Settlements of property for tax purposes: a dissertation on Section 105 of the Land & Income Tax Act, 1954, and related aspects of assignments of property

Abstract

The object of this thesis is the examination of Section 105 of the Land and Income Tax Act 1954. The treatment - basically confined to the scope and deficiencies of section 105 - takes four parts. Part I considers the position of taxpayers who deal with rights to income only. It is suggested that alienations based on assignments - absolute or short term - are so fraught with danger that they should be avoided. There are three conclusions: (a) Taxpayers obliged to deal with rights only, and not the income-source, should make contracts of assignment rather than rely on section 130 of the Property Law Act 1952; (b) Section 105 (1) makes the unjustifiable assumption that the fact of ownership of a capital asset necessarily gives rise to ownership of the right to income therefrom; (c) Section 92 (1) of the Land Income Tax Act 1954 may operate to render technically perfect assignments - whether or not they are for value complying with section 105 (1) ineffective to transfer derivation. The discussion is based on the proposition that a transfer of derivation is the essential feature of a tax effective alienation. In Part II special emphasis is placed on discretionary trusts. After a brief comparative description of the English 1egislation and history, attention in confined to alienations of property to trusts. Section 105 (2) saves settlements where the income beneficiaries are "entitled" to corpus. It is suggested that recent authorities make it clear that powers of appointment over corpus, which remain executory, create no beneficial interest in anyone, including those, if any, named as objects on default, and consequently no "entitlement". The second major issue dealt with concerns the settlor's retained interests. The conclusions reached here emphasise fundamental trust doctrines: (a) A power of appointment is not subject to fiduciary obligations; (b) The execution of a power is not a dispositive act. Finally, attention is given to the "prescribed period" definitions of section 105(4). The leading case on section 105 (2) is examined in Part III. While the case covers considerable ground, it does not purport to be exhaustive of the issues which arise. The attention given to the basic principles of statutory interpretation indicates that section 105 (2) may be very limited in application to many types of settlement. It is concluded that where section 105 (2) does apply, it is necessary to place a gloss on the wide language employed in relation to transactions for full consideration. The "arm's-length" gloss is suggested as being more appropriate than the English "bona-fide commercial transaction" test. In Part IV the relationship between sections 105 and 108 is considered. The present state cf the section 108 authorities is so confusing that it is suggested that its purpose might profitably be reconsidered with a view to a further amendment. Nevertheless, it is accepted that section 108 governs section 105, within very narrow limits. Section 105 is a potentially more powerful anti-avoidance provision than is credited. It is concluded that it is a more desirable provision to combat tax avoidance - and income splitting in particular - than section 108. Both require revision.