The High Court held (on 6.4.22) that a beneficiary, who disclaimed their ‘default’ right to a trust’s income (on becoming aware of it) did not succeed in avoiding tax on the income they were entitled to and the end of the relevant year. ‘Disclaimer’ might ‘undo’ an equitable right, created unilaterally, but for equitable rights, at least, it doesn’t operate retrospectively. This could operate very unfairly, if disclaimer was effective in trust law but too late to avoid tax on the income, which they no longer have the right to receive (they’d have got the tax but not the money to pay it with). The following is the High Court’s summary of its judgement and an extract from each judgement, explaining why the gift of trust income is effective, without the consent of the donee and can only later be undone.
COMMISSIONER OF TAXATION v NATALIE CARTER & ORS [2022] HCA 10
On 6 April 2022 the High Court unanimously allowed an appeal from a judgment of the Full Court of the Federal Court of Australia concerning the operation of s 97(1) of the Income Tax Assessment Act 1936 (Cth). Section 97(1) relevantly provides that “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 … the assessable income of the beneficiary shall include … 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”. The principal question for determination was whether a beneficiary’s present entitlement, under s 97(1), is to be determined immediately prior to the end of an income year or whether events after the end of the income year may be considered.
The respondents were beneficiaries of a trust estate. The trust deed provided that if the trustee did not pay, apply, set aside or accumulate any part of the trust income in a given accounting period, the trustee would hold that income in trust for specified beneficiaries, including the respondents. An accounting period was relevantly defined as a 12-month period ending on 30 June. In this way, the trust deed ensured that in each accounting period, the whole of the trust income was distributed, if not otherwise dealt with.
n the 2014 income year, the trustee failed to pay, apply, set aside or accumulate the income of the trust. As a result, one-fifth of the trust income was held on trust for each of the respondents. On 27 October 2015, the appellant, the Commissioner of Taxation (“the Commissioner”), issued an amended assessment to each respondent for the 2014 income year (“the 2014 Assessments”) which included as assessable income one-fifth of the trust’s ‘tax law’ net income on the basis that the respondents were “presently entitled” to that one-fifth share of the trusts ‘trust law’ income, within the meaning of s 97(1). On 30 September 2016, the respondents disclaimed their interest in the trust income. They subsequently objected to the 2014 Assessments in reliance on the disclaimers.
On appeal on a question of law from a decision of the Administrative Appeals Tribunal, the Full Court of the Federal Court relevantly held that the respondents’ disclaimers operated retrospectively so as to disapply s 97(1) in respect of the 2014 income year.
The High Court held that s 97(1) is directed to the position existing immediately before the end of the income year for the purpose of identifying the beneficiaries who are to be assessed with the income of the trust. The section looks to the right to receive an amount of distributable income, not the receipt of income. Events occurring after the end of the income year cannot disentitle a beneficiary who was “presently entitled” immediately before the end of the income year. The respondents’ disclaimers were therefore not effective to retrospectively expunge the rights of the Commissioner against the respondents which were in existence at midnight on 30 June 2014 and which gave rise to the 2014 Assessments
GAGELER, GORDON, STEWARD AND GLEESON JJ
Presumption of assent
27 Given the construction of s 97(1) which has been adopted, it is unnecessary to address the content and effect of the Third Disclaimers. Whether or not they were effective to vary the rights and obligations of the Trustee and the respondents, they were not effective to “retrospectively expunge[]”[25] the rights of the Commissioner against the respondents which were in existence at midnight on 30 June 2014 and which gave rise to the 2014 Assessments[26].
28 It is appropriate, however, to address and reject the respondents’ contention that they were not presently entitled to the income within the meaning of s 97(1) because the presumption of assent – that the donee (the beneficiary) assents to a gift – is an evidentiary presumption or inference that may be rebutted and that the Third Disclaimers were evidence of the rebuttal. The respondents’ contention was that, when the “evidentiary presumption” is rebutted, the result is that “one of the elements necessary for an effective gift is, and at all times has been, missing”.
29 There is a distinction between legal and evidentiary presumptions. In Masson v Parsons[27], six members of the Court said:
“A presumption of fact, or evidentiary presumption, is a traditional inference, based on logic and common sense, which a tribunal of fact ordinarily draws from basic facts, particularly circumstantial evidence. By contrast, a presumption of law is a legal rule that givesadditional force to some basic facts in the proof of the presumed fact, by permitting or requiring an inference from the former to the latter. If a presumption of the latter kind is rebuttable and so merely facilitates proof of the presumed fact, it is properly to be conceived of as a rule of law ‘relating to evidence'”. (emphasis in original)
30 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”[28]. Recognising that a gift “requires the assent of both minds”[29] and that the subject matter of a gift can vest in a donee before the donee actually assents[30], the law supplies that assent based “on fundamental attributes of human nature”[31]. It “presumes a donee’s assent until disclaimer”9F[32]. That presumption takes a basic fact – a transfer of property – and gives additional force to that basic fact by supplying the assent to the transfer of that property. It is not an evidentiary presumption in the sense of an inference drawn from basic facts. It is a presumption of law, and Div 6 – and, in particular, the criterion of “is presently entitled” in s 97(1) – is consistent with, and operates on, the presumption of law of assent. On the facts in this appeal, that presumption applied immediately before the end of the 2014 income year to the operation at law of cl 3.7 of the Trust Deed.
31 The argument made by the respondents about assent is met by the presumption of law described in Matthews v Matthews[33]. The premise of the respondents’ argument, that assent to distribution is necessary, was not disputed by the Commissioner. Argument proceeding as it did, this is not the case to examine whether any wider questions arise about distributions or disclaimers.
EDELMAN J.
The operation of a disclaimer depends on the reason it is invoked
47 The short point for the purposes of this appeal is that, at least in relation to equitable rights, issues of disclaimer are separate and distinct from the creation of, or increase in the value of, a beneficiary’s rights or entitlements in relation to the subject matter of a trust. Although the unilateral vesting of equitable rights and entitlements can occur without a beneficiary’s assent, such unilateral vesting can often be unwound by a later disclaimer by a beneficiary. As Lord Wright said in Lady Naas v Westminster Bank Ltd[64]:
“The declaration of trust by the settlor depended not on the other party’s consent any more than on mutual consideration. It depended on the act of the settlor in executing the settlement. The beneficiary might, it is true, disclaim, but her acceptance was immaterial except perhaps as ruling out disclaimer.”
48 At general law, the effect of a disclaimer is generally retrospective, thus preserving the important principle of liberty that rights or liabilities are not generally to be conferred or imposed upon a person independently of that person’s actions. But when considering questions about the retrospective effect of a disclaimer, whether of rights at common law or in equity, it is always necessary to appreciate why the question is being asked. In this case, where the question as to the effect of a disclaimer is being asked for the purpose of defeating the operation of a vested and “present entitlement” under s 97(1), the question is answered by the interpretation of that provision.
[Tax Month – April 2022 – Previous Month, 7.4.22]