Tax Files: Disclaimers and some taxes

Disclaimers and some taxes

BERNIE WALRUT, MURRAY CHAMBERS

INTRODUCTION TO DISCLAIMERS

Adisclaimer 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 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

nature”. It “presumes a donee’s assent until disclaimer”. That presumption takes a basic fact – a transfer of property – and gives additional force to that basic fact by supplying the assent to the transfer of that property. It is not an evidentiary presumption in the sense of an inference drawn from basic facts. It is a presumption of law, and Div 6 – and, in particular, the criterion of “is presently entitled” in s 97(1) – is consistent with, and operates on, the presumption of law of assent. On the facts in this appeal, that presumption applied immediately before the end of the 2014 income year to the operation at law…

In effect, the retrospective operation of a disclaimer has no effect in determining who is presently entitled to the income for income tax purposes, at least where the disclaimer is made after the end of the relevant tax year. However, the majority did note that the “[a]rgument proceeding as it did, this is not the case to examine whether any wider questions arise about distributions or disclaimers.”35 Further, in most cases involving capital gains and franked distributions passing through trusts, the return of the gain or a franked distribution is to be determined by reference to a specific entitlement36 rather than a present entitlement (as discussed in this case). Obviously in respect of such specific entitlement, like a present entitlement, it is usually determined in respect of a tax year at the end of a tax year.

Payroll Tax

In Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd37 the Chief Commissioner had grouped certain companies under the Payroll Tax Act 2007 (NSW) (PTA(NSW)). The grouping provisions, in particular section 72, allowed the Chief Commissioner to group certain commonly controlled businesses and in effect to allow only a single payroll tax exempt threshold for the grouped entities. In addition, members of the group were jointly and severally liable for the payroll tax payable by a group member.38 Under section 72 one basis of grouping, occurs where a person (or a set of persons) is a beneficiary in respect of more than 50% of the value of the interests in a trust that conducts a business.39 A further provision provided that where a person could benefit from a discretionary trust the person was taken for the purpose of the grouping provisions to control the business conducted by the trust.40

Smeaton Grange Holdings Pty Ltd (Smeaton) was trustee of a discretionary trust.41 One of the persons (Michael Gerace) who could benefit from the discretionary trust (an object) controlled another business owned by a company in liquidation that had a significant payroll tax liability arsing from a payroll tax audit. Consequently, the two businesses were grouped.

In June, 2014 Michael Gerace executed disclaimers of his interest in the trust of which Smeaton was the trustee. Smeaton contended that the effect of the disclaimers were that they operated retrospectively and that consequently Michael Gerace was never an object of the discretion of the trust that Smeaton was the trustee. In effect the grouping nexus was broken and the disclaimer operated from the time the trust was constituted.42 At first instance this was held to be the case as it was said that revenue statutes were to be construed having regard to the principles of the general law and therefore there was no reason why the retrospective effect of a disclaimer should not apply.43

On appeal the Court of Appeal held44 that the construction of the language of section 72 strongly implies that the existence and composition of a group must be determined according to the circumstances as they existed during the relevant tax period or periods.45 Further, the PTA (NSW) only allowed for one situation where a group liability could be retrospectively altered, namely on the Chief Commissioner determining to exclude a member of the group from the group pursuant to section 79.46 Subject to that exception, “the legislative scheme can only be given effect if the existence and composition of any group of which the employer forms part can be determined at the same time as the employer becomes liable to pay payroll tax to the Chief Commissioner.”47

Whilst it is recognised that as between Smeaton and Michael Gerace the disclaimer may have altered their respective rights, 48 “…the consequence is not that Smeaton’s liability to pay payroll tax is retrospectively expunged. On the proper construction of the legislation, Smeaton became liable by force of statute at the expiration of a specified time after the end of each financial year (if not earlier). Smeaton’s liability under the legislation was to be determined once and for all by reference to the legal relationships then in existence (subject to s 79). A subsequent alteration of those relationships by the unilateral act of a discretionary object cannot change the operation of the legislation.”49

Stamp Duty

In Probert50 the appellant appealed against an assessment of stamp duty imposed on a disclaimer of an interest in a deceased estate of her brother that was still in the course of administration. The appellant was successful on the basis that the estate was in the course of administration51 and that the disclaimer operated by way of avoidance rather than disposition or vesting.52 The effect of Probert has been overturned by section 71AA of the Stamp Duties Act 1923 (SA).

Section 71AA provides that an instrument whereby a person disclaims an interest in an estate of a deceased person which the person is or may be entitled to share in is taken to be a conveyance of property operating as a voluntary disposition inter vivos. There is no definition as to what may constitute the disclaiming of an interest. In addition, for the purpose of calculating ad valorem duty payable on an instrument to which the section applies, the value of the interest subject to the conveyance is to be determined as if the estate had been distributed and the interest were an interest in possession.

In Circular No 209 Stamp Duties (Land Rich Entities and Redemption) Amendment Act 2000 the Commissioner said that the purpose of the amendment was to ensure the status quo was maintained, that is the Commissioner may assess “Deeds of Disclaimer and Arrangement” with duty and thereby protect the revenue base. There is little further guidance provided by the Commissioner as to the application of the section. Section 71AA applies not only to disclaimers but also to assignments of interests in deceased estates still in the course of administration.

In practice, because of the width of section 71AA in particular, care needs to be taken in drawing deeds of family arrangement because, in disallowing an objection, the Treasurer has taken the view that where A and B are entitled to share in an estate and under a deed of family arrangement A takes one property and B takes another property there is either a disclaimer or an assignment of their interests. How such an arrangement may constitute a disclaimer is simply not clear, having regard to the requirements for a disclaimer to be an outright avoidance of an interest with no direction.

SUMMARY

In summary, whilst a disclaimer may have a retrospective effective for most purposes, when it comes to some revenue laws, in particular those that impose a liability by reference to a state of facts at a point in time, commonly the end of a taxing period, a disclaimer executed after the end of the relevant taxing period may be ineffective to alter the existing revenue incidence. That may not be the case if the disclaimer is effected prior to the expiration of the taxing period. However, where the transaction that is taxed is the disposition, then unless the taxing provision expressly extends the concept of disposition to a disclaimer, the disclaimer will operate by way of avoidance rather than disposition.

By Bernie Walrut, Murray Chambers. Tax Files is contributed on behalf of the South Australian based members of the Taxation Committee of the Business Law Section of the Law Council of Australia. B

Endnotes 1 LexisNexis Australian Legal Dictionary (2nd ed) 474. It may include property, income, an interest under a will in the course of administration or an interest on an intestacy and interest as an object of a discretionary trust. See In the Estate of

Simmons dcd (1990) 56 SASR 1 (Simmons); Probert v Commissioner of State Taxation [1998] SASC 6896 (Probert); Ramsden v FCT [2005] FCAFC 39 (Ramsden). Some articles discussing disclaimers include: N Crago “Principles of Disclaimer of Gifts” (1999) 28 University Western Australia

Law Review 65 (Crago); D Marks Disclaimer of

Testamentary Gifts STEP Australia Conference 2019 Brisbane Queensland (Marks); Alan

Krawitz, Disclaimer in the Context of Taxation of Trusts in Australia, (2006) 13 eLaw J 1. 2 A person who is appointed as a trustee does not assume that office until the person has accepted that appointment as trustee, see J Heydon and M

Leeming Jacobs’ Law of Trusts in Australia (8th ed) [15-73]. 3 Section 57 Law of Property Act 1936 (SA). 4 [1946] HCA 32, (1946) 73 CLR 394, 401 (Cornell). 5 (1819) 3 B & Ald 31, 38; 106 ER 575, 577. 6 Cornell. 7 Re Stratton’s Disclaimer [1958] Ch 42 (Stratton);

Standing v Bowring (1886) 31 Ch D 282 (Standing); Crago 70-76. 8 E.g. Section 57 Law of Property Act 1936 (SA). 9 Probert [29]-[30] and [37]-[39]. 10 Simmons 5. 11 Stratton; Standing; Crago, 70-76. There may be a difference between a situation where the benefit is yet to vest and those where it has vested, and where the interest is equitable rather than legal. 12 Tantau v McFarlane [2010] NSWSC 224 [107][114] (Tantau). 13 Confidential and Commissioner of Taxation [2008]

AATA 927. 14 Marks [134]-[140]. 15 Re Hodge [1940] Ch 260 (Hodge); Crago 76-77; though it is suggested that may not apply to testamentary gifts, Lewis v Lohse [2003] QCA 199;

Marks [153]-[169]. 16 Hodge; Lady Naas v Westminster Bank Limited [1940] AC 366; Crago 77. 17 Confidential and Commissioner of Taxation [2008]

AATA 927; Marks [113]-[123]. 18 Hodge; Lady Naas v Westminster Bank Limited [1940] AC 366; Crago 77. 19 I.e. the executor, administrator or trustee. 20 Re Paradise Motor Co Ltd [1968] 2 All ER 625;

Re Bisset (deceased) [2015] QSC 85, [2016] 1 Qd

R 211. However, see Re Young [1913] 1 Ch 272 and Re Cranstoun [1949] Ch 523. Crago n 60 suggests those decisions do not support revocability, however see the discussion about this proposition in Tantau [108]. 21 An interest in a residuary estate can only be disclaimed in its entirety, Hawkins v Hawkins (1880) 13 Ch D 470; Crago 78-79. 22 Hodge; Crago 80. 23 Re Boyd [1966] NZLR 1109; Crago 78-79. 24 Rex v Skinner (1883) 22 Ch D 373; Marks [56]. 25 Ibid; Marks [56]-[57] and [104]. 26 Pearson v FCT (2005) 58 ATR 502; Ramsden;

Marks [141]-[152]. 27 Ramsden; Cornell; Ex p. Gilchrist In Re Armstrong (1886) 17 QBD 521. 28 The two recent decisions described below are not reflected in the foregoing discussion. 29 [2022] HCA 10. 30 Commissioners of Inland Revenue v Ward (1969) 1

ATR 287. 31 There were two disclaimers for the respondents on different days. 32 Gaegler, Gordon, Steward and Gleeson JJ.

Whilst Edelman J concurred with their reasoning as to the operation of section 97(1) he then provided his own reasoning on the assent issue and distinguished between common law and equitable rights. 33 [2022] HCA 10 [24]-[25]. 34 Ibid [30]. 35 Ibid [31]. 36 Subdivisions 115-C and 207-B of the Income Tax

Assessment Act 1997 (Cth). 37 [2017] NSWCA 184. 38 Section 81 PTA (NSW). 39 Section 72(2)(g) PTA (NSW). 40 Section 72(6) PTA (NSW). 41 There was no definition of a discretionary trust in the PTA (NSW), see [2017] NSWCA 184 [110]-[113]. 42 [2017] NSWCA 184 [78]-[80]. 43 Ibid [82]. 44 The primary judgment was given by Sackville

AJA with whom Gleeson and Leeming JJA agreed. Leeming JA also discusses a number of the general principles relating to the operation of disclaimers described earlier. 45 [2017] NSWCA 184 [138]. 46 Ibid [142]. 47 Ibid [143]. 48 [Ibid 145]. 49 Ibid [146]. 50 Probert v Commissioner of State Taxation [1998]

SASC 6896 51 Ibid [18]-[30]. 52 Ibid [36]-[39].