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Tax & AccountingNovember 29, 2022

Must a trust beneficiary drink from a poisoned chalice?

By: Dr Justin Dabner
The Carter case emphasises the self-evident proposition that regard must be had to trust deed and general law requirements when appointing income.

Remember the good old days (before September 2011) when the ATO allowed hard pressed accountants an extra two months to make trustee resolutions rather than commit them to a mad panic on 30 June. Then the decision in Colonial First State Investments Ltd v FC of T 2011 ATC ¶20-235; [2011] FCA 16 forced the ATO to withdraw the practice concession.

Short of potentially career ending backdating, there did remain a possibility that sub-optimal income tax outcomes from poorly thought out, or ineffective, 30 June resolutions might be remedied by beneficiaries subsequently disclaiming their entitlements.

It has traditionally been accepted that the principles of Equity hold that a person cannot be compelled to accept a gift. Rather they must assent to it (which might be inferred from their (in)actions or even presumed). It is this principle that is relied on to support of the validity of trust beneficiaries purporting to disclaim their interests with the disclaimer effecting a retrospective rejection of the gift so that it is treated as never made. The only riders are for the disclaimer to be effective it must be done within a reasonable time of the beneficiary becoming aware of their entitlement, there must be no evidence that the beneficiary has otherwise accepted the gift and disclaimers by default beneficiaries must be of their entire interest (FC of T v Ramsden 2005 ATC 4136; [2005] FCAFC 39).

There can be many good reasons (other than tax) why a beneficiary might want to reject their entitlement. For example, the existence of foreign beneficiaries might impact on the trustee’s ability to acquire a business or property or lodge a tender. Family breakups might lead to former spouses disclaiming interests in family trusts. Social security entitlement and asset protection, insolvency and bankruptcy considerations might also warrant disclaimers.

And then there is tax. Disclaimers are commonly used to avoid adverse outcomes under the payroll tax grouping rules. And in the income tax context, where discretionary beneficiaries are facing adverse tax outcomes, a disclaimer might be considered.

It might not be expected that the later scenario would occur if proper consideration was given to the initial appointment of income to the beneficiaries. However, matters can go amiss in the hurly burly of a busy accounting practice where trust deeds can take many forms and are typically long, tedious and full of legalese. Audits by the ATO might result in trust resolutions being claimed to be ineffective resulting in assessments being imposed on default beneficiaries. This was, indeed, the scenario in the recent High Court decision in FC of T v Carter & Ors 2022 ATC ¶20-822; [2022] HCA 10.

Facts and litigation history

The case has a chequered history detailed in this publication in 2020 (Issue 36 (2020) CCH Tax Week ¶724). Suffice for current purposes, trustee resolutions were claimed to be ineffective for non-compliance with the Trust Deed and Corporate Law requirements resulting in assessments being issued to the default beneficiaries. An attempt by the default beneficiaries to effectively disclaim their interests met with initial acceptance by the ATO for some years but this largesse was not extended to subsequent years, resulting in the beneficiaries declaring further disclaimers (three in total) and the ATO challenging the effectiveness of these subsequent disclaimers.

The AAT ([2019] AATA 5637) upheld the Commissioner’s assessments. It was not persuaded that the trustee resolutions were valid nor the disclaimers effective. Although the third disclaimers were found to be sufficiently broad to disclaim the entirety of the beneficiaries’ interests they were ultimately ineffective as the taxpayers had implicitly accepted their entitlements and delayed in executing the disclaimers.

The decision was, however, reversed on appeal to the Full Federal Court (2020 ATC ¶20-760; [2020] FCAFC 150). The Court agreed that the resolutions were invalid and that a default distribution was made to each of the taxpayers in accordance with the trust deed. However, the AAT erred in finding the third disclaimers ineffective. The taxpayers’ entire conduct was directed at rejecting the right to any income from the trust. The disclaimers were determinative as against the Commissioner in the application of s 97 of the ITAA 1936 to the taxpayers. Until disclaimer, a beneficiary’s entitlement to income under a trust was operative for the purposes of s 97 from the moment it arose but, upon disclaimer, the general law extinguished the entitlement to trust income ab initio.

The Commissioner appealed to the High Court. The issues were reduced to a consideration of the effectiveness of the disclaimers.

Held – disclaimers ineffective

The Court unanimously held for the Commissioner with Justice Edelman issuing a separate judgment. It was found that the legislative scheme in s 97 was directed at identifying the legal right of the beneficiary immediately prior to the end of the year of income. The other relevant criteria in s 97(1) apart from present entitlement, namely that a beneficiary is not under any legal disability and is a resident, reinforced the conclusion that a beneficiary’s present entitlement is determined at this time. Those criteria, ascertained during and at the end of the income year, were conditions or circumstances which could not be altered by facts and matters subsequent to the relevant income year.

Thus, once the present entitlement had come into existence s 97 applied to render the beneficiaries liable and a subsequent disclaimer of that present entitlement in a later income year after the income had been assessed could not have any effect for tax purposes.

The taxpayer’s contention that the phrase “is presently entitled” should be construed to mean “really is” presently entitled 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, was rejected as contrary to the text of s 97 and the object and purpose of Division 6. It would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate and the subsequent assessment of those beneficiaries. Rather, the question of the “present entitlement” was to be tested and examined at the close of the taxation year not some reasonable period of time later. Any potential unfairness to a beneficiary was simply a product of the legislation.

As to any suggestion that for a gift to be valid there needed to be assent by the beneficiary and any presumption of assent had been rebutted by the disclaimers, the Court observed that this was a presumption of law displaced by the terms of Division 6. Justice Edelman went further on this point opining that, in fact, the assent of a beneficiary is irrelevant to the creation of equitable rights by an unconditional declaration of trust. Furthermore, as a declaration of trust involves a creation of equitable rights and obligations, in contrast to the common law’s focus on the transfer of rights, common law principles are not informative and it is clear that equitable rights can arise by virtue of a gratuitous declaration of trust without delivery, deed, writing, notice to the donee, or acceptance. Equity lawyers will no doubt be engaged by his Honour’s observation that “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 Carter case emphasises the self-evident proposition that regard must be had to trust deed and general law requirements when appointing income. The need to strictly comply with the terms of a trust deed and to ensure that contemporaneous supporting documentation exists is a message repeatedly delivered by the caselaw. Unfortunately, the realities of a busy accounting practice time and again derail good practice.

It is now clear that beneficiary disclaimers cannot be used to remedy a sub-optimal income tax outcome. While disclaimers may have the desired outcome for other purposes, possibly even for payroll tax purposes, it is necessary in each case to consider whether the principles of Equity are subjugated to the legislative scheme. The High Court has made it clear that pursuant to Division 6 of the ITAA 1936 the entitlement of a beneficiary is a once and for all assessment as at 30 June and a subsequent disclaimer does not have a retrospective operation.

Although likely to be of limited utility, beneficiary disclaimers effected prior to 30 June would seem to be remain effective for income tax purposes. In the case of default beneficiaries such disclaimers need to be of their whole interest and not just the current year’s entitlement.

Finally, the Assistant Treasurer has stated in response to the recent trust taxation developments (namely relating to s 100A and Division 7 of the ITAA 1936 and the decision in Carter) that “a re-elected Morrison Government will not hesitate to make common-sense legislative amendments to provide certainty for family trusts and prevent unfair application of the tax law”. Given the Government’s track record on the implementation of the promised Division 7 reforms it might be advisable not to place too much reliance on this undertaking.

Dr Justin Dabner
Principal of Tax Re-solutions, Tax advisory and education services
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