Date of Hearing: 9 November 2021 Date of Judgment: 6 April 2022
S62/2021
ORDER
1.Appeal allowed.
2.Set aside orders 1 and 2 made by the Full Court of the Federal Court of Australia on 10 September 2020 and, in their place, order that the appeal be dismissed.
On appeal from the Federal Court of Australia
Representation
M J O'Meara SC with D P Hume for the appellant (instructed by Australian Government Solicitor)
B W Walker SC with J L Evans QC and D R Lewis for the respondents (instructed by O'Loughlin Westhoff)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Commissioner of Taxation v Carter
Income Tax (Cth) – Trusts – Where s 97(1) of Income Tax Assessment Act 1936 (Cth) provides that where beneficiary of trust estate not under any legal disability is presently entitled to share of income of trust estate, assessable income of beneficiary shall include so much of that share of net income of trust estate as is attributable to period when beneficiary was resident – Where trust deed provided that, if trustee made no effective determination to pay, apply, set aside or accumulate any part of trust income in given accounting period, income held on trust for specified beneficiaries – Where trustee failed to pay, apply, set aside or accumulate income in income year – Where share of trust income in income year held on trust for beneficiaries – Where Commissioner of Taxation assessed each beneficiary on basis that beneficiaries "presently entitled" to share of income within meaning of s 97(1) – Where beneficiaries subsequently disclaimed interest in share of income – Whether present entitlement under s 97(1) determined immediately prior to end of income year – Whether disclaimers operated retrospectively so as to disapply s 97(1) in respect of income year.
Words and phrases – "default distribution", "disclaimer", "end of the year of income", "presently entitled", "presumption of assent", "retrospectively disapply", "right to demand and receive payment", "trust estate", "vested in interest and vested in possession".
GAGELER, GORDON, STEWARD AND GLEESON JJ. This appeal concerns Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), headed "Trust income". The primary provision in Div 6, s 96[1], states: "Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate". Section 96 reflects that, in Div 6, the basic income tax treatment of the net income of a trust estate is to assess the beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Commissioner of Taxation v Carter [2022] HCA 10
Case
[2022] HCA 10
Decision Date
CaseChat Overview and Summary
The High Court of Australia heard an appeal from the Full Court of the Federal Court of Australia concerning the income tax assessments of beneficiaries of a trust. The Commissioner of Taxation assessed each beneficiary on the basis that they were "presently entitled" to a share of the trust's income for a particular income year, as provided by section 97(1) of the *Income Tax Assessment Act 1936* (Cth). The trust deed stipulated that if the trustee failed to make an effective determination regarding the trust income, it would be held on trust for specified beneficiaries. In the relevant income year, the trustee failed to make such a determination, resulting in the income being held on trust for the beneficiaries. Subsequently, the beneficiaries disclaimed their interests in this share of income. The core dispute revolved around whether the beneficiaries' disclaimers operated retrospectively to negate their "present entitlement" at the end of the income year, thereby preventing the application of section 97(1).
The legal issues before the High Court were whether a beneficiary's "present entitlement" under section 97(1) is determined immediately prior to the end of the income year, and whether a subsequent disclaimer of that entitlement could operate retrospectively to disapply section 97(1) for that income year. The beneficiaries argued that their disclaimers, by rebutting a presumed assent to the distribution, effectively unwound their entitlement before it was finalised for tax purposes.
The High Court allowed the appeal, setting aside the orders of the Full Court of the Federal Court. The Court held that a "present entitlement" under section 97(1) is an entitlement at the present time of the determination, which is the end of the relevant financial year, irrespective of whether that entitlement is later subject to defeasance by a disclaimer. The Court rejected the argument that a disclaimer operates retrospectively to defeat a vested and present entitlement for the purposes of section 97(1). The Court clarified that the common law notion of a "presumption of assent" to a gift, which a disclaimer might rebut, is a fiction without purpose and does not apply to the determination of a present entitlement under section 97(1). The Court found that the creation or increase in value of equitable rights, such as a beneficiary's entitlement, can occur without the beneficiary's assent, and that a disclaimer, while capable of unwinding such rights, does not alter the characterisation of an entitlement as "present" at the end of the income year for tax assessment purposes.
Orders
Orders of the court
1. Appeal allowed.
2. Set aside orders 1 and 2 made by the Full Court of the Federal Court of Australia on 10 September 2020 and, in their place, order that the appeal be dismissed.
Background
Background to the litigation
Full text does not contain this section.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
GAGELER, GORDON, STEWARD AND GLEESON JJ
EDELMAN J
The argument made by the respondents about assent is met by the presumption of law described in Matthews v Matthews[33]. The premise of the respondents' argument, that assent to distribution is necessary, was not disputed by the Commissioner. Argument proceeding as it did, this is not the case to examine whether any wider questions arise about distributions or disclaimers.[33](1913) 17 CLR 8 at 44; see also 20, 43.Conclusions and orders The appeal should be allowed. Orders 1 and 2 of the Full Court of the Federal Court of 10 September 2020 should be set aside and, in their place, it be ordered that the appeal is dismissed. Two connected issues I have had the considerable benefit of reading the joint reasons of Gageler, Gordon, Steward and Gleeson JJ. I agree entirely with their reasons concerning the interpretation of "is presently entitled" in s 97(1) of the Income Tax Assessment Act 1936 (Cth)[34]. A "present entitlement" to a share of the income of the trust estate in s 97(1) is an entitlement at the "present" time of the determination, being the end of the relevant financial year, whether or not that entitlement is later the subject of defeasance by a disclaimer.[34]See reasons of Gageler, Gordon, Steward and Gleeson JJ at [1]‑[26]. The resolution of this issue of interpretation is logically anterior, although necessarily connected, to the issues raised by the parties concerning the content and effect of the Third Disclaimers. The interpretation adopted by the joint reasons answers the issue of how a disclaimer operates under s 97(1). But the submissions of the parties concerning the operation of the Third Disclaimers, including the references in those submissions to "presumptions" and "assent", cannot be addressed without dealing with an error in an assumption of the parties about the operation of disclaimers in equity. That assumption was made by the parties in this Court as well as in the Full Court of the Federal Court of Australia and in the Administrative Appeals Tribunal. The assumption of the parties was that the creation or increase in value of equitable rights is incomplete until affirmed by the beneficiary. That is, until affirmed, a declaration of trust, or an event increasing the value of the subject matter of a trust, would be inchoate, resting only upon a "presumed" assent by the beneficiary. This assumption was applied to the operation of the default distribution clause in the Trust Deed for the Whitby Trust, where income from the Trust was "distributed" in the sense that it was held on a separate trust for the Primary Beneficiaries. Thus, the parties assumed that the validity of the creation of the separate trust, or (if the separate trust already existed) the validity of the increase in the value of the subject matter of any existing trust for the Primary Beneficiaries, depended upon a "presumption", in each case, that the Primary Beneficiaries had assented to that creation or increase. The assumption that there is a "presumption" of assent in such circumstances was thought to be supported by the notion that a disclaimer operates to rebut a "presumption" of assent. In making the assumption in his submissions, the Commissioner of Taxation drew from remarks in cases concerning gifts of common law rights[35] and made the following submission in this Court:"the key conclusions are these. A disclaimer operates to refute the legal presumption of assent to a gift. It thereby operates to prevent the perfection of the transfer of title contemplated by the gift."[35]See, eg, In re Parsons; Parsons v Attorney-General [1943] Ch 12; In re Stratton's Disclaimer [1958] Ch 42.
Ratio Decidendi
Legal Principle Established
Established by:
GAGELER, GORDON, STEWARD AND GLEESON JJ,
EDELMAN J
Perhaps most fundamentally, there is no rationale for any "presumed fact", still less for any rule of law that "facilitates proof of the presumed fact"[58]. The rationale for a "presumption" may have arisen from a mistaken[59] belief that title at common law could not pass without the assent of the donee[60], with the language of "presumption" as a shorthand for the legal rule that a donee "must be taken to give an implied assent"[61]. But that legal rule of deemed assent was a fiction, as can be seen by its operation even when it was known that the donee had no knowledge of the gift[62], and even when it was known that the donee accepted the gift only as a loan[63]. 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.[58]Masson v Parsons (2019) 266 CLR 554 at 575‑576 [32].[59]See Siggers v Evans (1855) 5 El & Bl 367 at 380 [119 ER 518 at 523]; Standing v Bowring (1885) 31 Ch D 282 at 288, 290.[60]Butler and Baker's Case (1591) 3 Co Rep 25a at 26b, fn E [76 ER 684 at 688].[61]Townson v Tickell (1819) 3 B & Ald 31 at 37 [106 ER 575 at 577].[62]London and County Banking Co v London and River Plate Bank (1888) 21 QBD 535 at 541‑542.[63]Dewar v Dewar [1975] 1 WLR 1532 at 1538; [1975] 2 All ER 728 at 733.The operation of a disclaimer depends on the reason it is invoked The short point for the purposes of this appeal is that, at least in relation to equitable rights, issues of disclaimer are separate and distinct from the creation of, or increase in the value of, a beneficiary's rights or entitlements in relation to the subject matter of a trust. Although the unilateral vesting of equitable rights and entitlements can occur without a beneficiary's assent, such unilateral vesting can often be unwound by a later disclaimer by a beneficiary. As Lord Wright said in Lady Naas v Westminster Bank Ltd[64]:"The declaration of trust by the settlor depended not on the other party's consent any more than on mutual consideration. It depended on the act of the settlor in executing the settlement. The beneficiary might, it is true, disclaim, but her acceptance was immaterial except perhaps as ruling out disclaimer."[64][1940] AC 366 at 403. At general law, the effect of a disclaimer is generally retrospective, thus preserving the important principle of liberty that rights or liabilities are not generally to be conferred or imposed upon a person independently of that person's actions. But when considering questions about the retrospective effect of a disclaimer, whether of rights at common law or in equity, it is always necessary to appreciate why the question is being asked. In this case, where the question as to the effect of a disclaimer is being asked for the purpose of defeating the operation of a vested and "present entitlement" under s 97(1), the question is answered by the interpretation of that provision.Conclusion