible, as the name suggests, for producing requisite financial reports. Other employees are employed in relation to various aspects of the operation of the airport.

17 Counsel for NAL summarised the activities of the employees as being all activities for the operation and development of the airport. It is clear that the bulk of the activities of the employees are directed to the day-to-day operations of the airport. The activities of some employees, such as the Project Manager responsible for managing capital works, are directed to the future development of the airport. But the bulk of the work of the employees is directed to day-to-day operations.

18 The significance of this is that the Chief Commissioner contends that the function of operating the airport was not a delegated function under the instruments of delegation.

19 On 18 December 1992 the Commonwealth and the Councils had entered into a licence for a six-month period to allow the councils to operate the airport until a lease was entered into. The licence was subsequently extended until the lease was entered into.

20 NAL was incorporated on 25 May 1993 as a company limited by guarantee. Its two members are the Newcastle City Council and the Port Stephens Shire Council. Its Memorandum of Association listed the following powers (amongst others):

"(I) The promotion of commerce by the operation of a civil aviation terminal and related activities.

(II) To accept appointment as and act as delegate of any person or body corporate with or without reward and to carry out any act in exercise or performance of the delegation and to declare a trust in respect of any property acquired or obtained in or in consequence of the exercise or performance of the delegation.

(III) To accept appointment and to act as trustee of any trust or fund with or without reward."

Declaration of trust and instruments of delegation

21 On 3 June 1993 NAL executed a declaration of trust. It provided:

"DECLARATION OF TRUST

This deed is made 3rd June, 1993

TO THE COUNCIL OF THE CITY OF NEWCASTLE

AND THE COUNCIL OF THE SHIRE OF PORT STEPHENS

('the Councils')

NEWCASTLE AIRPORT LIMITED ACN 060 254 542 ('the Company')

SENDS GREETING:

WHEREAS:

A. The Company has agreed to act as the delegate of the councils upon the terms and conditions set forth in the Schedule below and as they may be amended, extended or replaced from time to time ('the Delegations').

B. In compliance with and to satisfy paragraph 2 of the Delegations the Company is executing these presents.

NOW THIS DEED WITNESSES:

That the Company declares and agrees that it will:

1. Hold all property of any kind (including all interests therein or thereto and moneys or other property received or receivable by the Company to which the Company is or may become entitled) which the Company may hold or to which the Company may be entitled at any time in the exercise or purported exercise of the delegation referred to in paragraph 1 of the Delegations ('the property') on trust for the Councils absolutely.

2. Not dispose of or deal with the property from time to time other than to satisfy the obligations of the Company properly incurred in the exercise of the delegation referred to in paragraph 1 of the Delegations only when and in such manner as the Councils may from time to time permit.

3. Transfer and/or dispose of the property in such manner as the Councils may from time to time direct.

..."

The schedule to the deed recited the resolutions for delegation made by both councils pursuant to s 530A of the Local Government Act 1919 (NSW).

22 Prior to 1 July 1993, the Local Government Act 1919 was in force. Section 490 of that Act relevantly provided:

"490.

(1) The council may establish, maintain, and

regulate public aviation stations for the starting, landing,

housing, and repair of aerial craft."

23 Section 530A of the Local Government Act 1919 provided that:

"530A

(2) Subject to this section the council may by resolution authorise an officer, or a servant, or a person, or a committee consisting either wholly or in part of officers, servants or persons to exercise or perform on behalf of the council any power, authority, duty, or function of the council other than a power, authority, duty or function relating to -

(a) the making of any rate, the fixing of any charges or fees, or the borrowing of any moneys;

(b) the voting of moneys for expenditure on the works, services or operations of the council;

(c) the resumption, purchase, sale, exchange, leasing or surrender of any land or other property or the granting of any lease of land;

(d) the acceptance of tenders;

(e) any application or notice to the Governor or the Minister;

(f) the payment of travelling expenses;

(g) any other matter which may be prescribed."

24 On 25 May 1993 both the Port Stephens Council and the Newcastle City Council resolved to make the following delegation to NAL:

"1. That pursuant to s 530A of the Local Government Act 1919 ('the Act') council delegate to Newcastle Airport Limited ACN 060254542 ('the Company') the function of establishing, maintaining and regulating a public aviation station within the meaning of s 490 of the Act at the civil area of Williamtown Airport."

25 On 1 July 1993 the Local Government Act 1919 was repealed and replaced by the Local Government Act 1993 (NSW). Whereas the 1919 Act had specified a long list of particular functions that councils could perform, the 1993 Act conferred general powers on councils to perform functions. Section 21 of the 1993 Act provides that:

"21 Functions under this Act

A council has the functions conferred or imposed on it by or under this Act.

Note. This Act classifies certain of a council's functions as service, that is, non-regulatory (Chapter 6), regulatory (Chapter 7) or ancillary (Chapter 8). Ancillary functions are those functions that assist the carrying out of a council's service and regulatory functions.

A council also has revenue functions (Chapter 15), administrative functions (Chapters 11, 12 and 13) and functions relating to the enforcement of this Act (Chapters 16 and 17)."

26 Chapter 6 confers "service functions" on councils. Section 24 is the general provision. It provides:

"24 Provision of goods, services and facilities and carrying out of activities

A council may provide goods, services and facilities, and carry out activities, appropriate to the current and future needs within its local community and of the wider public, subject to this Act, the regulations and any other law."

27 It is pursuant to s 24 that the two councils provide the services and facilities and carry out the activity of the Newcastle Airport.

28 Section 355 of the Local Government Act 1993 provides:

"355 How does a council exercise its functions?

A function of a council may, subject to this Chapter, be exercised:

(a) by the council by means of the councillors or employees, by its agents or contractors, by financial provision, by the provision of goods, equipment, services, amenities or facilities or by any other means, or

...

(d) jointly by the council and another council or councils (including by means of a Voluntary Regional Organisation of Councils of which the councils concerned are members), or

(e) by a delegate of the council (which may, for example, be a Voluntary Regional Organisation of Councils of which the council is a member)."

29 Section 380 of the Local Government Act 1993 provides:

"380 Review of delegations

Each council must review all its delegations during the first 12 months of each term of office."

30 As a result of the enactment of the new Local Government Act in 1993 new delegations were adopted by the Port Stephens Council on 14 September 1993 and by the Newcastle City Council on 28 September 1993. Both delegations were expressed to be conditional upon there being a delegation by the other council "in terms identical with this delegation". But the terms of the delegations were not identical. The delegation of the Port Stephens Shire Council was:

"1. That pursuant to s 377 of the Local Government Act 1993 ('the Act') and in reliance upon declaration of trust dated 3 June 1993 by Newcastle Airport Limited ACN 060254542 ('the Company') ... the council delegate to the Company the function of establishing, developing, operating, maintaining and regulating a facility for the conduct of civil aviation and all associated and/or supporting activities (being formerly described as a public aviation station within the meaning of s 490 of the [now repealed] Local Government Act, 1919) being a service and/or facility and/or activity within the meaning of s 24 of the Act at the civil area of Williamtown Airport."

31 The delegation by the Newcastle City Council resolved upon at its meeting of 28 September 1993 was that:

"That pursuant to s 377 of the Local Government Act, 1993 ('the Act') and in reliance upon declaration of trust dated 3 June 1993 by Newcastle Airport Limited ACN 060254542 ('the Company') a copy of which is set forth in the schedule hereto, the council delegate to the Company the function of establishing maintaining and regulating a public aviation station within the meaning of s 24 of the Act at the civil area of Williamtown Airport."

32 It is doubtful that either delegation took effect because they were not "in terms" identical even if they were identical in effect. The Port Stephens Council's delegation included a delegation of the function of "operating" "a facility for the conduct of civil aviation and all associated and/or supporting activities (being formerly described as a public aviation station within the meaning of s 490 of the (now repealed) Local Government Act 1919". Newcastle City Council's delegation did not include the word "operating" and used different words to describe the relevant facility. This case is concerned only with payroll tax that might be payable from 1 July 2008.

33 New delegations were made by both councils under seal in 2001. The delegation was made by the Newcastle City Council on 27 March 2001 and by the Port Stephens Council on 22 May 2001.

34 The delegation by the Newcastle City Council was in the following terms:

"INSTRUMENT OF DELEGATION TO NEWCASTLE AIRPORT LIMITED

Review Date: 8 March 2001

Delegations

Pursuant to Sections 355, 377 and 381 of the Local Government Act 1993 (NSW) ('the Act') and in previous delegation reliance upon Declaration of Trust dated 3 June 1993 and executed by Newcastle Airport Limited CAN 060 254 542 ('the Company') a copy of which is set forth in the attached Schedule. Newcastle City Council hereby delegates the following powers, authorities, duties or functions to the body known as Newcastle Airport Limited. These delegations are to be exercised according to:

The requirements of the Local Government Act, 1993, and Regulations thereunder;

The requirements of any other relevant Act, law or regulation

Any expressed resolution or policy of Newcastle City Council

Authority to establish, develop, maintain and regulate a facility for the conduct of civil aviation and all associated and/or supporting activities being a service and/or facility and/or activity within [the] meaning of Section 24 of the Act at the civil area of Williamtown Airport.

This delegation is conditional upon:

The delegation of authority by Port Stephens City Council to the Company ('the Port Stephens City delegation') in terms identical with this delegation; and

The continuance in full force and effect of the Port Stephens City Delegation.

This delegation shall be deemed revoked upon revocation of the Port Stephens City Delegation.

Nothing in this delegation shall be construed so as to amount to a power or function which cannot be delegated under Section 377 of the Act, being:-

the appointment of a general manager

the making of a rate

a determination under section 549 as to the levying of a rate

the making of a charge

the fixing of a fee

the borrowing of money

the voting of money for expenditure on its works, services or operations

the compulsory acquisition, purchase, sale, exchange or surrender of any land or other property (but not including the sale of items of plant or equipment)

the acceptance of tenders which are required under this Act to be invited by the council

the adoption of a management plan

the adoption of a financial statement included in an annual financial report

a decision to classify or reclassify public land under Division 1 of Part 2 of the Chapter 6

the fixing of an amount or rate for the carrying out by council of work on private land

the decision to carry out work on private land for an amount that is less than the amount or rate fixed by the council for the carrying out of any such work

the review of a determination made by council, and not by a delegate of the council, of an application for approval or an application that may be reviewed under section 82A of the Environmental Planning and Assessment Act 1979

the power of the council to authorise the use of reasonable force for the purpose of gaining entry to premises under section 194

a decision under section 356 to contribute money or otherwise grant financial assistance to persons

the power of the council under section 455 in relation to attendance at meetings

the making of an application, or the giving of a notice, to the Governor or Minister

this power of delegation

any function under this or any other Act that is expressly required to be exercised by resolution of Council

The delegations revoke all previous delegations to Newcastle Airport Limited.

The delegation to Newcastle Airport Limited is effective from the date of this Instrument of Delegation as authorised by Council."

35 On 22 May 2001 the Port Stephens Council executed an instrument of delegation in identical terms to that of the Newcastle City Council except that it included the following additional words:

"In addition, Port Stephens Council delegates to Newcastle Airport Limited:

In accordance with relevant Council policy, authority to undertake the function of day to day control of Newcastle Airport Limited employees who have been delegated authority by Council to act as enforcement officers under the Road Transport (Short Descriptions and Penalty Notices Offences) Regulation 1999 (NSW) and Clause 60(1) of the Road Transport (Safety and Traffic Management)(Road Rules) Regulation 1999 (NSW). This day-to-day control will include management of the employees in their roles as enforcement officers, and monitoring and reporting performance of those officers to Port Stephens Council on a quarterly basis.

In accordance with relevant Council policy, authority to adjudicate all appeals and to deal with all Court elections made in relation to issue of Infringement Notices by NAL employees for restricted parking infringements at Newcastle Airport.

The authorisation immediately above is delegated to Newcastle Airport Limited by Port Stephens Council as the authority for the Port Stephens Local Government Area and its continuance in full force and effect is not subject to identical delegation by Newcastle City Council.

The above delegations revoke all previous delegations to Newcastle Airport Limited.

The delegation to Newcastle Airport Limited is effective from the date of this Instrument of Delegation as authorised by Council."

36 The Chief Commissioner did not contend that the additional delegation by the Port Stephens Council for the Port Stephens local government area that was expressed not to be subject to identical delegation by the Newcastle City Council affected the validity of the delegations. It was common ground that from 2001 both councils had given delegations in identical terms to NAL to "establish, develop, maintain and regulate a facility for the conduct of civil aviation and all associated and/or supporting activities being a service and/or facility and/or activity within the meaning of s 24 of the Act at the civil area of Williamtown Airport".

37 On 21 December 2004 the Port Stephens Council made a new instrument of delegation to NAL. It was in identical terms to the previous delegation, but revoked the previous delegation to NAL.

38 No new delegation was made by the Newcastle City Council in 2004. NAL submitted that accordingly its delegation of 27 March 2001 continued in operation. However, the delegation by the Newcastle City Council of 27 March 2001 was expressed to be conditional upon "the continuance in full force and effect of the Port Stephens City Delegation", being the delegation by the Port Stephens Shire Council "in terms identical with this delegation". That delegation was made by the Port Stephens City Council on 22 May 2001. Prima facie it was revoked on 21 December 2004 but replaced by a delegation on 21 December 2004 in identical terms. If so, it would be at least arguable that the delegation by the Newcastle City Council on 22 May 2001 was deemed to be revoked on 21 December 2004.

39 If the delegation of the Port Stephens Council of 22 May 2001 was revoked by its delegation of 21 December 2004 and the revocation of its delegation revoked the Newcastle City Council's delegation of 27 March 2001, as the Port Stephens Council's delegation of 21 December 2004 was conditional on a delegation of authority by the Newcastle City Council in identical terms, and as there was no new delegation by the Newcastle City Council at that time, it would be arguable that from 21 December 2004 there was no effective delegation of functions until new delegations were signed by both councils in September 2009.

40 On 8 September 2009 the Port Stephens Council passed a resolution to delegate functions to NAL in the same terms as the previous delegation of 21 December 2004, save that it omitted the delegation of the additional functions confined to the Port Stephens local government area that was contained in the 2004 delegation. Relevantly, it delegated the:

"following powers, authorities, duties or functions to the body known as Newcastle Airport Limited:

...

Authority to establish, develop, maintain and regulate a facility for the conduct of civil aviation and all associated and/or supporting activities being a service and/or facility and/or activity within the meaning of s 24 of the Act at the civil area of Williamtown Airport. The authorisation immediately above is conditional upon:

→ the delegation of authority by Newcastle City Council to the Company (the 'Newcastle City delegation') in terms identical with this delegation; and

→ the continuance in full force and effect of the Newcastle City delegation. This delegation shall be deemed revoked upon revocation of the Newcastle City delegation."

41 On 22 September 2009 the Newcastle City Council passed a resolution in identical terms. Those delegations continued in force until 2011 when new delegations were made by both councils in the same terms.

42 The Chief Commissioner did not submit that no delegations were in force for the period from 1 July 2008 to 22 September 2009. This may have been because the view was taken that the revocation by the Port Stephens Council on 21 December 2004 of the previous delegation was only to be effective if a new delegation was effectively made. On that view, the 2001 delegations continued until they were replaced by the September 2009 delegations. As no submissions were made about this issue I proceed on the basis that was common ground, namely, that at all times relevant to the tax years in question delegations were in force appointing NAL as the delegate of both councils.

43 Clearly, from 22 September 2009 delegations from both councils were in effect on the same terms as the previous delegations.

Employment of individuals to operate airport was within the delegated functions

44 The delegations conferred on NAL "authority" to "establish, develop, maintain and regulate a facility for the conduct of civil aviation and all associated and/or supporting activities being a service and/or facility and/or activity within the meaning of s 24 of the [Local Government] Act [1993] of the civil area of Williamtown Airport." To do those things NAL needed to employ people. The function delegated was the provision of a service, facility or activity within the meaning of s 24 quoted at para [26] above. The provision of those services, facilities and activities could only be done through individuals who would have to be engaged by NAL as contractors or employees. There was no express delegation of the councils' function of employment. The functions delegated were the "provision" of services and facilities and the carrying out of activities at the airport. The functions delegated were functions to be carried out by the councils or their delegate in relation to third parties, such as airlines or passengers. The employment of individuals was a means of performing those functions and was incidental to the performance of those functions, but it was not itself one of the functions delegated.

45 Section 49 of the Interpretation Act provides:

"49 Delegation of functions

(1) If an Act or instrument confers a power on any person or body to delegate a function, the person or body may, in accordance with the Act or instrument, delegate the function to a person or body by name or to a particular officer or the holder of a particular office by reference to the title of the office concerned.

(2) A delegation:

(a) may be general or limited,

(b) shall be in, or be evidenced by, writing signed by the delegator or, if the delegator is a body, by a person authorised by the body for that purpose, and

(c) may be revoked, wholly or partly, by the delegator.

(3) A delegated function may be exercised only in accordance with any conditions to which the delegation is subject.

(4) A delegate may, in the exercise of a delegated function, exercise any other function that is incidental to the delegated function.

(5) A delegated function that purports to have been exercised by a delegate shall, until the contrary is proved, be taken to have been duly exercised by the delegate.

(6) A delegated function that is duly exercised by a delegate shall be taken to have been exercised by the delegator.

(7) If:

(a) the exercise of a function by a person or body is, by virtue of an Act or instrument, dependent on the opinion, belief or state of mind of the person or body in relation to any matter, and

(b) the person or body has delegated the function to some other person or body,

the function may be exercised by the delegate on the opinion, belief or state of mind of the delegate in relation to any such matter.

(8) If a function is delegated by or to a particular officer or the holder of a particular office:

(a) the delegation does not cease to have effect merely because the person who was the particular officer or the holder of the particular office when the function was delegated ceases to be that officer or the holder of that office, and

(b) the person for the time being occupying or acting in the office concerned is taken to be the delegator or delegate (as the case requires).

(9) A function that has been delegated may, notwithstanding the delegation, be exercised by the delegator.

(10) This section applies to a sub-delegation of a function in the same way as it applies to a delegation of a function, but only in so far as the Act or instrument that authorises the delegation of the function also authorises the sub-delegation of the function."

46 Pursuant to s 49(4) of the Interpretation Act, NAL in exercising its delegated functions could exercise other functions incidental to the delegated functions, including the function of employing individuals to enable it to perform the delegated function. I do not consider that the employment of the individuals was the establishment, development, maintenance or regulation of associated or supporting activities. Those activities refer to matters in which the councils (through their delegate) engage with external third parties to whom services and facilities are provided.

47 I accept NAL's submission that the things done by NAL through its employees in operating the airport fell within the terms of the delegations even though the delegations did not include a separate delegation of a function of "operating" the airport. The Chief Commissioner submitted that:

"To operate something connotes the actual carrying on of an activity or thing by positive action, as distinct from:

I the setting up or instituting of that activity or thing (establish);

II advancing the capabilities or possibilities of the activity or thing (development);

III preserving or retaining the status quo of the activity or thing (maintain);

IV controlling of the manner or method of the carrying on of the activity or thing (regulate)."

48 I think this is too narrow an approach. The Macquarie Dictionary definition of "develop" includes "to bring out the capabilities or possibilities of; bring to a more advanced or effective state; to cause to grow or expand" and the definition of "maintain" includes "to keep in existence or continuance, to keep in due condition operation or force." Moreover, the thing to be developed and maintained is not just the physical infrastructure of the airport but the airport as a service and facility. The service or facility provided to airlines, passengers, visitors and others, for example retailers, is the airport developed and maintained through its continued operation. Even if this were not so the acts of operating the airport would in any event fall within the delegation of developing and maintaining all associated or supporting activities.

49 Whether the instruments of delegation are construed in the same way as a statute or as a contract, the instruments are to be construed in their context and having regard to their purpose as objectively known. That context and purpose included that the delegations would be the means by which the councils would perform their obligations to the Commonwealth under the lease to operate the civil aviation facility. The words used in the instruments of delegation were sufficient to achieve that purpose.

Interpretation Act section 49(6)

50 As I have said, the employment of workers by NAL was incidental to the performance by NAL of its delegated function. The employment of the workers and the payment of their wages was the means by which the delegated function was exercised. Section 49(4) of the Interpretation Act provides that a delegate may, in the exercise of a delegated function, exercise any other function that is incidental to the delegated function. Section 49(4) applies in the present case. It is clear from s 49(4) that a delegate exercises a delegated function when the delegate exercises a function incidental to the delegated function for the purpose of exercising the delegated function.

51 The Chief Commissioner argued that s 49(6) applies only to the exercise of a delegated function and not to the exercise of a function incidental thereto. I do not agree. In such a case, and in this case, in exercising a function incidental to the delegated function, the delegate exercises the delegated function itself. That is to say, the delegated function is to be taken to include the exercise of functions incidental to it.

52 The Chief Commissioner argued that in employing staff NAL was acting personally. So much may be accepted. The contracts of employment were made personally between each employee and NAL. NAL took out in its own name the policy of workers' compensation insurance. This is consistent with its acting as the councils' delegate. Where a statute confers a power or authority on A and authorises A to delegate that power or authority to another and the delegation is made, the delegate exercises personally the power or authority that has been conferred on him, her or it. The delegate does not act as agent for A because the effect of the delegation is that the power in question is exercisable by the delegate and not by A (Blackpool Corporation v Locker [1948] 1 KB 349 at 365, 374; Re Reference under s 11 of Ombudsman Act 1976 (1979) 2 ALD 86 at 94; New South Wales Land and Housing Corporation v Navazi [2013] NSWCA 431 at [58]). Hence, if the delegate acts beyond power by failing to adhere to a condition of the delegation, the validity of the delegate's act cannot be saved by a subsequent purported ratification by A (Blackpool Corporation v Locker at 377-378). The power must be exercised in the name of the delegate (Re Reference under s 11 of Ombudsman Act 1976 at 95).

53 Section 49(6) modifies this position by deeming the delegated function, where duly exercised by the delegate, to have been exercised by the delegator. The acts of the delegate in duly exercising the delegated function, which include the acts done as the means of performing the delegated function, are deemed to have been done by the delegator.

54 The Chief Commissioner submitted that such a deeming provision is to be construed strictly and only for the purpose for which resort is to be had to it (Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96). The Chief Commissioner's argument did not explain how s 49(6) would operate if given a narrow or strict construction as distinct from giving the words used their ordinary and natural meaning. Counsel for the Chief Commissioner submitted that s 49(6) existed "for the purposes of determining whether or not a statutory function has been exercised by the delegator". Undoubtedly, that is true in the sense that the provision provides that where a delegated function has been duly exercised by the delegate, it is taken to have been exercised by the delegator. But that is only to repeat the words of the section. Counsel submitted that the purpose of the provision was "to determine whether or not a statutory function has been exercised". I do not understand that submission because s 49(6) applies only where a delegated function has been duly exercised.

55 In my view the approach to be taken to construing the deeming provision in s 49(6) is the same as in construing any statute. In DCC Holdings (UK) Limited v Revenue and Customs Commissioners [2010] UKSC 58; [2011] 1 WLR 44 at 58 Lord Walker approved the following passage from the judgment of Peter Gibson J in Marshall v Kerr (1993) 67 TC 56 (at [38]) as follows:

"[38] Peter Gibson J (with whom Balcombe and Simon Brown LJJ agreed) then stated this principle 67 TC 56, 79 (the same passage also appears at p 92 but with five words accidentally omitted):

'For my part, I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that, because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.'

In the House of Lords (which reversed the Court of Appeal on a point not taken below) Lord Browne-Wilkinson approved this passage as the correct approach: [1995] 1 AC 148, 164."

56 Lord Walker added (at [39]):

"[39] Neuberger J developed this reasoning in a passage in Jenks v Dickinson [1997] STC 853, 878, 69 TC 458 that I find helpful:

'It appears to me that the observations of Peter Gibson J, approved by Lord Browne-Wilkinson, in Marshall indicate that, when considering the extent to which one can "do some violence to the words" and whether one can "discard the ordinary meaning", one can, indeed one should, take into account the fact that one is construing a deeming provision. This is not to say that normal principles of construction somehow cease to apply when one is concerned with interpreting a deeming provision; there is no basis in principle or authority for such a proposition. It is more that, by its very nature, a deeming provision involves artificial assumptions. It will frequently be difficult or unrealistic to expect the legislature to be able satisfactorily to [prescribe] the precise limit to the circumstances in which, or the extent to which, the artificial assumptions are to be made.'"

57 The purpose of s 49(6) is clearly to modify what would otherwise be the position that a delegate is taken to be exercising himself, herself or itself the statutory function that by reason of the delegation is entrusted to the delegate personally. In Re Reference under s 11 of Ombudsman Act Brennan J said (at 94) that:

"There is a confusing similarity between the exercise of an authority's power by the authorized acts of another, and the exercise by an authority's delegate of the power delegated to him. In either case the act - whether the act of the authorized person or the act of the delegate - is a valid exercise of power. Nonetheless, the sources of validity are different, though it must be said that the term 'delegation' has frequently been used to describe either case without distinguishing between them. For some purposes, a distinction must be made.

Where an authority has not delegated his power but he has authorized another to act in exercise of his power, the act is to be done in the name of the authority: London County Council v Agricultural Food Products Ltd [1955] 2 QB 218 per Romer LJ at 224. But where a delegate is exercising the power delegated to him, he may validly exercise that power in his own name: Owendale Pty Ltd v Anthony (1967) 117 CLR 539 at 562, 611. May a departmental officer to whom the Director-General's powers and functions are delegated under s 12 of the Social Services Act elect whether to act as a delegate of power (in his own name), or an officer exercising the power of the Director-General (in the name of the Director-General)? In principle, there seems to be no reason why an attempted exercise of power should not be supported on either of the bases which would give validity to his act (Moore v Attorney-General for the Irish Free State [1935] AC 484 at 498; R v Bevan; Ex parte Elias and Gordon (1942) 66 CLR 452 at 487), but that approach assumes that the officer has a dual character - one who may exercise his own power and one who may exercise the like power vested in another."

58 In my view, s 49(6) is to be given its literal interpretation. NAL employed workers as the means of performing its delegated function. This was an incidental function but NAL did so in the exercise of its delegated function. It was duly exercising the delegated function in doing so. Accordingly, its actions in employing staff and paying them are taken to have been done by the councils. Unless there is anything in the Payroll Tax Act or in the instrument of delegation indicating a contrary intention, the effect of s 49(6) is to deem the councils to have paid the wages paid by NAL.

59 Section 5(2) of the Interpretation Act provides:

"5 Application of Act

...

(2) This Act applies to an Act or instrument except in so far as the contrary intention appears in this Act or in the Act or instrument concerned."

60 The Chief Commissioner did not submit that there was anything in the instruments of delegation that indicated a contrary intention. However, he did submit that s 59 of the Payroll Tax Act indicated that there was a contrary intention to the application of s 49(6) to s 58.

61 Section 59 provides:

"59 Local government business entities

(1) Subject to section 60, wages are exempt wages if they are paid or payable:

(a) by a wholly-owned subsidiary (within the meaning of the Corporations Act 2001 of the Commonwealth) of a council (within the meaning of the Local Government Act 1993), and

(b) to a person for or in connection with an activity that is conducted for the council under a written arrangement between the subsidiary and the council.

(2) The written arrangement referred to in subsection (1) (b) must include a provision for the payment by the subsidiary to the council of an amount approximately equivalent to the amount of tax that would be payable by the subsidiary under this Act but for the exemption."

62 NAL is not a wholly owned subsidiary of a council. It has two members, neither of whom is a body corporate, let alone a related body corporate, or a subsidiary of the other. But that is not material to the Chief Commissioner's argument. Counsel for the Chief Commissioner submitted that s 59 provided an additional ground of exemption, but only on conditions that the wages be paid or payable by a wholly owned subsidiary of a council, and be paid pursuant to a written arrangement that includes a provision for the payment by the subsidiaries of the council of an amount approximately equal to the amount of tax that would be payable by the subsidiary but for the exemption.

63 The fact that there is such a limited exemption is said to show a contrary intent to the application of s 49(6) to a delegation that would have the effect that the councils would be taken to have paid and to be liable to pay the wages payable by the vehicle through whom they act. If s 49(6) applied, the limitations in s 59 to an exemption in respect of wages payable by a wholly owned subsidiary of a council could be avoided by the subsidiary's taking a delegation of functions from the council, rather than by acting under an arrangement that did not involve a delegation.

64 The Chief Commissioner also submitted that it would not be consistent with the purpose of the exemption in s 58 of the Payroll Tax Act for the exemption to be available to NAL. Reliance was placed on NAL's 1999-2000 to 2003/2004 Business Plan that records that:

"Councils chose to delegate responsibility for management of the airport to a company limited by guarantee to ensure that the airport was operated as a stand-alone business which did not become a burden on ratepayers".

65 Neither of these arguments indicates a legislative intention that s 49(6) not apply. Section 59 of the Payroll Tax Act provides an additional and specific exemption where wages are paid or payable by a wholly owned subsidiary of a council. The limitation on the exemption that the arrangement with the subsidiary provide for payment to the councils of the payroll tax that would otherwise be payable by the subsidiary appears to be based on the ground that there be a level playing field where the council's subsidiary is in competition with other commercial providers of goods or services (Victorian Legislative Assembly, Parliamentary Debates (Hansard), 27 October 1998 at 730). It is unnecessary to consider how effective such a provision would be in achieving such an outcome or why the outcome would be desirable where the council has a choice between acting itself or incorporating a subsidiary. It is sufficient for present purposes that the limitation on the exemption provided to a subsidiary of a council is not a reason for displacing the operation of s 49(6) where the council has appointed a delegate, who may or may not be a subsidiary, and is thus to be taken as acting through it.

66 NAL's strategic plan does not indicate that there is any incongruity between the purpose of the exemption in s 58 and the application of the exemption to NAL through s 49(6) of the Interpretation Act. The reference in the business plan to the operation of the facility, through NAL, relieving ratepayers of the financial burden of the operation, clearly means that it was anticipated that the operation of the airport would be self-funding. That has proved to be the position. The airport has been conducted at a profit which has been accounted for as part of a joint venture between the councils and can be expected to be reflected in the councils' financial statements.

67 This would be the position, irrespective of the operation of s 49(6). If the airport were to operate at a loss, the councils would be required to indemnify NAL in respect of the expenses it incurred. Assuming that s 49(6) is not to be given a literal interpretation, or if NAL were not exercising a delegated function, it would nonetheless be entitled to indemnity from the councils in respect of expenses properly incurred on the principle in Hardoon v Belilios [1901] AC 118 and Balkin v Peck (1998) 43 NSWLR 706 that the beneficiaries who are sui juris and absolutely entitled are personally bound to indemnify the trustee for liabilities properly incurred. There is no reason as a matter of policy why the exemption which would undoubtedly be available to the councils had they conducted the operations as a joint venture using their own staff without the interposition of NAL should not be entitled to the benefit of the exemption. The fact that they obtained the benefit because they have used the power of delegation in the Local Government Act does not lead to any incongruous result.

68 For these reasons I accept NAL's submission that the wages in respect of which payroll tax has been levied are exempt wages as they are taken to have been paid and payable by the councils by reason of the operation of s 49(6) of the Interpretation Act.

NAL's alternative submission: Wages paid from moneys held on trust for councils

69 It follows that NAL's alternative submission that the wages were exempt because the moneys used by NAL to pay the wages were held on trust for the councils does not arise. Indeed, it is difficult to see how NAL could hold property on trust for the councils when everything it did in exercise of its delegated function, including its receipt of property, is taken to be done by the councils.

70 Nonetheless, I should deal with NAL's alternative argument even though it only arises if my conclusion as to the application or effect of s 49(6) is wrong. What follows proceeds on that assumption.

71 NAL argues that because the wages were paid from property held by NAL on trust for the councils, the wages were paid by the councils within the meaning of s 58 of the Payroll Tax Act. It relies on the dissenting judgment of Lee AJA in Glebe Administration Board v Commissioner of Pay-roll Tax (1987) 10 NSWLR 352. That case concerned the construction of s 10(b) of the Pay-roll Tax Act 1971 (NSW). Wages that were "paid or payable ... by a religious ... institution" were exempt from payroll tax. The wages were paid by the Glebe Administration Board, a body corporate constituted under the Church of England (Bodies Corporate) Act 1938 (NSW). It paid the wages out of moneys it received from managing commercial properties for the purposes of raising funds for the Church of England in New South Wales. The taxpayer submitted that whilst it was not a religious institution but paid the wages, in a realistic sense the wages were paid by a religious institution, namely the Church of England Diocese of Sydney. All of the property of the Board was held on trust for the Diocese. It was said that the money was "really" the money of the religious institution which was paying the wages of the Board's employees (at 365).

72 At first instance Rogers J held that the exemption provided for by s 10(b) was only available to a contractual employer. That view was upheld in the Court of Appeal (per Priestley JA with whom McHugh JA agreed at 369). The Chief Commissioner made the same submission in the present case, namely, that whether or not the moneys used to pay the wages were moneys held on trust for the council, the exemption in respect of wages paid or payable by councils was only engaged if the councils were the employers of the employees to whom the wages were paid. NAL did not point to any changes to the structure of the Payroll Tax Act since the decision in Glebe Administration Board v Commissioner of Payroll Tax that should yield a different conclusion.

73 In any event, I do not accept the premise of NAL's argument. The premise of the argument is that the moneys used to pay the wages were moneys of the two councils. If s 49(6) of the Interpretation Act does not have the effect that I have concluded it does have, the moneys used to pay the wages were moneys that were part of the property held on trust by NAL for the two councils. It does not follow, as NAL's argument assumed, that the moneys so used were beneficially owned by the councils. It is not in dispute that the liability of NAL to pay wages was a liability that it properly incurred in administering the trust. It had a right to be indemnified out of the trust property in respect of that liability. The right of indemnity was either a right of recoupment if it paid any money of its own or, more probably on the facts of this case, the right to be exonerated from its liability to pay wages to its employees out of the trust property. It had a preferred beneficial interest in the money used to pay the wages. The money used to pay the wages was its money by virtue of its legal ownership. The rights of councils as the beneficiaries were deferred to the right of NAL as legal owner to be exonerated out of the trust assets in respect of the liabilities properly incurred (Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 Qd R 576 at 586-587; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226 at [48]; CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98 at [51]; Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26; (2012) 16 BPR 30,397 at [41]).

74 Counsel for NAL submitted that this was not correct because NAL's right of exoneration out of the trust property, which was an aspect of its right of indemnity, was properly characterised as a right of lien or charge over the trust property that did not affect the councils' beneficial ownership of the trust property that was used to pay the wages. Counsel cited Arjon Pty Ltd v Commissioner of State Revenue [2003] VSCA 213; (2003) 8 VR 502 at [62] where Phillips JA, with whom Buchanan and Eames JJA agreed, said:

"[62] Thus, having reviewed the cases to which we were referred, I can only conclude that what was said by the majority in Baker v Archer-Shee remains good law: namely, that the beneficial ownership by the beneficiary of an asset of the trust when vested in interest is unaffected by any right of recoupment that the trustee may have from time to time, even if that right entitles the trustee to have resort for a limited purpose to the assets in priority to the beneficiary. One cannot deny, since Octavo Investments, that the trustee has a 'beneficial interest' in the trust assets to enforce his 'charge or lien', but given the ambivalence attaching to the use of the term 'beneficial interest', I do not see that as denying equitable ownership to a beneficiary who is otherwise entitled, immediately and absolutely, to the trust assets - or in the case of the Broadmeadows land, to all of the units in the unit trust of which that land is an asset. That such ownership should be treated as subject to an uncertain right in the trustee, varying from time to time in amount and effect, is one thing; that that variable right should actually deny equitable ownership to the beneficiary in whom the trust fund is otherwise presently vested in interest and possession is an altogether different matter and one that, in my opinion, should be rejected."

75 To similar effect, in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 Brereton J (at [16], 553) described the trustee's right of indemnity as a security interest in trust assets, albeit one that took priority over the claims of beneficiaries (at [16], 553). His Honour said (at [46], 560):

"[46] The starting point is that it is universally accepted that the nature of the trustee's interest is that of an equitable lien - that is, an equitable security interest arising not by agreement of the parties but by operation of law. It is also universally accepted that the only remedy of the trustee against the trust assets is judicial sale or appointment of a receiver. That is consistent with the nature of an equitable lien as a mere hypothecation. Such a security does not confer on the security holder any right of foreclosure, nor any right to possession of the property. It creates an interest which the security holder can enforce, as I have said, by judicial sale or appointment of a receiver, but such a security holder cannot bring an action for possession of the property the subject of the equitable lien. ..."

76 In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 the High Court described the trustee's right of indemnity in the following terms (at 367):

"We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire, supra. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190.

In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trustent, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trustent are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied."

77 Octavo Investments must be now understood in the light of what the High Court said in Chief Commissioner of Stamp Duties (NSW) v Buckle and CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic). In Buckle the High Court held that the trustee's right of indemnity out of trust assets was not an encumbrance upon the interests of the beneficiaries. The Court said (at [50], 246-247):

"[50] However, the starting point in the class of case under consideration is that the assets held by the trustee are 'no longer property held solely in the interests of the beneficiaries of the trust' (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 370). The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not 'encumbered' by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation' (Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335). A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the 'trust assets' which may be enforced in the same way as any other equitable charge (See Hewett v Court (1983) 149 CLR 639 at 663). However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded." (my emphasis)

78 The characterisation of the trustee's right of indemnity as being in the nature of a lien or charge is apt where there has been a change of trustee so that the trustee with the right of indemnity no longer has ownership or possession of the trust assets and cannot satisfy itself out of the trust assets by exercising the rights of legal ownership. It is also an apt description of the right of a creditor entitled by subrogation to exercise the trustee's right, the creditor being entitled to the remedies of the appointment of a receiver and order for sale. Otherwise the description of the right of indemnity as a lien or charge is misleading. It suggests that the trustee's right of indemnity is a security interest in property belonging to others, that is, the beneficiaries. That is how it is described in Arjon in the passage quoted above on which NAL relied. But a trustee in office who has recourse to the trust assets to be exonerated or recouped for liabilities properly incurred does so by virtue of its legal ownership of the assets, not by enforcing a security against them. As Barrett JA (with whom Campbell JA and Sackville AJA agreed) said in Agusta Pty Ltd v Provident Capital Ltd (at [41]):

"It is anomalous to refer to a person having a charge or lien over property of which the person is the owner."

79 In Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) McPherson J described the beneficiaries' entitlement as being confined to so much of the trust assets as were available after properly incurred liabilities had been discharged or provided for and that to the extent of the trustee's right to be indemnified the trustee was under no fiduciary obligation to the beneficiaries and the asset was not properly characterised as trust property (at 586-587). This view was upheld by the High Court in Buckle. There the High Court said (at [48], 246):

"[48] Until the right to reimbursement or exoneration has been satisfied, 'it is impossible to say what the trust fund is' (Dodds v Tuke (1884) 25 Ch D 617 at 619). The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them (Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576 at 587). To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 370)."

80 In Arjon Phillips JA dismissed the reasoning in Kemtron Industries Pty Ltd v Commissioner of Stamp Duties and Chief Commissioner of Stamp Duties v Buckle in the following paragraph:

"[59] In Kemtron Industries Pty Ltd v Commissioner of Stamp Duties ([1984] 1 Qd R 576), the Full Court of the Supreme Court of Queensland held that the trustee's right of indemnity in respect of liabilities properly incurred was not properly regarded as an 'encumbrance' on the trust assets. This was for the particular purpose of deciding value for duty. The holder of a one-quarter share in a trust fund by writing transferred his interest to the appellant and the Commissioner of Stamp Duties assessed the transfer to ad valorem duty by reference to the amount of the current assets of the trust without taking account of its liabilities. Not surprisingly, the Full Court held that this was error; the value for duty purposes of the property transferred was to be fixed by the worth of the net assets of the trust, and not of the assets without regard to the liabilities. Although there are references in the judgments to the trustees' right of indemnity going to 'reduce' the estate or interest of the beneficiary in the assets, this was in the context that the immediate concern of the court was not so much to define the 'estate or interest' of the beneficiary as simply to value the subject matter of the transfer. And, as I read it, the later case of Buckle v Commissioner of Stamp Duties ((1998) 192 CLR 226 at 244-247) [sic], in respect of a discretionary trust under a deed of settlement, was to like effect."

81 With respect, this reasoning does not address the particular point made by McPherson J in Kemtron, nor its endorsement in Buckle. It is right that in Buckle the High Court was concerned with the construction of a phrase in s 66(1) of the Stamp Duties Act 1920 (NSW) whereby ad valorem duty was imposed on "the unencumbered value of the property thereby conveyed". One of the issues was whether the trustee's right of indemnity was to be taken into account in ascertaining the unencumbered value of the property liable for duty on a resettlement. The High Court approached the construction of s 66(1) by recourse to a general law analysis of the nature of the trustee's right of indemnity that shows that that right is not properly characterised as a security interest over the beneficiaries' property.

82 As appears from para [62] of the judgment in Arjon quoted at [74] above, Phillips JA found support for his conclusions from what was said by the majority of the House of Lords in Baker v Archer-Shee [1927] AC 844. In Baker v Archer-Shee the respondent was liable to pay income tax in respect of all of his wife's "property, profits or gains" whether situate in the United Kingdom or elsewhere (at 863). The respondent's wife was a beneficiary under the will of her late father. The will directed that the testator's real and personal estate be held in trust by his executors and trustees and that the whole of the income and profits therefrom should be applied to the use of his daughter during her life (at 864). The estate had been fully administered. It consisted of securities, stocks and shares in America. The trustees were in America. Income was paid to the respondent's wife in America. The amount paid was the amount determined by the trustees to be income after deduction of commission payable to the trustees and amounts payable by the trustees for income tax in the United States. Any other expenses were also allowed for before net income of the investments was paid to the beneficiary.

83 As Phillips JA noted, the majority of the House of Lords held that the beneficiary (hence the respondent) was liable to pay income tax in England not merely on the net income paid to her in the United States, but on the whole of the income derived by the trustees from the investments.

84 The Attorney-General argued that upon principles of income tax law, which applied to the chargeability of income subject to the trusts of a will as laid down in Williams v Singer [1921] 1 AC 65, the person owning the income and assessable to tax in respect of it was the person beneficially entitled thereto and not the trustee in whom the income was legally vested, except insofar as the trustee might be assessed on behalf of the beneficiary (at 845). Thus, Viscount Sumner (who dissented) said (at 851):

"... it is in the terms of the Income Tax Act or in some decided construction which binds your Lordships, that the inland revenue can alone find authority for the present contention, that the person 'entitled to' the income is the beneficiary, and a rule of 'income tax law', which so completely and uncompromisingly disregards the regular law of trusts and the ordinary law of property ..."

85 Lord Carson held (at 870) that:

"... the respondent's wife was sole beneficial owner of the interest and dividends of all the securities, stocks and shares forming part of the trust fund therein settled and was entitled to receive and did receive such interest and dividends. This, I think, follows from the decision of this House in Williams v Singer, and in my opinion the Master of the Rolls correctly stated the law when he said 'that in considering sums which are placed in the hands of trustees for the purpose of paying income to beneficiaries, for the purposes of the Income Tax Acts, you may eliminate the trustees. The income is the income of the beneficiaries; the income does not belong to the trustees.'"

86 Thus it appears that Lord Carson considered that the rule to be applied was a particular rule in relation to the application of the Income Tax Acts. If the principle is to be understood as applying more widely, it is clearly wrong because the beneficiary would be only entitled to so much of the income as was available after the trustees had exercised their right of exoneration or recoupment.

87 Lord Atkinson (one of the majority) said (at 859) that:

"I think it is not an unreasonable inference ... that the life interest given to her by her father's will had become vested in her, and that the trust company which she had appointed were merely her agents to administer the fund for her and in her interest. If that be so, payments necessarily made properly in the administration of the fund are made in her interest and on her behalf, and, in my view, are made with her money."

88 A trustee is not ordinarily the agent for his beneficiary. It is not clear why Lord Atkinson considered that it should be inferred from the fact that the beneficiary could appoint a replacement trustee and had done so, that the replacement trustee was the beneficiary's agent. No reason is given for that conclusion. Whether that was a conclusion based upon particular principles of income tax law thought to apply in England at the time, or whether it was based upon some other facts, or whether it was simply wrong, need not be decided. Clearly, if the trustee were the agent to the beneficiary, then the income derived by the trustee was derived by the beneficiary and the expenses paid by the trustee were paid by the beneficiary. Lord Atkinson's judgment provides no support to the conclusion reached by Phillips JA in Arjon.

89 Phillips JA quoted part of the speech of Lord Wrenbury which does support the conclusion to which his Honour came. Lord Wrenbury said (at 865-866):

"The trustees, of course, have a first charge upon the trust funds for their costs, charges and expenses, and American income tax will be a tax which they would have to bear and which would fall upon the beneficiary. But this does not reduce the right of property of the beneficiary to a right only to a balance sum after deducting these. If an owner of shares deposits them with his banker by way of security for a loan he is not reduced to being the owner of a balance sum being the difference between the dividends on the shares and the interest on the loan. He is the owner of the equity of redemption of the whole fund. If a landowner employs an agent to collect his rents and authorizes him to deduct a commission he does not cease to be the owner of the rents."

90 The conclusion that the trustees' entitlement to a "first charge" on the trust fund for their costs, charges and expenses and American income tax did not reduce the right of property of the beneficiary is inconsistent with the decision of the High Court in Octavo Investments that to the extent of the trustee's right of indemnity the trustee has a preferred beneficial interest in the trust funds. It is inconsistent with the reasoning and decision of the High Court in Buckle and CPT Custodian. Lord Wrenbury's reasoning is not advanced by the analogy with the owner of shares who makes an equitable mortgage of them as security for a loan, or the analogy of an agent entitled to deduct commission from rents collected as agent for his principal. Although a trustee can be an agent for his beneficiary, and hence have power to bind the beneficiary to dealings carried out within the scope of the authority conferred by the beneficiary as principal on the trustee as agent, the relationships of trust and agency are distinct. In the present case NAL disclaimed any argument based on agency.

91 In Arjon, Phillips JA observed that the submissions of the taxpayers drew significantly on the views of the dissentients in Baker v Archer-Shee (at [55]). It is only the views of the dissentients that are consistent with the decisions of the High Court in Octavo Investments, Buckle and CPT Custodian.

92 The reasoning in Arjon was applied by the Court of Appeal of Victoria in the related case of Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2003] VSCA 214; (2003) 8 VR 532 (at [19], [21], [25]). The reasoning in Arjon was applied to hold that a sole unit holder of a trust should properly be regarded as the beneficial owner of the trust asset and thus entitled in equity to an estate of freehold in possession. That conclusion in Karingal 2 was reversed on appeal to the High Court (CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic)). There was no appeal in Arjon itself, but its authority is undermined by the reasoning of the High Court in CPT Custodian and the upholding of the appeal in Karingal 2.

93 In CPT Custodian the High Court held that on the terms of the trust deed in that case, even where there was only one unit holder of the trust, the unit holder did not have an interest amounting to ownership. It rejected the proposition that where property is held on trust, somebody other than the trustee must be the owner of the equitable estate (at [25], 112). One reason the High Court held that the sole unit holder of the unit trust did not have an interest amounting to equitable ownership in the trust property and was not entitled to bring the trust to an end by calling for a transfer of the trust property, was that the trustee had an unsatisfied right of indemnity out of the trust fund in respect of liabilities incurred in execution of the trust. The High Court said (at [50] and [51]):

"[50] The classic nineteenth century formulation by the English courts of the rule in Saunders v Vautier did not give consideration to the significance of the right of the trustee under the general law to reimbursement or exoneration for the discharge of liabilities incurred in administration of the trust. In Wharton v Masterman ([1895] AC 186), Lord Davey approached the rule in Saunders v Vautier from the viewpoint of the law respecting accumulations of income for an excessive period; if no person had any interest in the trust other than the legatee, the legatee might put an end to the accumulation which was exclusively for the benefit of that person and as a result there was no effective or enforceable direction for any accumulation ([1895] AC 186 at 198-200). However, his Lordship's discussion of the authorities ([1895] AC 186 at 200-201) does indicate that the rule in Saunders v Vautier could not apply if, by reason of the charging of legacies on the fund and accumulations, the persons seeking to put an end to the accumulations were 'only entitled to an undetermined and uncertain surplus (if any) which might be left of the fund after payment of the legacies' ([1895] AC 186 at 201).

[51] In the present case, the unsatisfied trustees' right of indemnity was expressed as an actual liability in each of the relevant accounts at each 31 December date and rendered applicable the sense of the above words of Lord Davey. Until satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was (Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 246 [48].)"

94 Underlying the analyses in Buckle and CPT Custodian is a fundamental notion about the nature of trusts and the nature of beneficiaries' interest in a trust. It was explained by Hope JA in D K L R Holding Co (No. 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 518-521, [14]-[20] and by McLelland J (as his Honour then was) in Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311. Hope JA said:

"Where the trustee is the owner of the legal fee simple, the right of the beneficiary, although annexed to the land, is a right to compel the legal owner to hold and use the rights which the law gives him in accordance with the obligations which equity has imposed upon him. The trustee, in such a case, has at law all the rights of the absolute owner in fee simple, but is not free to use those rights for his own benefit in the way he could if no trust existed. Equitable obligations require him to use them in some particular way for the benefit of other persons."

95 McLelland J said (at 311):

"Where a legal owner holds property on trust for another, he has at law all the rights of an absolute owner but a beneficiary has the right to compel him to hold and use those rights which the law gives him in accordance with the obligations which equity has imposed on him by virtue of the existence of the trust. Although this right of the beneficiary constitutes an equitable estate in the property, it is engrafted onto, not carved out of, the legal estate."

96 Where a trustee has a right of indemnity in respect of debts properly incurred, the beneficiaries cannot compel the trustee to use its legal ownership for their benefit except if the right of indemnity is satisfied or provided for. In exercising its right of indemnity the trustee has a preferred beneficial interest in the assets held on trust. To characterise the trustee's right of indemnity as a security interest involves treating the beneficiaries as having an equitable estate carved out of the legal ownership over which the security, by way of lien or charge, can be exercised. That is not the right way of analysing the beneficiaries' interests. When the trustee in possession of the trust property has recourse to the trust property to satisfy its right of indemnity, the trustee is exercising its rights as legal owner and the beneficiaries do not have an equity to assert against the trustee to restrain a proper exercise of the right of indemnity by way of recoupment or exoneration. Where the trustee exercises the right of indemnity the trustee is realising its property. The beneficiaries' beneficial interest in the trust property is deferred to the beneficial interest of the trustee.

97 Hence, I do not accept the premise in NAL's argument. In exercising its right to be recouped out of the trust assets in respect of the wages properly incurred by NAL, NAL was having recourse to its assets, not the councils' assets.

98 However, for the reasons earlier given, by reason of s 49(6) of the Interpretation Act the wages are to be taken to have been payable by and to have been paid by the councils.

Conclusion

99 For these reasons the decision of the Chief Commissioner to issue the notice of assessment to NAL should be revoked. NAL is entitled to a refund with interest on the tax paid. I will stand over the proceedings to a convenient time and direct that counsel for the plaintiff bring in short minutes of order in accordance with these reasons. I will then hear any argument on costs. Prima facie, the Chief Commissioner should be ordered to pay NAL's costs.

Amendments

07 November 2014 - In "Case Title" field and "Parties" field, Newcastle Airport Ltd amended to Newcastle Airport Pty Ltd
Amended paragraphs: 0

Decision last updated: 07 November 2014