Alderton and Commissioner of Taxation (Taxation)

[2015] AATA 807

Alderton and Commissioner of Taxation (Taxation) [2015] AATA 807 (16 October 2015)

Division	TAXATION & COMMERCIAL DIVISION
File Number	2015/2176
Re	Lisa Alderton
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President PE Hack SC
Date	16 October 2015
Place	Brisbane

The decision under review is affirmed.

........................................................................

Deputy President PE Hack SC

CATCHWORDS

INCOME TAX – assessable income – trust estate – beneficiaries – trust income – whether beneficiary presently entitled – beneficiary knew nothing of trust affairs – beneficiary had interest in income vested in interest and possession – lack of knowledge no consequence – disclaimer of interest – must constitute absolute rejection of gift – applicant accepted benefit of gift – use and benefit of distribution – disclaimer ineffective – decision under review affirmed.

LEGISLATION

Income Tax Assessment Act 1936 (Cth), 97(1)

CASES

Vegners v Commissioner of Taxation (1991) 21 ATR 1347

Federal Commissioner of Taxation v Ramsden [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136

REASONS FOR DECISION

Deputy President PE Hack SC

16 October 2015

1. In 2000, when Ms Lisa Alderton[1] was 18 years old (and considerably less sophisticated than she now appears to be) she commenced a relationship with a medical professional, Mr Trapperton who was then aged about 42 or 43 years. The relationship lasted until 2010.

   [1]This name, together with the name of the other party, is a pseudonym adopted to comply with s 14ZZJ of the Taxation Administration Act 1953 (Cth).

2. Throughout the relationship Ms Alderton was entirely dependent on Mr Trapperton for financial support. Originally, Mr Trapperton provided that by transferring money from his bank account to Ms Alderton's bank account. That changed in February 2006 when Mr Trapperton arranged to set up the Vo Vo Trust, a discretionary trust in conventional terms. Mr Trapperton was the trustee of the Trust and he and Ms Alderton were named in the trust deed as beneficiaries of it. Once the Trust had been set up Mr Trapperton made regular deposits to the Trust's bank account, an account in his name in his capacity as trustee of the Trust, and Ms Alderton was able to access funds in that account using a debit card in the name of the Trust and by Internet banking.

3. In May 2010, and after the relationship with Ms Alderton had come to an end, the Trust lodged a trust return with the Commissioner of Taxation disclosing net income of $79,880 in the 2009 income year, said to have been distributed to Ms Alderton. In June 2014 the Commissioner made a default assessment of her taxable income for the 2009 income year. The distribution from the Trust was the major component of the assessment; without it Ms Alderton would have been well below the taxable threshold. Additionally, the Commissioner made an assessment of administrative penalty for Ms Alderton's failure to lodge a return. It was calculated, as the legislation requires, at the rate of 75% of the assessed tax liability.

4. Ms Alderton engaged solicitors who first wrote to the Commissioner in November 2014. In January 2015 those solicitors objected to the default assessment (but not to the penalty assessment). On 10 March 2015, the Commissioner disallowed the objection. Ms Alderton seeks a review of that objection decision.

5. For the reasons that follow the decision under review was correct. It will be affirmed. Despite the unusual factual background, Ms Alderton was “presently entitled” to the income of the Trust assessed in her hands. Her disclaimer in 2014 was ineffective as, by then, she had accepted the gift.

6. The applicable legal principles are not in doubt. By virtue of s 97(1) of the Income Tax Assessment Act 1936 (Cth), where a beneficiary of a trust estate, not under any legal disability, is presently entitled to a share of the income trust estate, the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident. As I have said, Ms Alderton was named as one of two beneficiaries of the Trust.

7. Ms Alderton said, and I accept, that whilst she was aware of the creation of the Trust, she knew nothing of its affairs and, so far as she was concerned, its purpose was to save Mr Trapperton tax. She was not involved in its financial affairs nor was she aware of its dealings beyond using a debit card in the Trust’s name to access the funds provided to her by Mr Trapperton. But, as the decision of the Full Court in Vegners v Commissioner of Taxation[2] makes clear, her lack of knowledge of the Trust is of no consequence. In that case the Court said:[3]

   [2](1991) 21 ATR 1347 affirming the decision of Gummow J in Commissioner of Taxation v Vegners (1989) 20 ATR 1645 which had allowed an appeal against the decision of the Tribunal in Case NT 86/7672-7674 89 ATC 363.

   [3]At 1349.

   Mrs Vegners was assessed to tax on the income resolved to be distributed to her each year and her objections were considered by the Administrative Appeals Tribunal. The learned senior member constituting the tribunal held no sum was assessable to tax in Mrs Vegners' hands as Mrs Vegners had had no knowledge of the trust.

   In his reasons for decision, the learned senior member said, inter alia:

   Upon any effective determination of the trustee to distribute income to the wife, she became entitled to the benefits of the distribution, but only if she chose to accept them. No such choice could be made until such time as she learned of the existence of the trust and the passing of the resolution. That knowledge did not come to her until the assessment came to her notice and her enquiries led to the discovery of her entitlement. In my view, the amounts in question could not become her “income” until she consented to the status of being a beneficiary and she determined to accept the distributions. As she did not assent to either proposition, there was no derivation of income whether in the amounts assessed or in any lesser amounts.

   This view was incorrect in law, for an entitlement under a trust is valid notwithstanding that the beneficiary has had no knowledge of it. See, eg Equity and the Law of Trusts by Pettit, 2nd ed, p 63. One of the cases most oft cited in this respect is Standing v Bowring (1885) 31 Ch D 282. Other cases to the same effect are referred to in Pettit. In this country, the principle has been discussed and applied by the High Court of Australia in FCT v Cornell (1946) 73 CLR 394; 3 AITR 405 and by the Court of Appeal of New South Wales in Grey v Australian Motorists and General Insurance Co Pty Ltd [1976] 1 NSWLR 669.

   In Federal Commissioner of Taxation v Ramsden,[4] the Full Court cited Vegners as authority for this proposition:

   Until disclaimer, a beneficiary's entitlement to income under a trust is operative for the purposes of s 97 of ITAA 1936 from the moment it arises notwithstanding that the beneficiary has no knowledge of it.

   [4][2005] FCAFC 39; (2005) 58 ATR 485, 492; 2005 ATC 4136, 4144 at [30].

8. There is no evidence that contradicts, or casts doubt on, what appears in the Trust’s 2009 income tax return, that is, that a distribution of $79,880 had been made by the Trust in favour of Ms Alderton. By virtue of clause 3 of the trust deed creating the Trust, Mr Trapperton had power to distribute the income of the Trust or to accumulate it. He could make a determination in writing signed by him or, under clause 3D(e) he could determine to distribute an amount to a beneficiary “by paying the same in cash to or for the benefit of the Beneficiary”.[5] The bank statements of the Trust demonstrate that amounts in excess of $80,000 were transferred into the Trust's bank account to which Ms Alderton had access and that she withdrew those amounts.[6] It must now be regarded as settled that the beneficiary is presently entitled to a share of the income of a trust estate at least where the beneficiary has an interest in the income which is both vested in interest and vested in possession.[7] Accordingly, Ms Alderton was presently entitled to the net income of the Trust shown by the Trust’s return to have been distributed to her.

   [5]Exhibit 1, page 18.

   [6]Exhibit 1, pages 147 – 159.

   [7]Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264, 271.

9. It remains to consider Ms Alderton’s disclaimer, made in November 2014 and evidenced in these proceedings by the assertion in her solicitors’ letter of 10 November 2014 to Mr Trapperton which read:[8]

   [8]Exhibit 1, page 93.

   We are instructed to put you on notice that our client disputes the lawfulness of any distribution by you to our client via the Trust. Our client also herewith immediately disclaims the entirety of any interest accrued by her in the past or which may accrue in the future in the income or corpus of the trust fund. So as to be clear, this disclaimer is to take effect from the date of settlement of the trust.

   I am prepared to assume, without deciding, that Ms Alderton sufficiently evidenced a disclaimer of her interest in the Trust. The question arises whether it was effective to do so. I do not consider that it was. Federal Commissioner of Taxation v Ramsden[9] is authority for the proposition that, to be effective, a disclaimer must constitute an absolute rejection of the gift. Here, Ms Alderton did not reject the gift because, having accepted the benefit of it, it was no longer able to be disclaimed. She had the use and benefit of the distribution.

   [9][2005] FCAFC 39; (2005) 58 ATR 485, 492 – 3; 2005 ATC 4136, 4144 at [31].

   It follows that the objection decision was correct. It is most unfortunate that Ms Alderton is in the predicament that she now finds herself. But in the context of a domestic relationship, the operation of Division 6 of the Income Tax Assessment Act 1936 makes taxable in the hands of a beneficiary of a trust monies that would not have been taxable but for the trust. On the face of it, the conduct of Mr Trapperton is quite discreditable. He has, at least in this respect, taken advantage of Ms Alderton’s naivety in a way that has burdened her with a significant tax debt for primary tax, penalty and general interest charge. Moreover, her solicitors did not seek remission of the administrative penalty when it seems obvious that they should have done so. Mr Kim, who appeared for the Commissioner at the hearing, accepted that it was still open to Ms Alderton to now seek remission of that penalty. I urge her to do so. Mr Kim informed me that it has been suggested that Ms Alderton seek the exercise of the discretion to release her from the tax debt that has arisen. Again, I would urge her to do so. On the face of it she presents a case with considerable merit.

I certify that the preceding 10 (ten) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC

........................................................................

Associate

Dated 16 October 2015

Date of hearing	14 October 2015
Applicant	In person
Solicitors for the Respondent	Mr J Kim, Australian Taxation Office Review and Dispute Resolution