The NSW Court of Appeal has allowed the Comr of State Revenue’s appeal and overturned a Supreme Court decision that a retrospective disclaimer by a beneficiary of his rights under a discretionary trust meant that the trust was not grouped, for payroll tax purposes, with other entities controlled by the beneficiary:
A company had failed to pay payroll tax for 7 years and was placed in liquidation. Following an audit, the Chief Commissioner determined that various entities should be grouped with the company, including another company, and 2 discretionary trusts. Payroll tax assessments were issued but just before that happened, the company director signed various deeds, purporting to disclaim any rights, entitlements or interests he might have as a discretionary object of the trusts. [See Payroll Tax Act 2007 NSW]
At first instance in Smeaton Grange Holdings Pty Ltd v Chief Comr of State Revenue  NSWSC 1594, the NSW Supreme Court held that the director’s retrospective disclaimers were effective for payroll tax purposes. However, the NSW Court of Appeal allowed the Chief Commissioner’s appeal, holding that the payroll tax legislation determined who was grouped and that this determination needed to be made on the basis of the legal relationships as they existed at the relevant time. It followed that any subsequent alteration of those relationships (in this case by the unilateral act of a discretionary object) could not change the operation of the legislation.
(Chief Comr of State Revenue v Smeaton Grange Holdings Pty Ltd  NSWCA 184 (NSW Court of Appeal, Gleeson JA, Leeming JA and Sackville AJA, 28 July 2017.)
A gift can be disclaimed retrospectively (which would include a distribution from a discretionary trust to a beneficiary) but a beneficiary disclaimer, disclaiming any benefit as a beneficiary, back to the date the trust was established (which was what happened here) cannot be retrospective – or not, anyway, so as to bind third parties, such as the Commissioner of State Revenue.
Catchwords from First Instance Decision
TAX — payroll tax — businesses grouped for payroll tax purposes by operation of subs 106I(6) of the Taxation Administration Act 1996 and s 72(6) of the Payroll Tax Act 2007 — person with controlling interest in grouped businesses who could benefit from discretionary trusts as a result of the trustees exercising some power or discretion disclaimed his right as a discretionary object on becoming aware of the grouping
— whether the disclaimer meant that subs 106I(6) of the Taxation Administration Act 1996 [as it then was, about determinations to de-group, now in s79 of the current Payroll Tax Act] and s 72(6) of the Payroll Tax Act 2007 [about groups of commonly controlled businesses] had no application for the tax years in question
— whether a person who may benefit from a discretionary trust as a result of the trustee exercising some power or discretion may disclaim their right as a discretionary object — held they can
— whether a person who may benefit from a discretionary trust as a result of the trustee exercising some power or discretion may disclaim their right as a discretionary object in the absence of valuable consideration — held they can
— whether the disclaimer of a person who may benefit from a discretionary trust as a result of the trustee exercising some power or discretion operates retrospectively — held it does — notices of assessment revoked
Catchwords from the Court of Appeal (overturning First Instance Decision)
TAXATION – payroll tax – operation of the “grouping of employees” provisions of the Payroll Tax Act 2007 (NSW) – whether trustee of a discretionary trust correctly grouped with another entity – whether object of the discretionary trust deemed to have a controlling interest in the business conducted by the trustee – whether a disclaimer executed by the object purporting to operate retrospectively could affect liability to payroll tax in a previous year – whether a discretionary object can disclaim retrospectively
Extract from Austlii report of the Court of Appeal decision
- GLEESON JA: I agree with Sackville AJA. I also agree with the additional observations of Leeming JA.
- LEEMING JA: I agree with Sackville AJA’s reasons and the orders his Honour proposes allowing this appeal. The parties framed this litigation, at first instance and on appeal, by reference to whether the disclaimer by an object of a discretionary trust was retrospectively effective, thereby defeating the Chief Commissioner’s reliance on the grouping provisions in Part 5 of the Payroll Tax Act 2007 (NSW). Thus the respondents’ written submissions commenced:
“At issue in this case is the question whether it is possible for a discretionary object of a discretionary trust to disclaim his right as a discretionary object, which disclaimer takes effect from the time the discretionary trust was settled.”
- The Chief Commissioner’s principal submission was to challenge the reasoning of the primary judge to the effect that the law of disclaimer in relation to gifts could be applied analogously to the object of a discretionary trust. The Chief Commissioner submitted that because a fully constituted discretionary trust arose without any requirement of assent on the part of the object, and because the object of such a trust was merely the object of a power and had no real or personal interest which could be the subject of a gift, the doctrine of disclaimer, being a doctrine related to gifts, was inapplicable. It was submitted that In re Gulbenkian’s Settlement Trusts (No 2)  Ch 408 was wrongly decided.
- I entirely agree with Sackville AJA that this appeal turns on statute, and that the starting point for analysis must be statute. It is in light of the deeming provisions in the legislation that the effect of the deed polls entered into by Mr Michael Gerace on 27 June 2014 fall to be determined.
- The retrospectivity of the purported disclaimer was essential to the respondents’ submission. It was essential because the goal was to escape the operation of the deeming provisions which applied in respect of the payroll tax obligations incurred by a company presently in liquidation many years earlier.
- But precision is vital when making and analysing submissions invoking “retrospectivity”. In particular, it is one thing for private parties to agree that their legal relations are to be taken to have been conducted on a particular basis, and for that agreement to have retrospective effect as between themselves. It is an entirely different thing for parties by their private agreement to alter with retrospective effect their relations with a third party. True it is that some general law doctrines have retrospective effect, but even so, the law is astute to have regard to the prejudice which such operation may have on third parties.
- McDougall J illustrated the distinction in Gilsan v Optus [No 2]  NSWSC 38 at  (an appeal was allowed in part:  NSWCA 171, but not in respect of this statement of principle):
“In principle, it should be open to parties to a contract to agree upon the date (including in the past) from which their legal relations commence to have effect, and in principle it should be open to the courts to enforce that agreement. Indeed, Gilsan did not submit otherwise. However, Gilsan submitted that an agreement made with retrospective effect between Optus and AT&T could not affect rights that Gilsan had against Optus that had accrued before the agreement was made.”