Respondents Dispute Tax Assessments Disclaiming Trust Deed

Commissioner of Taxation v Carter [2022] HCA 10 (6 April 2022)

The parties are in dispute over a trust deed which provided that, if the trustee made no effective determination to pay, apply, set aside or accumulate any part of trust income in a given accounting period, the income was to be held on trust for specified beneficiaries.

The trustee failed to pay, apply, set aside or accumulate income in the income year.  The Court, in making its final orders, assessed whether present entitlement under s 97(1) is determined immediately prior to end of the income year and whether disclaimers operated retrospectively so as to disapply s 97(1) in respect of income year.

Facts:

This appeal concerns Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), headed "Trust income" which states: "Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate".  

The Whitby Trust was settled on 27 July 2005.  Mr Allen Bruce Caratti and his daughter Alisha were joint Guardians.  The power to appoint income was contained in cl 3.1 of the Trust Deed for the Whitby Trust.

Clause 3.7 of the Trust Deed then provided for the default distribution of income if the Trustee failed to make a determination under cl 3.1.  No income remained with the Trustee.  Clause 3.7 operated "immediately prior to the end of the last day of [the] Accounting Period" and distributed all of the income of the Whitby Trust successively to the persons identified in cll 4.1 to 4.5.  

The Trustee having failed to appoint or accumulate the income of the Whitby Trust in the 2014 income year, the income of the Trust was distributed to the Primary Beneficiaries of the Trust, who were Mr Caratti's children – Natalie, Alisha, Nicole, Christina and Benjamin.  

One‑fifth of the income of the Trust was distributed to each of Mr Caratti's children.  Thus, the combined operation of cll 3.1, 3.7 and 4.2 was such that "immediately prior to the end of the last day" of the 2014 income year, one‑fifth of the income of the Whitby Trust was held on trust for each of Mr Caratti's children.

On 27 October 2015, the Commissioner of Taxation ("the Commissioner") issued an amended assessment to each respondent for the 2014 income year which included as assessable income one‑fifth of the income of the Whitby Trust on the basis that the respondents were "presently entitled" to that income within the meaning of s 97(1) ("the 2014 Assessments").  On 3 and 4 November 2015, the respondents executed deeds of disclaimer in respect of their default distributions under cl 3.7 for the 2014 income year. 

On 30 September 2016, the respondents executed further disclaimers ("the Third Disclaimers") disclaiming any and all right title and interest conferred by the Trust Deed to any income and, without limiting the generality of that disclaimer, disclaiming any and all right title and interest conferred by cl 3.7 of the Trust Deed.  

The respondents objected to the 2014 Assessments, contending, among other grounds, that each had validly disclaimed the relevant cl 3.7 distribution by the Third Disclaimers.  

The Administrative Appeals Tribunal held that the Third Disclaimers were ineffective because they were made after the respondents, with knowledge, had failed to disclaim and had accepted the gifts.  The Full Court of the Federal Court held that the Third Disclaimers were effective and dismissed the Commissioner's notice of contention.  

The Full Court held that there was nothing in s 97(1) of the 1936 Act to indicate that a beneficiary's liability was to be determined once and for all at the end of the income year by reference to the legal relationships then in existence.  The Commissioner appealed to this Court on the sole ground that the Full Court erred in finding that the Third Disclaimers operated retrospectively so as to disapply s 97(1) in respect of the 2014 income year. 

Issue:

Whether or not disclaimers operated retrospectively so as to disapply s 97(1) in respect of income year.

Applicable law:

Income Tax Assessment Act 1936 (Cth) ss 95A, 96 - reflects that, in Div 6, the basic income tax treatment of the net income of a trust estate is to assess the beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate. 

Income Tax Assessment Act 1936 (Cth) s 97 - provides that subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia ..." 

Union‑Fidelity Trustee Co of Australia Ltd v Federal Commissioner of Taxation [1969] HCA 36 - makes clear that a present entitlement of a beneficiary under s 97(1) does not depend upon receipt of the income. 

Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264  - provides that a beneficiary is presently entitled to a share of the income of a trust estate "if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

Dwight v Commissioner of Taxation [1992] FCA 178 - provides that the phrase "is presently entitled to a share of the income of the trust estate" in s 97(1) is directed to the position existing immediately before the end of the income year for the stated purpose of identifying the beneficiaries who are to be assessed with the income of the trust – namely, those beneficiaries of the trust who, as well as having an interest in the income of the trust which is vested both in interest and in possession.

Federal Commissioner of Taxation v Whiting [1943] HCA 45 - provides that the criterion for liability looks to the right to receive an amount of distributable income, not the receipt.

Union‑Fidelity Trustee Co of Australia Ltd v Federal Commissioner of Taxation [1969] HCA 36 - makes clear that a present entitlement of a beneficiary under s 97(1) does not depend upon receipt of the income. 

Matthews v Matthews [1913] HCA 49 - provides that the presumption of assent – that when there is a transfer of property to a person, the donee assents even before they know of the transfer – is a "strong presumption of law".

Hill v Wilson [1873] UKLawRpCh 70 - provides that a gift "requires the assent of both minds".

Federal Commissioner of Taxation v Cornell [1946] HCA 32 - provides that the subject matter of a gift can vest in a donee before the donee actually assents.

Mansell v Mansell [1732] EngR 187 - provides that trusts can be validly declared for charitable purposes or in favour of unborn persons.

Mirzikinian v Tom & Bill Waterhouse Pty Ltd [2009] NSWCA 296 - where the irrelevance of the assent of a beneficiary to the formation of a perfect trust was the subject of the decision.

Analysis:

The respondents' contention that the phrase "is presently entitled" should be construed to mean "really is" presently entitled (emphasis added) for that income year, such that, for "a reasonable period" after the end of the income year, later events could subsequently disentitle a beneficiary who was presently entitled immediately before the end of the income year, is contrary to the text of s 97(1) and the object and purpose of Div 6 identified above.  

It would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate and the subsequent assessment of those beneficiaries.   The uncertainties that would arise, and which would apply with equal force to the Commissioner, trustees, beneficiaries and perhaps even settlers, would also not be fair, convenient or efficient.  

The submissions of the parties concerning the operation of the Third Disclaimers, including the references in those submissions to "presumptions" and "assent", cannot be addressed without dealing with an error in an assumption of the parties about the operation of disclaimers in equity.   

The parties assumed that the validity of the creation of the separate trust, or (if the separate trust already existed) the validity of the increase in the value of the subject matter of any existing trust for the Primary Beneficiaries, depended upon a "presumption", in each case, that the Primary Beneficiaries had assented to that creation or increase.  The assumption that there is a "presumption" of assent in such circumstances was thought to be supported by the notion that a disclaimer operates to rebut a "presumption" of assent.  The assent of a beneficiary is irrelevant to the creation of equitable rights by an unconditional declaration of trust. 

Conclusion:

The appeal is allowed.  The Court sets aside orders 1 and 2 made by the Full Court of the Federal Court of Australia on 10 September 2020 and, in their place, orders that the appeal be dismissed.

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