• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Carter (S62/2021).

FC of T v Carter & Ors

Judges: Gageler J
Gordon J

Edelman J
Steward J
Gleeson J

Court:
High Court of Australia, Full Court

MEDIA NEUTRAL CITATION: [2022] HCA 10

Judgment date: 6 April 2022

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Edelman J

Two connected issues

33. I have had the considerable benefit of reading the joint reasons of Gageler, Gordon, Steward and Gleeson JJ. I agree entirely with their reasons concerning the interpretation of " is presently entitled " in s 97(1) of the Income Tax Assessment Act 1936 (Cth) ^[34] See reasons of Gageler, Gordon, Steward and Gleeson JJ at [1]-[26]. . A " present entitlement " to a share of the income of the trust estate in s 97(1) is an entitlement at the " present " time of the determination, being the end of the relevant financial year, whether or not that entitlement is later the subject of defeasance by a disclaimer.

34. The resolution of this issue of interpretation is logically anterior, although necessarily connected, to the issues raised by the parties concerning the content and effect of the Third Disclaimers. The interpretation

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adopted by the joint reasons answers the issue of how a disclaimer operates under s 97(1). But 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. That assumption was made by the parties in this Court as well as in the Full Court of the Federal Court of Australia and in the Administrative Appeals Tribunal.

35. The assumption of the parties was that the creation or increase in value of equitable rights is incomplete until affirmed by the beneficiary. That is, until affirmed, a declaration of trust, or an event increasing the value of the subject matter of a trust, would be inchoate, resting only upon a " presumed " assent by the beneficiary. This assumption was applied to the operation of the default distribution clause in the Trust Deed for the Whitby Trust, where income from the Trust was " distributed " in the sense that it was held on a separate trust for the Primary Beneficiaries. Thus, 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.

36. 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. In making the assumption in his submissions, the Commissioner of Taxation drew from remarks in cases concerning gifts of common law rights ^[35] See, eg, In re Parsons ; Parsons v Attorney-General [1943] Ch 12 ; In re Stratton ’ s Disclaimer [1958] Ch 42. and made the following submission in this Court:

" the key conclusions are these. A disclaimer operates to refute the legal presumption of assent to a gift. It thereby operates to prevent the perfection of the transfer of title contemplated by the gift. "

37. The assumption is based upon two faulty premises. The first premise is that there is a role for the assent of a beneficiary in the creation of a trust or the increase in the value of equitable rights. The second premise is that a " gift " of common law rights operates according to the same principles as a " gift " of rights in equity. The flaws in these premises aside, there are also serious difficulties even with the concept of a " presumption " of donee assent as a universal principle at common law. None of these faulty premises or difficulties is required by the doctrine of disclaimer, the effect of which will depend upon the reason that it is being invoked.

Assent of a beneficiary is unnecessary for the creation of a trust or increase in the value of equitable rights

38. As to the first faulty premise, the assent of a beneficiary is irrelevant to the creation of equitable rights by an unconditional declaration of trust. A fortiori, the assent of a beneficiary is irrelevant to the notional allocation of income, increasing the value of equitable rights of a beneficiary, under a default distribution clause such as cl 3.7 of the Trust Deed for the Whitby Trust. Assent need not be proved by any evidence nor by any " presumption " : a " declaration of trust would be fully effective even though it did not come to the notice of the beneficiary " ^[36] Rose v Rose (1986) 7 NSWLR 679 at 686 . . Indeed, neither a declaration of trust nor the increase in value of an entitlement under the trust requires the existence of a beneficiary. Trusts can be validly declared for charitable purposes or in favour of unborn persons ^[37] Mansell v Mansell (1732) 2 P Wms 678 at 679-680 [24 ER 913 at 914]; Savage v Taylor (1736) Cas temp Talbot 234 at 239 [25 ER 753 at 755]. See also Heydon and Leeming, Jacobs ’ Law of Trusts in Australia , 8th ed (2016) at 4 [1-07]. . It would be a nonsense to speak of the assent of a charitable purpose or the assent of an unborn child either to the creation of a trust or to the increase in the value of rights under a trust.

39. The irrelevance of the assent of a beneficiary to the formation of a perfect trust was the subject of the decision of the House of Lords in
Lady Naas v Westminster Bank Ltd ^[38] [1940] AC 366 . See also Mirzikinian v Tom & Bill Waterhouse Pty Ltd [2009] NSWCA 296 at [51] . . That case concerned a trust settlement in favour of Lady Naas and an infant. The settlement was contained in a deed of covenant which provided for execution by the settlor, by the respondent bank as trustee, and by Lady Naas. The settlor and the bank executed the deed but, following delays, Lady Naas did not execute it. Lord Wright said that the " crucial issue " was whether the beneficial interest had vested " immediately on execution " of the deed without execution or any other action by Lady Naas ^[39] [1940] AC 366 at 398 . .

40.

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The House of Lords unanimously held that a trust had been perfectly constituted upon execution by the settlor. Lord Russell of Killowen (with whom Lord Romer agreed) rejected the approach taken by Scott and Clauson LJJ in the Court of Appeal as one that erroneously appeared " to have dealt with the matter as if it lay in contract and was governed by the rules as to offer and acceptance " ^[40] [1940] AC 366 at 389 . . Lord Wright also rejected the notion that the covenant containing a trust settlement " was to be construed as a consensual document requiring for its operation that [Lady Naas] should concur in it by executing it " ^[41] [1940] AC 366 at 402 . . His Lordship added that the deed had not been expressed to be conditional and that " the declaration of trust [was] absolute and unconditional in terms " ^[42] [1940] AC 366 at 403 . .

A trust is not the equivalent of a common law gift

41. The second faulty premise underlying the assumption about the role of assent in the creation of a trust or the increase in the value of equitable rights echoes the view, derived from a mistaken understanding of the writing of Sir Arthur Underhill ^[43] Lewin on Trusts , 20th ed (2020), vol 1 at 7 [1-005]. See Underhill, A Practical and Concise Manual of the Law Relating to Private Trusts and Trustees , 3rd ed (1888) at 1-2. , that " a trust [is] the equitable equivalent of a common-law gift " ^[44] Lewin on Trusts , 20th ed (2020), vol 1 at 7 [1-005]. . That premise ignores a fundamental difference between common law property rights and equitable rights under a trust. A gift at common law, such as a gift of a chattel, will involve a transfer of rights. But a declaration of trust involves a creation of equitable rights and obligations, not a transfer of rights ^[45] Commissioner of State Revenue (WA) v Rojoda Pty Ltd (2020) 268 CLR 281 at 315 [65] . : " it is fundamental that the creation of a trust involves the creation of new equitable obligations, which are ' annexed to the trust property ' or ' engrafted ' or ' impressed upon it ' " ^[46] Commissioner of State Revenue (WA) v Rojoda Pty Ltd (2020) 268 CLR 281 at 307 [44] , citing Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 243 [38] ; Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592 at 606 [30] ; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 519 ; on appeal (1982) 149 CLR 431 at 474 ; Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311 . . As Maitland explained more than a century ago, it is because the creation of equitable rights does not involve the transfer of any property rights that the law of trusts does not contradict basic principles of the common law of property ^[47] Maitland, Equity: also The Forms of Action at Common Law (1909) at 17-18; Maitland, Equity: A Course of Lectures , 2nd ed (1936) at 17. . Thus, as Professor Hyland observed of the difference between a gift of common law rights and the creation of equitable rights, under the general law the creation of equitable rights can occur " by a gratuitous declaration of trust without delivery, deed, writing, notice to the donee, or acceptance " ^[48] Hyland, Gifts: A Study in Comparative Law (2009) at 454. .

Even at common law, a " presumption " of assent is problematic

42. There would be further problems with the assumption of the parties - that a declaration of trust or the increase in value of equitable rights under a trust is incomplete without the assent of the beneficiary - even if a gift of common law rights were to be equated with the creation, or increase in value, of equitable rights. It is true that many common law cases have spoken of a " presumption " of assent by a donee to a gift of common law rights ^[49] Thompson v Leach (1690) 2 Ventris 198 at 202, 207-208 [86 ER 391 at 393-394, 396-397]; Siggers v Evans (1855) 5 El & Bl 367 at 380 [119 ER 518 at 523]; Hill v Wilson (1873) LR 8 Ch App 888 at 896; London and County Banking Co v London and River Plate Bank (1888) 21 QBD 535 at 541-542 ; Matthews v Matthews (1913) 17 CLR 8 at 31, 43-44 . . But there is no sense in treating a gift of common law rights as subject to any " presumption " of assent, whether the " presumption " is described loosely as one of " fact " or described as one of " law " ^[50] See Thayer, A Preliminary Treatise on Evidence at the Common Law (1898) at 339; Wigmore, A Treatise on the System of Evidence in Trials at Common Law (1905), vol 4 at 3533 § 2491. .

43. Some of the leading cases attempt to justify the " presumption " as founded on a standardised inference that the donee has assented to the gift. In this sense the " presumption … arises where common experience is that the existence of one fact means that another fact also exists " ^[51] Thorne v Kennedy (2017) 263 CLR 85 at 101 [34] , citing Calverley v Green (1984) 155 CLR 242 at 264 . . Hence, the " presumption " has been said to be " founded on human nature " , based upon an expectation that " in all probability " a gift would attract assent ^[52] London and County Banking Co v London and River Plate Bank (1888) 21 QBD 535 at 542 . . It has thus also been said that " the assent of a person to that which is obviously for [their] benefit may be inferred on slighter evidence than would be required to show that [they] assented to something, eg, a contract, which may be to [their] prejudice " ^[53] Matthews v Matthews (1913) 17 CLR 8 at 20 . See also Townson v Tickell (1819) 3 B & Ald 31 [106 ER 575]. .

44. One problem with this reasoning is the combination of the premise of subjectivity of donee assent and the assumption that a gift of common law rights " requires the assent of both minds to make a gift as it does to make a contract " ^[54] Matthews v Matthews (1913) 17 CLR 8 at 20 , quoting Hill v Wilson (1873) LR 8 Ch App 888 at 896. . Although it would be coherent to draw a standardised inference founded on human nature that persons subjectively assent to gifts for their benefit, the objective theory of contract law, which is now " in command of the field " ^[55] Taylor v Johnson (1983) 151 CLR 422 at 429 , cited in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179-180 [41]. , means that a binding contract does not depend upon the subjective assent of either party, and it is anachronistic to speak of a " presumption " of intention ^[56] Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 106 [26] . .

45. This problem cannot be resolved by shifting the " presumed fact " from one of the subjective assent of the donee to one of the objective or outward manifestations of assent

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by the donee. Why would it be presumed that a donee, who might not even know of the gift of common law rights, has acted in a manner which shows assent to the gift? And the underlying inference of fact, which must be rebuttable, would mean that a donor could revoke a gift by objectively demonstrating a change of mind before any act of objective assent by the donee. That is not the law ^[57] Standing v Bowring (1885) 31 Ch D 282 . . Indeed, it could create serious disruptions in the financial system if deposits into the account of a donee were to be subject to reversal by the donor at any time before the donee manifested assent to the receipt.

46. Perhaps most fundamentally, there is no rationale for any " presumed fact " , still less for any rule of law that " facilitates proof of the presumed fact " ^[58] Masson v Parsons (2019) 266 CLR 554 at 575-576 [32]. . The rationale for a " presumption " may have arisen from a mistaken ^[59] See Siggers v Evans (1855) 5 El & Bl 367 at 380 [119 ER 518 at 523]; Standing v Bowring (1885) 31 Ch D 282 at 288, 290 . belief that title at common law could not pass without the assent of the donee ^[60] Butler and Baker ’ s Case (1591) 3 Co Rep 25a at 26b, fn E [76 ER 684 at 688]. , with the language of " presumption " as a shorthand for the legal rule that a donee " must be taken to give an implied assent " ^[61] Townson v Tickell (1819) 3 B & Ald 31 at 37 [106 ER 575 at 577]. . But that legal rule of deemed assent was a fiction, as can be seen by its operation even when it was known that the donee had no knowledge of the gift ^[62] London and County Banking Co v London and River Plate Bank (1888) 21 QBD 535 at 541-542 . , and even when it was known that the donee accepted the gift only as a loan ^[63] Dewar v Dewar [1975] 1 WLR 1532 at 1538 ; [1975] 2 All ER 728 at 733 . . Since it is now recognised that title can pass without assent of the donee, the " presumption " of implied assent is a fiction without any purpose at common law. There would be no basis to extend the " presumption " to equity, even if an analogy between common law and equitable rights could be drawn.

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] [1940] AC 366 at 403 . :

" 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.

Conclusion

49. The appeal should be allowed and orders made as proposed in the joint reasons.

ORDER

• 1. Appeal allowed.
• 2. Set aside orders 1 and 2 made by the Full Court of the Federal Court of Australia on 10 September 2020 and, in their place, order that the appeal be dismissed.

On appeal from the Federal Court of Australia