ISSUES
Whether the beneficiaries are “presently entitled” for the purposes of s97 ITAA 1936 to income arising from a default trust distribution.
Further, whether a retrospective disclaimer by beneficiaries of the income was effective, such that the beneficiaries were not “presently entitled” to the trust income.
FACTS
The Whitby Family Trust was settled on 27 July 2005.
The Deed provided that:
- the Trustee had a full discretion to appoint income amongst the Beneficiaries before the expiration of the Accounting Period (clause 3.1)
- Accounting Period was defined to be a 12 month period ending on 30 June.
- in default of the income discretion being exercised, the Trustee was to hold the income for certain beneficiaries defined in the Deed.
In 2014, the Trustee failed to make a determination as to income. As a result, the income of the trust held by the trustee equally for 5 siblings, who were the default income beneficiaries.
In October 2015, the Commissioner issued notices of assessment to these beneficiaries which included the default income from the trust, on the basis that they were “presently entitled” to this income.
In November 2015, the beneficiaries executed (ineffective) deeds of disclaimer. A further disclaimer, disclaiming all the right title and interest to the default income, was executed in 2016.
In the AAT, the disclaimers were held to be ineffective because they were made after the beneficiaries had full knowledge and acceptance of the gift. In addition, the Commissioner (by notice of contention) argued that even if the disclaimers were effective at general law, they could not operate to retrospectively to exclude the application of s97(1) of the 1936 Act.[1]
The Full Court of the Federal Court held that the disclaimers were effective, and also that “there was nothing because s97 (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”.[2]
The appeal to the High Court was on the sole ground that that Full Court erred in its construction of s97(1) and application to retrospective deeds of disclaimer
DECISION
Section 97(1) is in the following terms:
“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 as is
attributable to a period when the beneficiary was not a resident and is
also attributable to sources in Australia …” (emphasis added)
The argument that had been advanced against this interpretation was 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.”[3]
However, the plurality[4] found that “the question of the “present entitlement” of a beneficiary to income of a trust must be tested and examined “at the close of the taxation year”, not some reasonable period of time after the end of the taxation year.”[5]
They emphasised that the relevant criterion in s97(1) is the “present legal right of the beneficiary to demand and receive payment of a share of the distributable income of a trust estate. The criterion for liability looks to the right to receive an amount of distributable income, not the receipt.”[6] (emphasis original)
There was a recognition that a beneficiary may be unaware they are presently entitled, but noted that s97(1) is specifically drafted to tax a beneficiary by reference to present entitlement, not receipt.[7]
There was also an interesting discussion of the presumption of assent in this context.
The unsuccessful respondents argued that they were not presently entitled to the income because of the presumption that a beneficiary must give their assent had been rebutted by the disclaimer, and therefore one of the necessary elements of the gift was missing.
The plurality did not disagree with this proposition, however they held that the presumption was not an evidentiary presumption, but a presumption of law. As such, “… the criterion of “is presently entitled” in s97(1) – is consistent with, and operates on, the presumption of law of assent … that presumption applied immediately before the end of the 2014 income year to the operation at law of [the relevant clause in the Deed].”[8]
Edelman J’s judgement is also well worth reading and contains a very interesting discussion of the role of assent in equity and a pointed reminder that a trust (and resulting income distribution) is not the equivalent of a gift at common law.
Read the full decision here.
[1] At [15].
[2] At [16].
[3] At [24]
[4] Being Gageler, Gordon, Steward, Gleeson JJ. Edelman J delivered a separate judgement, but was in broad agreement.
[5] At [25].
[6] At [20].
[7] At [26].
[8] At [30].