Commissioner of Taxation v Carter & Ors (Special leave decision)
Judges:
Gageler J
Edelman J
Gleeson J
Court appealed from: Federal Court of Australia (Full Court)
Commissioner of Taxation
v. Carter
Caratti
[2020] FCAFC 150
2020 ATC 20-760
[2021] HCAtrans 72
Date of decision: 16 April 2021
Result: Granted
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON FRIDAY, 16 APRIL 2021, AT 9.39 AM
Copyright in the High Court of Australia
MR N.J. WILLIAMS, SC : May it please the Court, I appear with MR D.P. HUME for the applicant. (instructed by the Australian Government Solicitor)
MR J.L. EVANS, QC : May it please the Court, I appear with MR D.R. LEWIS for the respondents. (instructed by O'Loughlin Westhoff)
GAGELER J: Thank you. Mr Williams, you need an extension of time. Is that opposed?
MR WILLIAMS: I do not believe so, your Honour.
GAGELER J: Very well. You have that extension.
MR WILLIAMS: Thank you, your Honour.
GAGELER J: In relation to costs you seek in the proposed grounds of appeal and orders an order as to costs. I take it that is overtaken by what you say in your reply.
MR WILLIAMS: It is. The composite effect - the last paragraph of our reply sets out our position in this Court. In our notice of appeal, we only sought to overturn the first two orders of the Full Court and not the third order. Therefore, we would not be seeking to disturb the orders below either.
GAGELER J: You both give the undertaking as to the costs in this Court?
MR WILLIAMS: We have indicated, in paragraph 15 of our reply, that there will be funding. That is the equivalent of an undertaking in this Court.
GAGELER J: Very well.
MR WILLIAMS: There will be test case funding.
GAGELER J: Justice Edelman has a question for you.
EDELMAN J: Mr Williams, would it right to say that, at least in the Full Court and in the submissions in this Court, an assumption has been made by the Commissioner that the second disclaimer - had it been effective - would have been operative because it would have been made within a reasonable period of time such as to evidence and intent to disclaim not to have accepted the distribution?
MR WILLIAMS: I believe that is so, your Honour. I believe that is so.
EDELMAN J: What was that? What is the underlying fact beneath that assumption? What is the reasonable period of time that was taken before the second disclaimer occurred?
MR WILLIAMS: Well, the chronology of the disclaimers is set out in the Full Court and in the Tribunal. The third disclaimer was of course in September 2016. The second disclaimer - - -
GLEESON J: At 105 of the application book at paragraph 91, the Full Court says:
We do not accept that evidence from the applicant's lawyer was necessary for the applicants to sustain their contention that they disclaimed the gift, in effect, immediately on understanding that the nature of the gift was such that it could not be disclaimed in relation to any particular year but had to be disclaimed in its entirety.
That is as to the first and second disclaimers.
MR WILLIAMS: Yes.
EDELMAN J: The first and second disclaimers only relate to the 2011, 2013 income tax years. Is that right?
MR WILLIAMS: Yes.
EDELMAN J: So the relevant disclaimer, or the relevant attempt to disclaim in relation to the 2014 tax year - - -
GLEESON J: I might just interrupt.
MR WILLIAMS: Actually, I am not sure. I have to say, I have not focused on the effects of the disclaimers, because we have not called them into question - - -
GAGELER J: No, we are getting into the weeds here, I realise, Mr Williams. Do you need a moment to get some instructions?
MR WILLIAMS: If I could get instructions. The second disclaimer did cover the 2014 year, but the Commissioner did not accept that it was effective.
EDELMAN J: Yes, that is right. But the first disclaimer did not. The first disclaimer was just 2011, 2013.
MR WILLIAMS: That is correct.
EDELMAN J: The difference in time between the first and the second disclaimers was about a year and three or four months. I suppose the point that I am raising with you is that, as I understand the chronology, the first disclaimers occurred very shortly before the assessment in relation to the 2014 tax year.
MR WILLIAMS: Yes.
EDELMAN J: Then there is a delay for a year - nearly a year and a half - before the second disclaimer relating to the 2014 tax year occurs.
MR WILLIAMS: Yes.
EDELMAN J: The second disclaimer comes, I think, on the Full Court's reasoning about a week after receipt of the Commissioner's assessment.
MR WILLIAMS: Yes.
EDELMAN J: Is this reasonable time period being assessed by the Full Court by reference to the time at which the Commissioner issued the tax assessment for the second disclaimer, or is it being assessed by reference to the date at which the distribution for the 2014 tax year was made? In other words, was the reasonable time period one week, or was the reasonable time period one year and six months?
MR WILLIAMS: One year and six months, I think, although it was an element of that that the beneficiaries had a week before they learned of the Commissioner's position.
EDELMAN J: Why is that relevant? I mean this is a case that is all about disclaimer. Why is it relevant to whether a gift is disclaimed what the beneficiary knows of the tax position or the tax consequences of that gift? Is that an In re Hastings-Bass issue or is that a disclaimer issue?
MR WILLIAMS: I think in the Full Court's reasoning, which we have not sought to impugn here in respect of these disclaimers - in the Full Court's reasoning it was relevant because of the state of knowledge of the beneficiaries as to the nature of the gift and the extent of the previous disclaimers.
EDELMAN J: So, in effect, then, the assumption upon which the appeal would proceed would be an assumption that the relevant reasonable time period is the week of receipt from the assessments in relation to the 2014 tax year?
MR WILLIAMS: It is both, your Honour, in that it is a period of over a year but with the particular knowledge being sheeted home to them a week before and causing them to act, yes.
EDELMAN J: Knowledge of the tax position or knowledge of the distribution?
MR WILLIAMS: Knowledge of the nature of the gift, which is reflected in the Commissioner's assessment for 2014 - that it had not been effectively disclaimed in the first disclaimer.
EDELMAN J: Thank you.
GAGELER J: Yes, thank you, Mr Williams. We will hear from Mr Evans.
MR WILLIAMS: Thank you.
MR EVANS: Your Honours, if I might respond in response to Justice Edelman's questions, we certainly adhere to the view that the reasonable time in respect of the second disclaimer was approached on the basis that it was one week, but there was no operation of a reasonable time in that context because of the acceptance by the Full Court of the decision in Tantau v MacFarlarne whereby, in order for the disclaimer to be effective, it was necessary that the beneficiary making the disclaimer needed to understand the effect of the gift - - -
EDELMAN J: So, if I make a gift to you today, and you wait for a year and a half and then suddenly find that the effect, a year and a half later - the effect of that gift is to give you some adverse tax consequence, the reasonable - and immediately then disclaim, the reasonable time would not have expired as to show acceptance of the gift.
MR EVANS: No, not necessarily. In this case, there was no knowledge of the existence of the gift until there was knowledge of the assessment of income because it was the assessment of the taxable income that led to the desire to disclaim in circumstances where, from the beneficiaries' point of view, they had no chance to call for the income.
EDELMAN J: Is that right, because they were assessed in relation to the 2011 to 2013 income as at June 2014.
MR EVANS: Yes, they were given notice.
EDELMAN J: But that assessment did not give them any knowledge or notice that there might be the equivalent right in relation to the 2014 tax year.
MR EVANS: It might, in the sense that they then became aware of the potential for default distributions, or indeed distributions by appointment, to be made to them within the relevant trust year.
EDELMAN J: Which were?
MR EVANS: I am sorry?
EDELMAN J: Which was their note.
MR EVANS: No, because it was a default distribution, so that the distributions that were made to them were conditional upon rejection of the proposition that there had, in fact, been a distribution made. That was a finding that was made initially by the Commissioner, then by the AAT, then the Full Court found also that there had been no alternative distribution, so the default provisions of the trust deed operated so that the four respondents, or the four original taxpayer respondents were identified and notified that they had been assessed for income.
So, the first notice they had that they had, in fact, received the trust income was at the same time as they received the notice of the taxable income. So, in that sense we say - and I would say, no beneficiary who is a default beneficiary could know that they had received a gift until at the end of the relevant year - so for the 2014 tax year it would be impossible for someone to know that they had received a distribution by default until 1 July 2014.
GAGELER J: Mr Evans, you had better tell us what you say about the Commissioner's application?
MR EVANS: Certainly. We say that the application involves no more than a reasonably narrow point of statutory construction where the relevant principles appear well settled and the application by this Full Court of the principle in Ramsden -was consistent with the decision in Ramsden and consistent with the existing authorities. The two principles which, we say, are reasonably well settled in the context of interpretation of the Income Tax Assessment Act and, in particular, in respect appear in the application of those principles to section 97, is that taxing statutes can be seen usually to apply general law concepts as they are found and, secondly, that relevant events occurring after the conclusion of the tax year may affect the question of the assessment of income for that tax year.
In our response, we have referred to the series of cases which, we say, support that proposition, that is, Kiwi Brands and then, on appeal, Sara Lee, Oates, Cornell and Tait. We say that each of those cases involves an application of retrospectivity to the process of assessment in the sense that events which occurred after the conclusion of the relevant tax year can be taken into account in determining what the present entitlement of the taxpayer in that year was.
GAGELER J: The Commissioner in his reply, of course, has an answer to each of those authorities.
MR EVANS: The Commissioner's reply, with respect, identifies that none of those cases deal with the specific question which the Commissioner wishes to address by virtue of the application and that is correct. As we have said, we look through the prism of a general principle, which can be seen to be taken up in the cases. We describe that general principle in paragraph - - -
GAGELER J: Is this the principle that goes to the construction of the - - -
MR EVANS: Yes - paragraph 20 of our special leave response. We also say that that principle is consistent with the language of Harmer and also of Thomas.
EDELMAN J: The question of retrospectivity really needs to be considered in the context of what is meant by a present entitlement, does it not?
MR EVANS: Yes.
EDELMAN J: Do you accept that the nub of your submissions really comes down to whether "present entitlement" in section 97 includes defeasible rights that have been avoided?
MR EVANS: Yes, it must necessarily. What we say is that the use of the phrase "presently entitled" does not mean that in considering the question of assessable income under section 97 one necessarily says one cannot look at matters which arise after the conclusion of the relevant tax year. We say that that is the same approach that was taken particularly in Sara Lee but also in Cornell and that in those cases acts which occur as a matter of the application of general law principles, after 30 June of the relevant tax year, were taken into account in determining the assessable income of the taxpayer for that previous tax year.
EDELMAN J: Your approach would mean then, would it, that a gift under the general law immediately before the end of the tax year, which is disclaimed immediately after, within a matter of days, the relevant tax year, as soon as the gift was known, would still have involved a gift to which the recipient was presently entitled, even though it was unknown and disclaimed immediately afterwards?
MR EVANS: No, our approach would say that it involved him not being presently entitled.
EDELMAN J: I see, yes.
MR EVANS: It is the Commissioner's approach that says that "presently entitled" means one cannot look at a matter that occurs at any time after. Indeed, in the context of gifts and in particular in the context of default gifts - which, by definition, the taxpayer cannot know about until the termination of the tax year, unless they are in control of the trustee because the trustee can make an appointment of income under a trust ordinarily at any time until the conclusion of the particular accounting period, 30 June - it would mean that it would be impossible for a taxpayer or a beneficiary who received income to avoid the taxation consequences of that income, even if, as we have identified in paragraphs 29 to 32 of our response, that income is not income for the purpose of the trust.
It is treated as capital instead by the trustee - for example, a capital gain - which would mean that you have a beneficiary unknowingly receiving an immediate liability to pay a very substantial amount of tax without any right of recourse to the assets of the trust to satisfy that tax liability.
Now, the beneficiary could be any person whatsoever. Obviously there is nothing in the law of trusts that defines a limit to the potential objects of a power of appointment of income, or the default beneficiaries. That is one reason we say - or it is the principal reason we say that the interpretation put forward by the Commissioner has the potential to work extraordinary unfairness upon beneficiaries of trusts.
It could be me, it could be your Honours. Anyone could be the subject of the appointment, and there would be no answer to that whatsoever. The Commissioner's response in the reply to say that it is inherent in section 97 that a beneficiary can be subject to a liability which is unable to be satisfied out of the assets of the trust, or by calling upon the trustee for a transfer of money to enable it to pay the income tax, is both glib and circular.
There is nothing within the words "presently entitled" or otherwise in section 97 which means that that effect needs to occur. It is only upon the Commissioner's interpretation that that would occur because it simply becomes impossible for a beneficiary to do anything to undo that tax liability. We say that that interpretation is so manifestly unfair to beneficiaries of trusts that it cannot possibly be right. We say, therefore, that the reasoning of the Full Court and the conclusion reached by the Full Court is obviously correct.
Further, we say that the Commissioner's submissions do not identify any cogent basis by reason of which their interpretation ought to be preferred. The special leave application only identifies two reasons why it is said that the interpretation put forward by the Commissioner ought to have been preferred and ought be preferred here. The first of those is in paragraph 28 of the special leave application at page 128 of the application book. That is the proposition that, line 20, on page 128:
all other things being equal, it is unlikely that Parliament would have intended the incidence of tax on trust income in a given year to vary by reference to events occurring after that year.
No identification is given why that should be said to be the policy, all other things being equal. It also carries within it the inherent proposition that that is "all other things being equal" and, as I have already described, all other things are very unequal in circumstances where a beneficiary can have a massive tax liability thrust upon it without any recourse whatsoever to the assets of the trust.
EDELMAN J: What do you say about the Commissioner's analogy, or borrowing from Lord Greene, In re Parsons, with an option?
MR EVANS: We say two things about Parsons and also about Re Stratton's - these are set out in our written response. We say that the analogy that is drawn is only an analogy. It is said to be "not unlike" an option. But if one looks at Townson v Tickell, and one looks at Cornell, it is reasonably clear that that analogy, while it may be factually correct, is not legally correct and never has been legally correct.
The other point we make about Parsons and about Stratton's is that they are cases of statutory interpretation and statutory construction of English revenue statutes in which the relevant question is not what is the effect of a disclaimer at general law, but rather what is the operation of the statute upon the circumstances where a gift was made within a particular income period, and then it was subsequently disclaimed?
In Stratton's, the withdrawal of - the question was whether or not the disclaimer was in fact a disclaimer for the purpose of the statute. So, it is only Parsons that provides potential scope for the operation of a suggestion that a gift that avoided a general law somehow does not undo matters sufficiently that section 97 might be said to continue to have operation upon them.
With respect to re Parsons, it is looking at particular facts rather than the legal consequences of those facts. One cannot deny that, as a matter of fact, a gift can be made in a particular year and then it can be disclaimed subsequently. The legal consequence of that at general law is, we say, that it is avoided, and it is avoided dating back to the date of the original gift.
In Parsons, the situation was that it was said, factually, it was still in place at that time and in interpreting this statute we will recognise that fact. In other words, looking at the principle we stated as being a general application in taxing statutes - that being the principle we identified at paragraph 20 of our response - we say that this is a case where there was some contrary indication in the statute and Parsons can be seen as being a case potentially like Smeaton Grange where the court determined that the general law would not operate to the detriment of the particular statute.
GAGELER J: So, we have a question as to the operation of the general law - which is Stratton's and Parsons - and then we have a question that, I suppose, logically arises subsequently as to the operation of section 97 in the 1936 Act.
MR EVANS: We say that we do not have the anterior - the anterior issue, we say, is a red herring. There is no question in this case raised by Parsons or by Stratton's about the operation of the general law with respect to disclaimers. We say that is - - -
EDELMAN J: You accept that the effect of a gift, without knowledge, is to transfer title - subject to a power to disclaim.
MR EVANS: Yes.
EDELMAN J: So, in effect, it confers.
MR EVANS: Well, actually, your Honour, may I withdraw that response. We do not necessarily accept that proposition. What we say is that the authorities establish that the - or the correct view should be that the making of a gift leads to a strong presumption - and that is the legal presumption said to arise, that the transfer was done with the acceptance or the implied consent of the done, but that is then subject to the principle that the donee, upon becoming - who is not aware of that - upon becoming aware of the gift may disclaim it. The legal effect of that is that it never ever existed as a gift.
EDELMAN J: But just so I understand whether there is a dispute about the general law, do you say that a gift to a recipient, even though the recipient does not have knowledge of the gift, at the moment of the gift, the effect is to confer an entitlement or a right upon the recipient, or not?
MR EVANS: Yes, but it can be undone by the subsequent act.
EDELMAN J: So, there is an immediate entitlement which can be defeased?
MR EVANS: Yes. In other words, the immediate entitlement is pregnant with the possibility of defeasibility. That is our position.
GAGELER J: Now, if special leave were to be granted, are you content with the indication as to ATO test case litigation - the ATO test case litigation program being applied?
MR EVANS: Yes.
GAGELER J: Thank you. There will be a grant of special leave to appeal in this matter.
AT 10.06 AM THE MATTER WAS CONCLUDED