ATO Interpretative Decision

ATO ID 2010/85 (Withdrawn)

Income Tax

• This ATO ID is withdrawn following Commissioner of Taxation v Carter & Ors [2022] HCA 10. The Commissioner issued a Decision Impact Statement outlining the Commissioner's views on this decision.
  This document has changed over time. View its history.

Issue:

Did the beneficiary validly disclaim their entitlement to trust income, which arose from the trustee exercising a power to appoint income to them as a discretionary object of the trust, with the result that the beneficiary was not presently entitled to any income of the trust for the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision:

Yes. Although the beneficiary had previously assented to gifts of income made to them as an object of the trustee's power to appoint income, the beneficiary was not prevented from disclaiming a further such gift. The beneficiary, having disclaimed the gift within a reasonable time, was not presently entitled to a share of the income of the trust estate for the purposes of section 97 of the ITAA 1936.

Facts:

An Australian resident individual (the beneficiary) is an object of a so called 'discretionary trust' in respect of whom the trustee can exercise its discretion to appoint the trust's income. The beneficiary is not within the class of beneficiaries entitled to income in the event the trustee does not make an effective appointment (that is, default beneficiaries). 'Income' is not defined for the purposes of the deed (nor does the deed give the trustee powers to characterise receipts or outgoings as being on income or capital account) and so takes its ordinary meaning.

The trustee derived income in the 2006-07 income year and appointed some of it to the beneficiary.

The trustee has appointed income to the beneficiary in some previous years, but had always notified the beneficiary of their entitlement in those years. However, the trustee had not notified the beneficiary of their entitlement to income for the 2006-07 income year and so the beneficiary did not include any of the trust's net income in their income tax return for that year.

In 2009, the Commissioner issued a Notice of Amended Assessment increasing the beneficiary's taxable income for the 2006-07 income year by including their share of the trust's net income.

The beneficiary immediately advised the trustee that they wished to disclaim their entitlement to trust income. The beneficiary attested that, until receipt of the Notice of Amended Assessment, they were not aware of their entitlement for that year.

Reasons for Decision:

Until disclaimer, a beneficiary's entitlement to income of a trust is operative for the purposes of section 97 of the ITAA 1936 from the moment it arises notwithstanding that the beneficiary has no knowledge of it (see Vegners v. FC of T 91 ATC 4213 at 4215; (1991) 21 ATR 1347 at 1349).

A beneficiary may disclaim an entitlement on its coming to their knowledge. A disclaimer does not need to be effected by a formal deed, however the beneficiary must do some act to show their dissent - mere silence or inactivity is not sufficient to establish that the interest has been disclaimed (see Federal Commissioner of Taxation v. Cornell (1946) 73 CLR 394; 8 ATD 184; 3 AITR 405).

An effective disclaimer, once made, operates retrospectively and not merely from the time of disclaimer.

To be effective, a disclaimer must be made within a reasonable time of the beneficiary becoming aware of the relevant gift and the gift must be disclaimed in its entirety (see Commissioner of Taxation v. Ramsden [2005] FCAFC 39; 2005 ATC 4136; (2005) 58 ATR 485 (Ramsden)).

So, the first step in determining whether a disclaimer is effective is to identify the gift said to have been disclaimed. In Ramsden, the Court rejected the Commissioner's contention that the entirety of the interests created in a beneficiary under a deed establishing what is commonly known as a discretionary trust was a single gift. On the Commissioner's view a beneficiary who, as a discretionary object or default beneficiary, had assented to a gift of income in one year could not make a disclaimer in relation to any later year.

The Court found that each entitlement arising as the result of the exercise of the trustee's discretion to appoint income was a separate gift - the subject matter of that gift being the income (as defined by the deed) for the relevant accounting period. Further, the Court found that the interest of a default beneficiary was a separate gift arising by operation of the trust deed. That gift relates to all accounting periods such that a disclaimer confined to one only of those accounting periods is necessarily ineffective whilst an assent in one year will prevent a disclaimer in a later year.

In this case, the appointment of income of the 2006-07 income year to the beneficiary as a discretionary object was a separate gift from those made in earlier years. The beneficiary was not prevented from disclaiming this gift merely because they had accepted gifts from the trustee in the past.

While acceptance of an earlier gift might be relevant to the question whether the beneficiary had knowledge of their interest in the trust under which the later gift was obtained and whether a reasonable time had elapsed within which that beneficiary could disclaim the later gift, there was no evidence to suggest that it was so in this case.

In this case, the beneficiary validly disclaimed their entitlement to the trust's 2006-07 income because they advised the trustee that they had no desire to receive the income appointed to them upon becoming aware of their entitlement.

Accordingly, the beneficiary was not presently entitled to a share of the income of the trust for the purposes of section 97 of the ITAA 1936 and thus was not assessable on any of the trust's net income for that year.

Note that the share of net income in respect of which the beneficiary would otherwise have been assessed will be assessed to the trustee (see Nemesis Australia Pty Ltd v. FC of T [2005] FCA 1273; 2005 ATC 4881; 61 ATR 119).

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1936
   section 97

Case References:
Federal Commissioner of Taxation v Cornell
   (1946) 73 CLR 394
   8 ATD 184
   3 AITR 405

Keywords
Disclaimer
Income
Trust income
Net income of a trust
Trusts
Trust distributions

Siebel/TDMS Reference Number:  6161208

Business Line:  Public Groups and International

Date of publication:  16 April 2010

ISSN: 1445-2782