TAX FILES
Disclaimers and some taxes BERNIE WALRUT, MURRAY CHAMBERS
INTRODUCTION TO DISCLAIMERS
A
disclaimer is simply a refusal to accept a benefit, usually some form of gift of property or right,1 though it may extend to disclaiming a position, such as the appointment as a trustee,2 or some form of power, whether coupled with an interest or not.3 In FCT v Cornell4 Latham CJ quoting from Holroyd J in Townson v Tickell5 described the basic principle that underpins the ability to disclaim a gift or benefit: ...an estate cannot be forced on a man .... he is supposed to assent to it, until he does some act to show his dissent. The law presumes that he will assent until the contrary be proved; when the contrary, however, is proved, it shows that he never did assent ... and ... that the estate never was in him. Any evidence of actual dissent to the benefit is sufficient.6 Further as a disclaimer acts by way of avoidance the general requirements as to writing for dispositions do not appear to apply,7 though in some situations a disclaimer may require a deed.8 As the disclaimer operates by way of avoidance rather than by way of disposition or conveyance,9 the benefit the subject of the disclaimer does not vest in the person disclaiming the benefit.10 Whilst the disclaimer is often described or may appear to have a retrospective effect, what it does is cause a cesser of the gift from the time of the disclaimer, in effect extinguishing the right to the benefit, as though it never existed.11 The disclaimer can only be made with knowledge12 and must be made within a reasonable time of the person entitled to the benefit becoming aware of the benefit, at least in general terms.13 There may be a difference when the time runs from in the case of an inter vivos gift and a testamentary gift.14 In most situations, once assent is given to the benefit it is too late to disclaim it.15 The assent may be by elapse of time, conduct16 and an agent may assent to the benefit.17 There must be an
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act showing dissent18 and the disclaimer must be communicated to the donor or those passing or creating the benefit.19 A disclaimer is generally regarded as irrevocable once made.20 It cannot be made in respect of part of the benefit, if the benefit is indivisible.21 However, if there are two or more independent benefits, a disclaimer only operates with respect to the specific benefit disclaimed,.22 The disclaimer should be simple and unqualified.23 The effect of the disclaimer cannot be the subject of a direction by the person disclaiming. The disclaimer simply operates to avoid the benefit, the benefit then accrues to the other persons that are entitled at law to share in the benefit, apart from the person disclaiming.24 Any attempt to effect where the disclaimed benefit is to go may be regarded as an acceptance and a disposition of the benefit.25 There may be some differences in treatment between disclaiming the rights as a beneficiary of a trust, disclaiming a particular appointment of income or capital of the trust and the rights of a beneficiary as a taker in default.26 In most respects the rules applicable to a disclaimer of a position or a power are similar to those applicable to a disclaimer of property, notwithstanding a position or power is not property.27 However, two recent decisions28 and a legislative change in the stamp duty context have limited the effectiveness of disclaimers from a tax perspective in the situations described in the following paragraphs.
DISCLAIMERS AND SOME TAXES Income Tax In FCT v Carter29 the trustees of the Whitby Family Trust failed to appoint or accumulate the income of the trust for the 2014 income year and therefore the income was distributed to the default beneficiaries in accordance with default income provisions of the trust. Consequently, the income was held on trust for those beneficiaries.30 In October 2015 the Commissioner of Taxation
issued amended assessments to each of the default beneficiaries. In November 2015 they disclaimed31 their interest in the default distributions and in September 2016 they executed further disclaimers of their rights under the income default provision. The AAT held the 2016 disclaimers to be ineffective. The Full Federal Court held that the 2016 disclaimers were effective. The Commissioner contended that even if the disclaimers were effective, they did not retrospectively disapply section 97(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA36). That section provides, inter alia, for the inclusion in the taxable income of a presently entitled beneficiary not under a disability of their share of the income of the relevant trust estate. It was the view of the Full Federal Court that there was nothing in section 97(1) 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. In the High Court the majority32 decided that the present entitlement of a beneficiary to income of a trust must be tested and examined at the end of the tax year, not some reasonable period of time after the end of the tax year. In doing so they stated that to do so was contrary to the text of section 97(1) and the object and purpose of Division 6 of ITAA36. Further the uncertainty created by any other approach would not only apply to the Commissioner but also the trustees and the beneficiaries and even possibly settlors.33 The majority also indicated that there was a distinction between legal and evidentiary presumptions and said as to the presumption of assent:34 The presumption of assent – that when there is a transfer of property to a person, the donee assents even before they know of the transfer – is a “strong presumption of law”. Recognising that a gift “requires the assent of both minds” and that the subject matter of a gift can vest in a donee before the donee actually assents, the law supplies that assent based “on fundamental attributes of human
