Commissioner of Taxation v Carter & Ors

[2021] HCATrans 189

[2021] HCATrans 189

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S62 of 2021

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

NATALIE CARTER

First Respondent

ALISHA CARATTI

Second Respondent

NICOLE CARATTI

Third Respondent

GAGELER J
GORDON J
EDELMAN J
STEWARD J
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA BY VIDEO CONNECTION TO SYDNEY, MELBOURNE AND BRISBANE

ON TUESDAY, 9 NOVEMBER 2021, AT 10.00 AM

Copyright in the High Court of Australia

____________________

GAGELER J:   In accordance with the protocol for remote hearings, I will announce the appearances of the parties.

MR M.J O’MEARA, SC appears with MR D.P. HUME for the appellant.  (instructed by the Australian Government Solicitor)

MR B.W. WALKER, SC appears with MR J.L. EVANS, QC and MR D.R. LEWIS for the respondents.  (instructed by O’Loughlin Westhoff)

GAGELER J:   Yes, Mr O’Meara.

MR O’MEARA:   May it please the Court.  Your Honours, the issue in this appeal is whether resident beneficiaries of a trust who are not under a legal disability and, at the end of an income year, are presently entitled to a share of the income of the trust estate and are thus liable to be assessed and are assessed on a proportionate share of the net income of that trust estate for the income year, can, by disclaimer made after the end of the income year and after assessment, cease to have been so assessable with the result that the assessment is or becomes excessive.

The Full Court answered that question yes, and its reasoning in support of that conclusion appears at paragraphs 109 and 110 of its judgment at core appeal book pages 111 and 112.  The Commissioner’s submission in this appeal is that the Full Court’s answer was in error, and the correct position is that the relevant tax law fact on which…..of the 1936 Act operates, is the existence during and, at the end of the income year in question, of a mixed legal and factual state of affairs, relevantly, being the possession of rights by a resident beneficiary not under a legal disability to a share of the income of the trust estate meeting the description of a present entitlement.

A disclaimer by a beneficiary operates at general law to release the trustee from the obligations it owed to the beneficiary, which were impressed upon the trust property, or in relation to the administration of the trust.  It can operate retrospectively in the sense that it releases obligations of the trustee, and correlative rights of the beneficiary accruing in the past.

However, what a retrospective disclaimer does not do, as a matter of law, is to obliterate for all purposes the existence of the relevant taxable fact at the relevant time, on which section 97 operates – that is the mixed legal and factual state of affairs consisting of possession by a resident beneficiary of rights to a share of her income of the trust estate, meeting the description of a present entitlement. 

EDELMAN J:    Mr O’Meara, the question is not really whether a disclaimer does or does not do that.  The question is whether the Act permits a disclaimer to do or not to do that, is it not?

MR O’MEARA:   That is certainly part of the question, your Honour.  We say whatever a – the correct understanding of a disclaimer is that it does not disturb the present entitlement on which the Act operated at the relevant time.

EDELMAN J:   But that is not a question of an understanding of the disclaimer, that is a question of understanding of the Act.  If the Act permits of the possibility that a present entitlement does not require the entitlement to be unchanging, then the general law of disclaimer might operate retrospectively upon it.  Is not the question a question of construction of the Act?

MR O’MEARA:   The question is certainly a question of construction of the Act, your Honour, but it is also, in our submission, a question of understanding correctly what a disclaimer does to the rights on which the Act operates.  In our submission, what it does not do is to remove the existence of those rights as at the relevant date.

So, to pick up I think the point your Honour Justice Edelman was putting to me, we say furthermore that on a proper construction of section 97 and Division 6 more generally, that division does not have an ambulatory or fluctuating operation such that the distribution of liability to include the net income of a trust estate in the assessable income of the trustee and beneficiary it affects by reference to the state of affairs at the end of the income year, is apt to be disturbed and in the case of disclaiming beneficiary rendered excessive by subsequent action of a beneficiary in disclaiming that entitlement. 

Therefore, in our submission, the assessments of the respondents for the 2014 income year to a one‑fifth share of the net income of the trust estate for that year, which the Commissioner issued on 27 October 2015, were not rendered excessive by the respondent’s disclaimers of September 2016 and the Full Court erred in so deciding.

Can I now cover some matters of factual background, and to do that can I invite your Honours to go the relevant trust deed which appears in the appellant’s book of further materials beginning at page 5.  Your Honours will note on the definitions which commence on page 7 of the trust deed or on page 155 of the appellant’s book of further materials the definition of the primary beneficiary as “The children of Caratti” - that is Mr Allen Caratti – and each of the three respondents fell within that class.

Turning over the page, your Honours will notice the definition of “General Beneficiaries” which relevantly includes “the Primary Beneficiaries”.  Then on the following page, page 157, the definition of “Beneficiary” which is defined to mean “any of the General Beneficiaries”.  Up the page, your Honours will also notice the definition of “Accounting Period”, which means, relevantly, and, in effect, every 12 months ending on 30 June.

Can I ask your Honours to go then to clause 3.1 – which is on page 16 of the trust deed, or page 164 of the book of materials.  Clause 3.1 is a power of appointment by the trustee of any part of what is referred to as “the net income of the Trust Fund”, but which is probably better referred to in this context as the distributable trust income or to accumulate that income.

The default clause appears over the page, at page 166, at clause 3.7.  That clause, together with clause 4.2, and leaving aside a circumstance of the death of a primary beneficiary, has the effect that if the trustee failed to make an appointment or to accumulate the distributable income of the trust by the last day of an accounting period – that is to say, 30 June – the trustee held that income on trust for the primary beneficiaries as tenants in common in equal shares.  The effect of clause 3.11, which your Honours will see over the page on page 167, was that that amount was then held on a separate trust absolutely for the primary beneficiaries.  

It is worth just observing, although no particular attention was directed to it in the Full Court or in the Tribunal, clause 18.1 which appears on page 180 of the book of materials at the bottom and going over to page 181 – which provides for a disclaimer by a beneficiary but only prospectively. 

Now, the result of these provisions, in our submission, is that aside from the trustee deciding to accumulate income, the trustee does not contemplate that there will be distributable income of the trust estate to which no beneficiary will be presently entitled at the end of an accounting period, nor does it make provision for the failure of the trusts for a default beneficiary, whether by way of disclaimer or through some other means.

Pausing at this point, we observe that the primary beneficiaries, including three respondents, had, from the date of this trust deed, a vested interest in the distributable income of the trust in any year but which was liable to be divested by the trustee making an appointment under clause 3.1.  That was the characterisation of the rights of the primary beneficiaries which the Full Court adopted at paragraph 98, which appears on page 105 of the core appeal book.

We also say that it is important at this stage to identify accurately what is the subject matter of the gift over which the trustee sought to create the relevant trusts and this is because, as I will develop later, in our submission much of the respondent’s argument, in its written submission, proceeds from a faulty premise in this regard.

The subject matter of the relevant gift is the income of the trust estate and, in particular and relevantly, the income of the trust for any accounting period which is not the subject of an appointment made by the trustee in the accounting period. 

That was the view taken by the Full Court of the Federal Court in a similar situation concerning entitlements of default beneficiaries in Federal Commissioner of Taxation v Ramsden which your Honours will find in the joint book of authorities at tab 38 and, in particular, at paragraphs 42 and 57 and your Honours will find paragraph 42 of the Full Court’s judgment in Ramsden set out by the Full Court in this case at paragraph 97 on page 105 of the core appeal book. 

Much of the respondent’s argument in this case, in our submission, is built on a misidentification of the relevant gift as a gift of the rights to the income of the trust but that is not what the settlor was trying to give away.  The settlor was, in our submission, giving away the income of the trust and to that end created rights in relation to that income.  The rights of the beneficiaries created were the means to an end, the relevant end being the gifting of the income of the trust.  I will return to this later. 

Can I just touch further on some of the background facts, some of which do not appear in the judgments below but are usefully contained in the respondent’s book of further material.

GAGELER J:   Mr O’Meara, before you do that, you took us to clause 18 of the trust deed and you say it was not referred to below. 

MR O’MEARA:   Yes, your Honour.

GAGELER J:   Do you have us make something of it for the purpose of the appeal?

MR O’MEARA:   No, I just drew it your Honours’ attention as a relevant – interesting matter.

GAGELER J:   Well, it could have been quite interesting, but it ‑ ‑ ‑

MR O’MEARA:   It could have been.  It was never taken.

GAGELER J:   Yes, thank you.

MR O’MEARA:   Your Honour, in January 2008, the trustee, Whitby Land Company, purchased land at 293 Nicholson Road, Forrestdale, Western Australia, for $28 million, and your Honours will find the ‑ ‑ ‑ 

GORDON J:   Mr O’Meara, can I just ask a couple of questions before we go into this detail?

MR O’MEARA:   Yes, your Honour.

GORDON J:   …..if it does not appear in the judgments below, why are we doing this?

MR O’MEARA:   Just to give your Honour the essential - the foundational background facts, so your Honour can see that what occurred commercially to generate the trust income, what the trust income was, and what was the finding of the net income in relation to it.  Simply to fill in the factual picture, your Honour.

GAGELER J:   Mr O’Meara, is it necessary for the legal argument that you are presenting that we have this detail?

MR O’MEARA:   Not entirely necessary, your Honour, no.  Perhaps I will move on then, or just deal with it very quickly, to sketch out that what the case involved was the sale of land which the trustee had purchased, which generated, for the 2014 income year, sales of around $36 million, and that is in the respondent’s book of further material at page 72.  The trustee returned a loss, but the Commissioner assessed the Whitby Trust as having a distributable income of $18,275,700 and a net income in the same amount, and your Honours will find that at page 73 of the respondent’s book of further materials.

Before the Tribunal, there was no issue about the quantum of the net income or the distributable income of the trust.  There was an issue as to whether the trustee had made an appointment, under clause 3.1.  That contention was rejected by the Tribunal and the Full Court and is not in issue in this appeal.

The result of that, in our submission, is that, at the end of 30 June 2014, the vested interest of the primary beneficiaries in the distributable income of the trust, which was created by clause 3.7, had vested in possession and had become indefeasible.

It had vested in possession because it became a present right of present enjoyment – or as Lord Reid put it succinctly in Gartside – which your Honours will find at tab 8 of the supplementary joint book of authorities, at page 607F of the report, or page 169 of the book of authorities – the respondents could then now claim the subject matter of interest, that being the income of the trust estate for that year.  The trustee held that income on trust absolutely for the beneficiaries, as tenants in common in equal shares – being one-fifth share upon the separate trusts which are referred to in clause 3.11 of the trust deed.

That was the present entitlement upon which the Commissioner issued the assessments on 27 October 2015 to a one‑fifth share of a net income of the trust estate in the amounts which are set out at page 94 of the respondents’ book of further materials.  It was against that background that on 30 September 2016, after ‑ ‑ ‑

GORDON J:   Mr O’Meara, may I ask a question.  Before you go to that point, as I understood your submissions – and maybe I have misunderstood them – if you drew a line by ruler under what you have just put to us, do you not win?

MR O’MEARA:   Yes, your Honour.

GORDON J:   That is, as I understand your position, if one identifies what has just transpired by the operation of the trustee giving rise to the trust…..and what I understand to be your view of present entitlement under section 97, that is the end of it, is it not?

MR O’MEARA:   That is our submission.  In our submission, nothing that thereafter happened could disturb the application of the Act to the state of affairs on 30 July 2014.

GORDON J:   So, if we go back to the question that Justice Edelman asked you at the outset, is that not a question of statutory construction of section 97?

MR O’MEARA:   Yes, your Honour, it certainly is a question of statutory construction of section 97, and also a question of understanding the relevant operation of the disclaimer because the Full Court ‑ ‑ ‑

GORDON J:   No, not the disclaimer – we have not got to the disclaimer, that is the point.  The question is whether or not, as matter of statutory construction of section 97, by reference to the taxable fact established by that section ‑ ‑ ‑

MR O’MEARA:   Yes.

GORDON J:   Applied to the state of affairs in the trust deed.

MR O’MEARA:   Yes, your Honour.  Your Honour is entirely correct.  So, can I take your Honours to section 97, which is at tab 3 of the joint book of authorities – and your Honours will of course be aware that there are relevantly three criteria in section 97, but one matter I do wish to draw your Honours’ attention to – and is of significance in this case – is the tense in which they are expressed. 

The first two – the beneficiary not being “under a legal disability”; and the second – the existence of a “present entitlement” are both expressed in the present tense by the word “is”.  The third, the question of residency, is expressed in the past tense and that is because, in our submission, the first two are looking at the state of affairs as at the end of the income year and the third, residency, is looking back across the income year to the state of the residence of the beneficiary during that income year.

In this case, there was no issue about the respondents being under a legal disability or residence during the income year, so the criterion of significance was that of present entitlement.  Your Honours will be aware that that was expounded in the judgment of this Court in Harmer v Federal Commissioner of Taxation, which is at tab 22 of the joint book of authorities.  It was there said by the Court to have two elements - at page 271 of the report - first:

an interest . . . vested in interest and vested in possession; and (b) . . . a present legal right to demand and receive payment –

of a share of the distributable income of trust.  We observe that two matters come out of the passage.  First, the content of the concept of the present entitlement is concerned with the possession by the beneficiary of rights enabling the beneficiary to the immediate payment of a share of the income of a trust estate and it is not concerned or conditioned on the actual receipt or payment of a share of the income of the trust estate.

That was a point which was also made by Chief Justice Latham in Tindal v Federal Commissioner of Taxation, which is behind tab 28 of the joint book of authorities.  I will not take your Honours to that, but your Honours will observe that at page 618 of the report and again at 619 of the report.

Given that the nature of an interest vested in possession is, as Lord Reid put it in Gartside, the ability to now claim the subject matter of the interest, and here that is the distributable income of a trust, there is some overlap between the two limbs of present entitlement identified by the Court in Harmer.  The rights which satisfy the second limb will constitute an interest which is vested in interest in possession, satisfying the first.  If one satisfies the second limb, one cannot but satisfy the first.

This is possibly why we see in the exposition of the concept of “present entitlement” by the Court in Federal Commissioner of Taxation v Whiting, which is behind tab 20 of the joint book of authorities, the focus of the Justices in that case in the Full Court is really on the second of the two criteria of present entitlement in Harmer – that is to say the possession of rights…..the beneficiary to immediate payment of a share of the trust income.  Your Honours will see that in the judgment of Chief Justice Latham and Justice Williams at page 215 of the report, at the bottom of the first full paragraph , and then by Justice Starke at page 219 of the report.

The judgments in Whiting suggest, and Justice Kitto in Taylor v Federal Commissioner of Taxation, which is at tab 27 of the joint book of authorities, also points out that it may be possible to have an interest which is vested in possession but which has not yet matured into a right to demand and receive payment.  An instance of this might be the annuity in Whiting, which one of the beneficiaries had, and that possibly explains why the Court in Harmer – I am sorry, your Honour.

GAGELER J:   Mr O’Meara, is there any dispute but that the two elements identified in Harmer were satisfied, if one looks just at the position as at the end of 30 June 2014?

MR O’MEARA:   No, I do not believe there is any dispute that, if one looks at the position at the end of the income year, the two elements are satisfied.  Now, I want ‑ ‑ ‑

GAGELER J:   I am sorry, go ahead.

MR O’MEARA:   One of the contentions of the respondent is that the effect of the disclaimer was that the first limb became unsatisfied, as it were, and my submission was directed to developing the nature of those two limbs to understand what we say is the error in that contention.  But to answer your Honour’s question directly, I do not believe there is a contention that as at 30 June 2014 both limbs of the exposition of present entitlement in Harmer were ‑ ‑ ‑ 

GAGELER J:   The burden of your argument, as I understand it, is in a reading of section 97 that seizes upon the word “is” and says that that speaks solely as at the end of 30 June in the relevant income year.

MR O’MEARA:   That is a very significant element of the argument, your Honour, yes.  In relation to that aspect of the concept of “present entitlement” being assessed in the relevant income year, the Court in Harmer made this point, further down the page on page 271 of the report behind tab 22 of the joint book of authorities, when their Honours observed that the question, that is to say, the question of present entitlement:

must be answered as at the time when –

in that case:

the interest was derived, that is to say, during the tax years.

Now, the same point was - or a similar point was made by Chief Justice Barwick in Union‑Fidelity v Federal Commissioner of Taxation, which is behind tab 29 of the joint book of authorities and ‑ ‑ ‑ 

GAGELER J:   Mr O’Meara, sorry to interrupt you again, when you give the references, could you also give the authorised law report?

MR O’MEARA: Yes, that is 119 CLR 177, and in the passage at pages 182 and 183, Chief Justice Barwick expresses the view that the present entitlement of a beneficiary, for the purposes of Division 6, was assessed at the close of the income year, with the consequence, his Honour said, that if a beneficiary had been paid their share prior to the end of the income year, discharging the present entitlement, the beneficiary did not, at the relevant time, have a present entitlement, and was therefore not assessable under section 97, but under the then section 26(b) of the 1936 Act.

Now, your Honours will probably be aware that his Honour’s discussion in Union‑Fidelity did provoke some legislative reaction which was found in the Income Tax Assessment Amendment Act 1979, the relevant parts of which are behind tab 10 of the joint book of authorities.  That introduced section 95A which is now contained in section 95A(1) which appears behind tab 3. 

The way in which section 95A(1)…..legislative reaction to Chief Justice Barwick’s views, in our submission, is significant because what it speaks of is a beneficiary who has a present entitlement being taken, and so it is a form of deeming section, to continue to be presently entitled notwithstanding that it is paid to or applied for the benefit of the beneficiary. 

So, the premise of section 95A is that the present entitlement which at general law is satisfied by the payment or application of the trust income to or for the beneficiary during an income year is continued for the purpose of the Act until the time section 97 comes to be applied, namely, at the end of the income year. 

By deeming the present entitlement for the purposes of Division 6 to, in effect, survive payment or the application of the trust income to or for the beneficiary and continues to the end of the income year, section 95A(1), in our submission, confirms that Division 6’s relevant focus is on the rights to receipt of trust income and not receipt – and that relevant point at which that is assessed is at the end of the income year.

Now, I think, as your Honour Justice Gageler observed, I do not believe it is in contention that as at 30 June 2014 on the facts as they then existed, the respondents had a present entitlement and, therefore, assessable on a proportionate share of the net income of the trust estate under section 97.  So, the question to be addressed is how and why did the disclaimers of September 2016 disturb that.

GORDON J:   I am sorry to ask again, Mr O’Meara, but before you get to the disclaimers, do we get anything else out of any other part of Division 6 which ‑ ‑ ‑

MR O’MEARA:   Yes, I was going to come back to Division 6 on the second limb of our argument which focuses on Division 6 more broadly, but what I was going to put to your Honour in that connection is when one looks at the scheme of Division 6 as a distribution of the income of the trust estate among the trustee and beneficiaries as at the end of the income year, according to the three pivotal sets of provisions, that is to say, section 97, section 98 and section 99 and section 99A, one sees that distribution taking effect at the end of the income year and the same legislative text and structure being applied in those sections as we see in section 97. 

So, my submission is that what we see in Division 6 is a distribution of liability among the trustee and beneficiaries of the net income of the trust according to the facts, the state of affairs, as it pertains at the end of an income year.  That is very relevant to ‑ ‑ ‑

EDELMAN J:   Mr O’Meara, how does the division work with the application of the rule in Re Hastings‑Bass?

MR O’MEARA:   I am not certain I can answer that question quite off the top of my head, as it were, your Honour.  I guess that the first question is to what extent Re Hastings‑Bass survives and is good law in Australia and that would require consideration of the judgments of the UK Supreme Court in Pitt v Holt.  I think our submission would be that an application of that rule, if it is a rule, in Australian law, would not affect the submission that I am putting that the state of affairs to be applied is one which is to be assessed at the end of an income year.

EDELMAN J:   Does that mean that any Hastings‑Bass or Pitt v Holt‑type argument that postdates the end of the financial year could affect the taxable income that is determined as at 30 June?

MR O’MEARA:   I think my submission would probably be no, it cannot, your Honour.  But I suspect that may ‑ ‑ ‑

EDELMAN J:   It falls to be treated in the same way as your submissions about a disclaimer?

MR O’MEARA:   Yes, I think that would be correct.  So can I take your Honours to the Full Court’s reasoning on the question of disclaimers.  The core of the reasoning is at paragraph 109 at page 112 of the core appeal book and it is in the proposition which is at lines 10 and 11, that:

upon disclaimer, the general law extinguishes the entitlement to trust income ab initio.

So the effect of the disclaimer on the reasoning of the Full Court was to deny that a present entitlement to the income, the subject of this disclaimer, ever existed at all and thus to deny that section 97 would ever have applied to the respondents. 

Now, in doing so, the Full Court appears to have adopted a view as to the relevant effect of a disclaimer, a theory of absolute nullity which is perhaps in some ways reminiscent of more of the extreme theories of voidness, of ultra vires acts in public law, which this Court discussed in Bhardwaj and Kable (No 2).

For the reasons I will develop, we say the Full Court was in error in this.  The correct analysis is that the disclaimer by a beneficiary of rights under a trust operates to release the trustee from its obligations in relation to the trust property, or the administration of the trust.  But the disclaimer can operate retrospectively by releasing rights which accrued in the past.  It can operate prospectively by preventing rights accruing in the future.

But a disclaimer does not retroactively obliterate the rights disclaimed as a fact or state of affairs which existed prior to the disclaimer, and which can have and continue to have legal consequences, including by the application of taxation legislation referable to a period of time at which the rights existed.

EDELMAN J:   Mr O’Meara, that must depend upon the application of the particular statute.  If a particular statute said, for example, the tax is to be assessed subject to any subsequent disclaimer, then plainly the disclaimer could operate retrospectively to obliterate the facts.

MR O’MEARA:   Yes, your Honour is ‑ ‑ ‑

EDELMAN J:   So surely, ultimately, the only question then is the question of construction of section 97?  Does section 97 prevent a subsequent retrospective operation by a disclaimer or not?

MR O’MEARA:   Your Honour is correct, but one also has to analyse and appreciate what is the retrospective operation of a disclaimer which might affect the way the statute operates.

GAGELER J:   Mr O’Meara, whatever effect a disclaimer has, it has effect at common law and in equity.  It cannot prevail against the statute if the statute provides otherwise, and your argument is that the statute here provides otherwise.  It speaks of a particular time.

MR O’MEARA:   Yes.  One way of viewing the situation is that the Full Court has construed section 97 as if it read “a beneficiary is and continues to be presently entitled”, and that is on one view one way of understanding the assumption that they have brought to the statutory construction of section 97 and our submission is that that is an erroneous understanding of the way the section operates.

In terms of understanding a disclaimer by a beneficiary of rights under a trust deed as operating by way of release, in the supplementary joint book of authorities we have given your Honours a copy of the decision of Justice Plowman in In re Gulbenkian’s Settlements (No 2), which is behind tab 10 of that book of authorities. In that case which involved the rights of an object of a discretionary trust, Justice Plowman accepted the submission of Mr Templeman, QC that the effect of the disclaimer there – and your Honours will see this at page 418B of the report, which is [1970] 1 Ch 408, that that disclaimer operated by way of release of the trustee’s obligations.

The same analysis is to be seen in the decision in in In re Wimperis [1914] 1 Ch 502 and appears behind tab 45 of the joint book, which involved a release by – I am sorry, a disclaimer by a beneficiary under a will who was entitled to an annuity. The order of Justice Warrington which your Honours will see at page 510 of the report expresses the way the disclaimer operated in that case was to:

release the defendants and the estate of the testatrix from any claim in respect of the annuity and from any liability to provide for the annuity by setting apart a fund –

In our submission, understanding the way a disclaimer operates by a beneficiary under a trust as a release is also consistent with the fundamental nature of equitable interests as they were explained by Justice Hope in the New South Wales Court of Appeal in DKLR Holdings [1980] 1 NSWLR 510 which your Honours will find behind supplementary joint book of authorities tab 7.

At page 519 of the report, Justice Hope described the equitable interests of beneficiaries under a trust as the product of the obligations which equity enforced on the conscience of the trustees in personam but which were annexed to property and so resembling rights in rem.  The decision of the New South Wales Court of Appeal in DKLR Holdings was varied on appeal to this Court, and your Honours will find that judgment behind tab 5 of the joint book of authorities at 149 CLR 413, but not in the relevant respect or in Justice Hope’s description of the nature of equitable interests. Indeed, at page 474 of the report, Justice Brennan gives a description of their nature to the same effect.

Now, the release of trustees of obligations under a trust by disclaimer does not operate to obliterate their existence.  The subject of the disclaimer is established in our submission by two decisions of the Court of Appeal in the context of a stated gift duty, being Inre Parsons [1943] 1 Ch 12, which is at joint book of authorities 44, and in Re Stratton’s Disclaimer [1957] Ch 42, which is at joint book of authorities 56.

If I can ask your Honours to go to In re Parsons at tab 44, your Honours will see that that concerned estate duty of a bequest of £10,000 in consolidated stock, which the deceased was entitled to under the will of his predeceased wife and which, after her death but before his, he had disclaimed.  The estate duty depended on whether the husband had been competent to dispose of that legacy within the meaning of the Finance Act 1894. 

Your Honours will see in the argument of Mr Nesbitt for the trustees at page 13 of the report, an argument put in terms which are reminiscent, or find an echo, of the Full Court’s reasons in this case.  That was rejected by the Court of Appeal, and at page 15 of the report Lord Greene at about – in the second full paragraph, construes the statutory phrase “competent to dispose” in terms which give it a content very close to that of the present entitlement, that is to say:

the ability to make a thing your own -

and which would certainly, in our submission, include an interest which was vested in interest and possessions, the ability to now claim the subject of the interest, which was in this case the consols.  At the bottom of page 15 and over to page 16, Lord Greene points out that between the time of:

the testatrix’s death and the disclaimer –

the husband was competent to dispose of the legacy because he could either take it or disclaim it as he thought fit, and he rejects the proposition that the effect of the disclaimer was that the rights which the husband possessed during the time were treated in law as not having existed, and your Honours will observe that at the bottom of the first paragraph on page 16, Lord Greene noted the irrelevance, for the purposes before the court, of the doctrines concerning the voidness for some purposes of a disclaimed gift, in his case, the consols. 

Over the page, on page 17, Lord Greene accepts the analogy put by Mr Stamp for the Attorney‑General, that the husband was, from the date of death until the disclaimer:

in a position not unlike that of a person with a binding option.  He could take the legacy out of the mass if he thought fit –

or disclaim, and therefore was competent to dispose.  So the disclaimer was akin to an election not to exercise that option.  Re Parsons was applied again by the Court of Appeal in Re Stratton, which your Honours will find behind tab 56 of the joint book of authorities, where the deceased was a beneficiary under the will of her husband, who predeceased her…..specific bequests for certain life insurance policies.  She disclaimed that bequest, and within five years of that disclaimer, died. 

Now, the question was whether the gift duty was payable on the property disclaimed, and that depended on whether in the period between the death of her husband and the disclaimer, the deceased had a debt or other right which was extinguished by the disclaimer, at the expense of the deceased, for the benefit of another.  Your Honours will see the elements of that set out at page 50 of Lord Justice Jenkins’ judgment. 

On page 52, towards the bottom of the page, after setting out some the authorities concerning disclaimers of gifts, Lord Justice Jenkins observes the proposition that the effect of a disclaimer was:

that the disclaiming party is to be looked upon as having never had any right in respect of the gift disclaimed.

That was an “extreme position”, which went beyond anything necessary for the decisions in those cases and could not be reconciled with in In re Parsons.  His Lordship then sets out the relevant passage of Re Parsons, and at the bottom of page 54, he further observes that:

the disclaiming legatee . . . has between the testator’s death and the moment of disclaimer a right –

to call for the transfer of the:

subject-matter of the bequest or devise –

and that it was:

none the less a right because it is defeasible by the beneficiary’s own act of disclaimer.

That was, his Lordship said, a mere capacity to elect whether or not to accept the gift – that being the subject matter of the bequest.  The effect of the disclaimer, his Lordship explained, was to avoid the gift, which in this case was the insurance policies:

and with it the concomitant right –

that is, the right to claim it: 

but that does not alter the fact that down to the moment of disclaimer –

the deceased had that right.  Now, the Full Court’s view otherwise appears to have been based on the authorities concerning the effect of disclaimers on the transfer of legal title in disclaimed gifts.  The reference at the top of paragraph 109 on page 111 to Re Paradise Motor (1968) 2 All ER 625 suggests as much. The Full Court referred to that case as authority for the proposition that a disclaimer of a present entitlement operates by way of avoidance and not disposition.

Part of the difficulty with that is that Paradise Motor did not concern questions of present entitlement, or indeed a trust at all – but concerned the efficacy of a disclaimer on the transfer of a title of a gift of shares for the purposes of determining who was entitled to the distribution on the winding‑up of a company.  It was in that context that the Court of Appeal, and your Honours will find this at tab 55 of the joint book of authorities, observed at 632 that the disclaimer in that case operated by way of avoidance, and not by way of disposition.

Now, that brief reference is perhaps not entirely easy to understand, and the discussion in Meagher, Gummow and Lehane – which we have included at tab 64 of the joint book of authorities – suggests as much.  But in our submission, the better understanding is that what the Court of Appeal was saying was avoided was the transfer of an undivided legal and beneficial…..shares, and therefore no issue of the re‑transfer of any interest ever arose by way of the disclaimer.

But whatever be the better understanding of the Court of Appeal’s reference, in our submission, it cannot be understood as supporting the proposition that the disclaimer obliterates the existence retrospectively of the rights to claim the gifts arising under wills or trusts because that is inconsistent with Re Stratton’sDisclaimer which the Court of Appeal goes on in Re Paradise Motor to refer to expressly.

STEWARD J:   Mr O’Meara, do we need resolving of these interesting issues if you are right in contending that the statutory scheme bites as to whatever was the position at the end of midnight on 30 June 2014?  Does any of it matter?

MR O’MEARA:   No, your Honour, it does not.

STEWARD J:   Thank you.

EDELMAN J:   Equally, Mr O’Meara, if you are wrong about that and the statutory scheme permits, whether one describes it as a disclaimer by retrospective avoidance or a disclaimer by retrospective disposition, then you do not succeed. 

MR O’MEARA:   Well, yes, that is right, your Honour.  If, in our submission, a disclaimer, operating as we say it does by way of release not by way of obliteration of the rights prevents section 97 from operating at the relevant time, that is to say it is construed as I suggested earlier as saying, in effect, is and continues to be presently entitled, I think I would have to concede that we would lose.

GAGELER J:   On a natural reading, both Parsons and Stratton turned on the particular taxing statutes that were in issue in each of those cases.

MR O’MEARA:   Yes, they did, your Honour, but they also turn on an understanding of what the effect of the disclaimer was on the rights – the rights which the – that the person who was the subject of the taxing statute had because in each case the court expressly rejected the proposition that the effect was to obliterate the existence of those rights so the taxing statute had nothing to operate on at the relevant time.  That was, I think, the end of the proposition which was put in both of those cases and is the burden of the Full Court’s judgment here in some of the submissions which are put in this appeal.

GORDON J:   In Smeaton’s case the court faced a similar question, identified as a question of statutory construction rather than these general law concepts.  Is that the approach that you suggest – or contend that we should take?

MR O’MEARA:   Yes, your Honour, we commend the approach in Smeaton, both in terms of technique and in terms of result.  We say the technique which puts the focus first on statutory construction and then the resolution of that issue which was the avoidance of what I will come to in a moment that Justice Leeming aptly refers to as an ambulatory and fluctuating operation of the statute is one that your Honours will likewise arrive at in the case of Division 6. 

Now, your Honours, the written submissions in these cases have contained a great deal of description about the effect of a disclaimer on gifts and that effect is retrospectively avoiding a transfer of legal title in the gift.  Those were usefully examined by acting Chief Justice Barton in this Court in Matthews v Matthews (1913) 17 CLR 8 and particularly at pages 20 to 21 and that is in the joint book of authorities tab 23.

What emerges from those authorities is that the reason the disclaimer retrospectively negatives the transfer of legal title of a gift is because it negatives the assumed assent which is necessary for the transfer of the title in the gift.  However, as Lord Greene observed in In re Parsons in the passage that I took your Honours to a moment ago, those authorities really have nothing to do which is the proposition embraced by the Full Court in this case which is to the effect that the disclaimer of rights of the beneficiary under a trust at one point in time operates to obliterate the existence of those rights at an earlier point in time.

The reason that had nothing to do with the circumstances of this case is that there was never any issue about property and the gift – and the gift being the relevant income of the trust estate in that year vesting in the respondents.  The trustee never sought to distribute the income of the trust estate, there was never any purported transfer of any income of the trust estate to the respondents and in any event, all of that is irrelevant for the purposes of section 97 which, as I have tried to demonstrate, does not turn on the beneficiary having received or having legal title to the income of the trust estate and it is not predicated or dependent on the beneficiary ever receiving legal title to the trust income.

It operates only relevantly on the existence of a present entitlement and, as I have said, we say that is what vested in the respondents as at the end of 30 June 2014, and they did not cease to have it by reason of their subsequent disclaimer releasing the trustee of those obligations.

EDELMAN J:   Mr O’Meara, your submission on disclaimer is not suggesting, is it, that the principles of disclaimer would operate differently if it were the trustee to be disclaiming the legal interest that is held on trust than the way the principles of disclaimer would work if it were the beneficiary disclaiming the beneficiary’s equitable interest under the trust?

MR O’MEARA:   Well, the disclaimer would operate differently, in my submission, because that which is being disclaimed is different.  In the case of a trustee disclaiming the legal interest, the question is, has legal title passed?  The authorities say that legal title cannot pass without assent.  Assent is assumed unless it is disclaimed, in which case it is negatived.  So if a trustee disclaims, that would mean the trust property never vested in law in the trustee and therefore there was nothing to which those obligations of the trustee in equity could attach.

EDELMAN J:   Just so I understand that, if we are talking about money, for example, which is a chose in action against a bank, if someone deposits money into an account which is held by a trustee, you say that the trustee has no rights in relation to that chose in action against the bank until the trustee later decides whether to disclaim or not?

MR O’MEARA:   No, your Honour.  The trustee will have legal property in that chose in action because the trustee is assumed to have accepted it until the trustee disclaims.  On disclaimer, the disclaimer has the effect that the legal title is taken to have never passed and therefore the trust never came into existence, but that is different in the case of a beneficiary, which is not concerned with the passage of legal title but with the existence of obligations of the trustee owed to the beneficiary, which constitute the equitable interest in the way Justice Hope described in DKLR Holdings. 

So that the analysis is different because that which is being disclaimed is different.  In terms of trustees disclaiming the legal title to the trust assets, in the joint book of authorities, behind tab 50, there is the decision of Justice Byrne in Mallott v Wilson [1903] 2 Ch 494. That concerned a trustee disclaiming a settlement.

The effect of Justice Byrne’s decision – and your Honours will see this, particularly, at page 501, and over the page – is that the effect of it was that the property re‑vested in the settlor but subject to a resulting trust.  So that was how his Honour analysed the effect of a trustee…..the subject of the settlement.  But, as I say, that is a very different analysis to that which applies in the case of a beneficiary disclaiming the obligations by way of release of a trustee which constitute the equitable interest.

GAGELER J:   Mr O’Meara, are we now at paragraph 9 of your outline? 

MR O’MEARA:   Yes, your Honour.  I was just about to deal with paragraph 8 – which is, very briefly, to address what seems to be the central proposition advanced by the respondents in this appeal which is – and it appears at paragraphs 36 to 38 of their submissions – to proceed by the following reasoning, it seems.  First, a characterisation of the gift in this case as the grant of the rights to the trust income and not the trust income itself – which is what I have submitted to your Honours.  Secondly, by saying that the effect of the disclaimer was that the respondents are to be treated as never having had any rights and, thus, never having had any interest to the income of the trust which was vested in interest and vested in possession, which was capable of engaging section 97.  Thirdly, characterising the position of the respondents, prior to the disclaimer, as having the right to accept, by not disclaiming, the grant of the rights to the trust income.

Your Honours will observe that it is actually very similar to the unsuccessful argument which was put by the taxpayer in In re Parsons, back at tab 44 of the joint book of authorities, on page 15, as it is described by Lord Greene.  That was an argument to the effect that the taxpayer was not “competent to dispose” of the legacy but merely competent to acquire the right to dispose of the gift – in that case, the consols, but had never done so because he disclaimed. 

The error in that case – and the error in the argument in this case – in our submission, is a misidentification of the subject matter of the gift and the relevant rights of the beneficiaries.  In re Parsons, the subject matter of the gift was the consols and the rights which engaged the competency to dispose were the rights constituting the ability to take it. 

In this case, the gift is the trust income and the relevant rights were the rights to require the immediate payment of that gift and those were the rights which engaged section 97 on 30 June 2014 and had the tax consequences that we say they did which were not undone by the disclaimer, for the reasons that I have articulated to your Honours.

Can I now move to paragraphs 9 and following of the outline of oral argument and, as has been observed in argument this morning, your Honours, whether and to what extent the acts of the parties which purport or effect to alter their relations retrospectively thereby alter results produced by the application of a taxing statute at a point in the past depends in the end on the proper construction of that statute.  That was a matter which the New South Wales Court of Appeal emphasised in Smeaton, as your Honours have observed.

Even when taxing statutes operate by reference to relations between parties, as established under the general law, there is no general principle, in our submission, that a retrospective alteration of those relations will also retrospectively alter the result which the application of those taxing statutes has yielded. 

That is illustrated by two cases, both of which were referred to by the Court of Appeal in Smeaton.  The first is Rowe v Federal Commissioner of Taxation, which appears behind tab 12 of the supplementary joint book of authorities, being a decision of the Full Court of the Federal Court, which concerned an agreement to form a partnership which was expressed to be effected at an earlier date and was to the effect that certain income was to be treated as partnership income from that date.

The Full Court of the Federal Court held that, if effective as between the parties, that did not require that the income derived in the past be treated as partnership income for the purposes of the statutes. I should say that is at 60 FLR 475, and the relevant passage is at 479.

The second authority is some obiter remarks of Justice Hill in Davis v Federal Commissioner of Taxation 44 ATR 140, which is behind tab 6 of the supplementary joint book of authorities, particularly at paragraph [55]. His Honour Justice Hill observed that if a trustee and beneficiary agree that trust income was retrospectively treated as the beneficial income of a trustee, that may be effective in the governing of the relations between the trustee and the beneficiary but will not affect the tax treatment of the income as trust income for the purposes of the 1936 Act. That was referred to by Justice Sackville in Smeaton at paragraph 149.

The Full Court addressed this issue of construction really only at paragraph 110 of its reasons and by way of the observational statement that in contradistinction to what the Full Court decided in Smeaton there was nothing to indicate in this case that the beneficiary’s liability under section 97 was to be determined on a “once and for all” basis.

Our submission is that part of the error of the Full Court in the approach here is that it has not construed the operation of section 97 here in the context of the scheme of Division 6 as a whole.  This was a submission I developed to your Honours a little earlier in answer to a question of Justice Gordon.

Now, if I could just take your Honours back quickly to tab 3, which contains some of the relevant provisions of Division 6.  The starting point, for present purposes, your Honours, is the definition of “net income”, and that is because that is the taxable subject of Division 6, that is the thing which Division 6 distributes liability to be assessed on, among the trustee and beneficiaries. 

As a net figure, the income of the trust estate can only be calculated and really falls to be calculated at the end of an income year.  The scheme of Division 6 is to distribute assessability and liability to be taxed on that net income…..among the trustee and beneficiary according to the three principle criteria we have articulated already:  the presence of present entitlement to a share of the income of a trust estate by one or more of the beneficiaries, whether or not the beneficiaries are under a legal disability, and beneficiaries’ residency during the income year, or if not a resident, the source of the income during those years, during that year.

Each of those concepts is, as I observe in relation to section 97, expressed in the…..provisions in Division 6, that is to say, sections 97, section 98, section 99 and 99A in a way which expresses the application…..two criteria, that is, residency – I am so sorry, that is, legal disability and present entitlement in the present tense “is”, and residency in the past tense “was” looking back across the income year.  That is consistent, we say, with ‑ ‑ ‑ 

GORDON J:   Mr O’Meara, I know that you state – could I ask one question?  In Bamford, the Court said in relation to Division 6 that the primary provision remained section 96, and as I read the Court’s reasons in that decision, did that for a particular reason, and consistent with the way in which I think you have described Division 6 so far, the scheme, if that is the word you use, of Division 6 is one where the default…..is subject to provisions in this Act that a trustee is not liable, as trustee, to pay income tax on the income of the trust estate. 

In other words, it is a division which provides a set of clearing provisions, or a set of provisions which ensures that, at least so far as is possible, the income is, in effect, distributed either by deeming provisions or fictions to beneficiaries in order to bring about that primary position.  Do you place any reliance on section 96 in the way Bamford did?

MR O’MEARA:   Yes, your Honour.  Your Honours – because section 96, as the Court observed in Bamford, really sets, I think as your Honour says, sets the premise for the operation of Division 6, which is that the liability of the trustee is a residual liability.  It is a liability for the net income of the trust estate after the present entitlements have been established, and the liability of the beneficiaries according to those present entitlements have been ascertained.

That contrasts – and I think this is the importance of section 96 – with the scheme as it was before what we now find in Division 6, and that really takes us back to the 1915 Act where the trustee was primarily liable for tax on the income of a trust estate, but had a deduction for distributions it actually made, and that was the scheme in the 1915 Act. 

So the scheme which we now find in Division 6 is really quite a radical shift from what was to be found in the 1915 Act and…..from that - and I think this is perhaps the point the Court was making in Bamford – is to be found in section 96.  So a trust estate is, in the language which is often used, a flow‑through vehicle except in circumstances where there are no present entitlements as at the end of the income year.  So I think the short answer to your Honour’s question is yes, I place reliance on that in that way.

Another aspect of that is that when one comes to apply Division 6, it really has a sequential operation.  First one ascertains what the net income of the trust estate is which, as I said, can only be done at the close of the income year.  Second, one ascertains the liabilities of the beneficiaries and trustees – and trustee under sections 97 and 98, and that involves ascertaining the present entitlements of the beneficiaries, again, in our submission, at the end of the income year.  Then, as we have said, following those two steps and as a…..matter, assessment of the trustee on those amounts – on amounts left over really under sections 99 or 99A.

So what we say emerges from the text and structure of Division 6 is that the criteria on which it distributes liability to be assessed and pay tax on the net income of the trust estate for an income year fall to be assessed on the state of affairs and taxable facts as they exist during and as at the end of the income year. 

That reflects the nature of income tax as generally an annual tax which creates obligations to pay tax as at the close of the income year.  That was a point which the Full Court emphasised in a different context in Federal Commissioner of Taxation v H (2010) 188 FCR 440 which is behind tab 35 of the joint bundle of authorities, in particular at paragraphs 39 and 43. The Full Court there observed that the obligation to pay tax comes into existence on 30 June of the year of income in respect of the year in which the income is derived.

So when the Commissioner comes to make an assessment under either section 166, 167 or 169, as appropriate, giving concrete expression to the obligations on trustees and beneficiaries which are created by Division 6, he naturally looks to the state of affairs as at the end of the relevant income years and disclosed in the returns and other information in his possession, and the tax so assessed then becomes due and payable following the assessment on the date specified in section 5‑5 of the 1997 Act. 

So if a disclaimer after the end of the relevant tax year is effective to retrospectively extinguish the present entitlements in one beneficiary and with it the tax liability generated at the end of the income year, that will of necessity have consequences for other beneficiaries or for the trustee or even perhaps in some circumstances settlor. 

For example, a retrospective disclaimer by one of a number of default beneficiaries after the end of the income year could have the effect of increasing the present entitlement of other beneficiaries and thus belatedly increasing their share of the net income of the trust estate for that income year and thus their liability to pay tax on that.

If all possible beneficiaries were able to disclaim, a belated tax liability may be generated in the trustee under sections 99 or 99A, and that may be so even though the trustee does not contemplate that the trustee will have any distributable income of the trust to meet that liability.  Alternatively, if the disclaimers have the effect that the trust fails altogether, a resulting trust may arise in the favour of the settlor, and that may involve an unexpected and belated liability on the settlor.  So the question of construction is ‑ ‑ ‑ 

GORDON J:   In Bamford, Mr O’Meara, though – in Bamford at, I think it is paragraph 17, is it not, the Court recognised that, in relation to Division 6, that both constructions at issue in that case could give rise to these kinds of unfairness.  In other words, there could be unfairness for the Commission, there could be unfairness for the beneficiaries at the same time.  On your construction of Division 6 it gives rise to unfairness for beneficiaries who are faced with, in effect, a guillotine at midnight on 30 June.

MR O’MEARA:   The question of unfairness in a case such as this, your Honour, is perhaps maybe a little bit different from that which was addressed in Bamford.  In Bamford, their Honours were addressing themselves to unfairness which was observed to arise by reason of a misalignment between the distributable income of the trust and therefore the rights created in it, and the net income of the trust.  In that context, their Honours observed that no matter what construction, one, because of that misalignment or the potential misalignment, one may get unfair results.

Now, the case of the question of construction in this case, if there is no misalignment, as is the case here, between the present entitlement to the distributable income of the trust and the net income of the trust, it is difficult to see any unfairness, because the beneficiary is always going to be able to call on the income of the trust to meet whatever tax liability they have. 

If there is a misalignment which might, it is suggested, I think, against us, induce a beneficiary to disclaim, if that is effective, as the Full Court found, that does not avoid the potential unfairness, if it be that, it merely shifts it to someone else and that person may or may not be a more fair, in inverted commas, person to receive that tax liability than the beneficiary, the disclaiming beneficiary.

So, in our submission, in this case, the question of unfairness, if it be such, is not one which is really addressed by a capacity to disclaim.  If there is an unfairness, it is the product of that which the Full Court, this Court, observed in Bamford, being the way in which, over time at least, the concept of net income of the trust has diverged from distributable income.  So I hope that answers your Honour’s question.

GAGELER J:   Mr O’Meara, would this be a convenient time for the Court to take its morning adjournment?

MR O’MEARA:   Yes, your Honour, yes.

GAGELER J:   Thank you.  The Court will now adjourn.

AT 11.16 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.31 AM:

GAGELER J:   Yes, Mr O’Meara. 

MR O’MEARA:   May it please the court.  So the question of construction, your Honours, we say in this case is really whether the distribution of liability as among the trustee and the beneficiaries to include in their assessable income the net income of the trust, and consequent tax liabilities affected by Division 6 at the end of the tax year, is to be revised and reformulated after the end of the income year, and potentially after assessment, if there is a retrospective change in the legal relationships between the trustee and the beneficiary on which Division 6 had operated to produce the tax results it had.

The Full Court decides, in effect, that it is required to be revised and reformulated and in doing so, in our submission, reads into Division 6 a condition subsequent of variable content – making its operation as between trustee and beneficiaries defeasible, if the beneficiary releases the trustee from the rights constituting the present entitlement at the end of the tax year.  In other words, as I have put before, it reads section 97(1) as if it reads, “Where a beneficiary is and remains presently entitled”. 

But in our submission, there is nothing to support the implication or assumption in Division 6 that the present entitlement of a beneficiary at the end of the income year must continue after the end of the income year, in order to sustain the tax results the application of Division 6 has produced at the end of the income year. 

Rather, as Justice Sundberg pointed out in the passage in Zeta Force v Federal Commission of Taxation – which is quoted with approval in Bamford at paragraph 45 which is in the joint book of authorities at tab 15, and it appears at 240 CLR 421, the concept of present entitlement has the limited purpose in Division 6 of ascertaining the percentage to be applied to the net income of the trust estate to work out the liabilities under sections 97 and 98 – and that occurs, as I have sought to demonstrate to your Honours, on the basis of the state of affairs at the end of the income year.

Moreover, the approach of the Full Court gives Division 6 an alteration that Justice Leeming at paragraph 22 of Smeaton aptly described as “ambulatory” and “fluctuating”.  That gives, in our submission, Division 6 an unstable operation, with the tax results it produces at the end of the income year really to be regarded as provisional for an indeterminate period, dependent on whether any of the beneficiaries disclaim any of their entitlements.  If that is what the Full Court meant in paragraph 110 of its reasons, by section 97 not having a “once and for all” operation, we say that was, with respect, a surprising conclusion.  Well, it would be surprising if Division 6 should operate in any other way. 

The creation of belated liabilities after and perhaps years after the end of an income year for non‑disclaiming beneficiaries or trustees, and possibly even to settlors, might create serious inconveniences for taxpayers concerned, difficulties in assessment and administration for the Commissioner, including by reason of the application of time limits within which the Commissioner can amend.

The Commissioner may not be able to always anticipate the full range of permutations and combinations of…..liability as between trustee and various beneficiaries, on the net income of tax which might be produced by disclaimers after the tax year, in order to issue alternative assessments to cover all those possibilities. 

The result, in our submission, is that the Full Court was in error to conclude as a matter of construction of Division 6 that the disclaimers of September 2016 were in effect to render the assessments of the respondents issued in October 2015…..and that is so, whatever their effect at general law was.  Your Honours, those are the submissions.

STEWARD J:   Mr O’Meara, just before you finish, can I ask do you say that the limitations in section 170…..buttress your argument?  So, for example, let us just pretend that only one beneficiary disclaimed and the Commissioner might then be out of time to increase investment to the remaining beneficiaries, is that something you relied upon?

MR O’MEARA:   Yes, your Honour, he may well be out of time and we do rely on that.  It is of a piece with the unstable effect which the approach of the Full Court gives Division 6 and the unusual consequences which that would…..which would induce your Honours to not prefer that interpretation.  If your Honours please.

GAGELER J:   Thank you, Mr O’Meara.  Mr Walker.

MR WALKER:   May it please your Honours.  We embrace the proposition that the case is about the meaning of section 97 as it applies to the subject matter explicitly contained within it, namely, relations between persons concerning property to which the word “trust” attaches.  We accept as well that the case is a candidate so to speak to be added to the not particularly edifying catalogue of…..in judicial dictionaries giving meaning to the word “is”.  We certainly accept completely that that word is at the very heart of the controversy between the parties before the Court.

Your Honours appreciate, of course, that it is an expression found in exactly the same collocation in a significant number of the provisions in Division 6 that have served simply in the interpretation provision, section 95(1), to give the example of the definitions of Division 6 percentage which is, as your Honours appreciate, a very important concept in relation to tax.

It would appear that as to the propositions that we seek to advance which your Honours will see in our outline that there is by no means joinder of issue let alone by way of contest on much of what we will call the general law.  May I, before coming to them, summarise where we go with respect to the word “is” used with respect to the “entitlement” in the subject matter context of trust for persons who may be called beneficiaries as follows. 

Though, so far, all the rhetorical emphasis has been upon the present tense of the word “is”, at least a significant – if, perhaps, not more significant – is the fact that it is indicative mood.  It makes a statement which is conveyed as a statement of fact or actuality or reality – not conditional. 

In our submission, given the subject matter, one, therefore, needs, at the outset, to understand how the indicative mood is, can or should be understood when used in relation to present entitlement to a share of the income of the trust estate – and I add, by way of such familiar dealings – as either an annual appointment in that regard or an initial gift defeasible by different annual appointments thereafter. 

The latter is our case.  The latter is the case for which the so‑called third disclaimer was directed.  On the issues now before this Court, there is no contest that the third disclaimer – as a matter of trust law – was effective to disclaim that initial gift of what I will call for convenience…..distribution. 

Our learned friend concluded by proposing as the…..position – to be contrasted unfavourably with what the wording of the statute would permit – that we were contending that the word “is” means “is and remains” – a part of present, continuing……query whether it is intended to have anything…..in it by way of argument against us.  It does not matter.  “Is and remains” is what our learned friend offers as the true character of our reading of “is”.  Therefore – so goes the argument – peremptorily to be dismissed because that is not what the statute says.  That is not our argument, knocking it down in a straw man…..

Our argument that “is”, if it is to be accompanied by any addition to bring out the meaning for which we contend simply involves the tautology, “really is”, as opposed, of course, to that which is manifest in the body of law called up by reference to the income of a trust estate.  For that matter, the notion of present entitlement to a share in it – namely, the operation of the well‑understood, well‑known doctrine of disclaimer – to which I will come in just a moment. 

So that, in summary, our position may be put this simply, that “is presently entitled”, et cetera, does not include “is presumptively presently entitled:, that is, would not include other moods of the verb such as “may” or “could be” presently entitled – subject to the operation of a disclaimer.

It is for those reasons, in our submission, that it is of significance there that it does not appear to be contest about two of the matters that we seek to address.  The first can be summarised and introduced by our proposition 1 in our outline.  The second is the combination of propositions 6 and 7, to which I will come however in order.

But, if I am correct in seeing no real contest – let alone fundamental – between the parties concerning those two propositions, then the question is – as your Honour has raised from our friend’s consideration – and which we embrace – about the meaning of section 97, which manifestly can, depending upon how it is interpreted, turn all of that on its head.

Now, proposition 1, I do not need much to develop – bearing in mind the exchange of written submissions – the reasoning of the Full Court, and the lack, we think, of any conflictual difference between us in our arguments.  Assent by a donee is to be seen by…..who are not legal scholars as an anthropological vestige – but it is not a vestige in law – it operates by reason of bringing in to existence a presumption, rather than by abolishing its need altogether – with the presumption operating as presumptions do of their character, namely giving rise to the possibility of it being displaced.

Now the assent which is presumed – or as some of the cases put it, may be the product of inference – that goes beyond the operation of the presumption of course – is one which is strongly grounded – without being a cynic, one can appreciate why it is seen as strongly grounded – in the usual perception of self-interest – that a person would prefer to take a benefit than reject a benefit.

Immediately, of course, your Honours see how that not so straightforwardly be understood – let alone as a universal position, when – as can be seen under Part 3, Division 6 – and in other contexts as well, private as well as statutory – a gift may come with burdens that render it no benefit at all.  It is for those reasons that there continues to be real…..in the need for assent and a real opportunity – not something frustratingly unavailable for the individual but the real opportunity, substantive in nature, for the putative donee to disclaim.

Now, the effect of the disclaimer is to substitute actuality – one might call it fact – for presumption in a way familiar in the related, but not identical, discourse concerning evidentiary presumptions and onus of proof.  It has this important quality, that there is no doubt that the disclaimer is by subsequent conduct and there is equally no doubt that it means that the putative gift perfected by presumed assent was never perfected at all and never at all is my way of seeking emphatically to contend for what has been called a retrospective or retroactive effect.  It adds nothing to use those words except perhaps to excite some basal instinct against them or against scenarios that display them at work.

It is in the nature of the disclaimer as a matter of the centuries old and well‑understood doctrine that the eventual – that is, subsequent or later – disclaimer, sometimes called dissent, means that that which appeared presumptively to be the case never was the case.  That is why we say the indicative mood of the word “is” is actually more informative given the subject matter of the provisions, which includes entitlement under a trust of a beneficiary, where of course the beneficiary may be seen in one sense always to be a volunteer, that is always to be actually or potentially the recipient of a gift.

It is because of the nature of that subject matter explicit in the wording of section 97 that the impaled…..is the context in which disclaimer operates as straightforwardly as we have put it and, we repeat, apparently without contest from our friends.

STEWARD J:    Mr Walker, may I ask a question please?  If one travelled back in time to 1 July 2014 and posed the question, “Who under Division 6 was liable to pay tax on the net income of a trust?” what would the answer be on your case?

MR WALKER:   Our answer is, depending on disclaimer, it would be the beneficiaries selected by the default provisions, and the opening phrase is the entirety of this case really, that is on 1 July, whether there is entitlement – and I stress, whether there is or, as I put it earlier by way of argumentative paraphrase, there really is entitlement – depends upon assent or disclaimer, the two sides of the one coin.

STEWARD J:    Does that means when you say “depending on the disclaimer” that the liability of the beneficiaries on 1 July was conditional, only to be perfected later on?

MR WALKER:   We actually submit there is no liability until it is known that they were, and I accept entirely the…...of the taxing provision, whether they were, at that time, presently entitled.

GORDON J:   Mr Walker, can I just ask for clarification on that submission?  When you say there is no liability until it is known whether they are presently entitled, does that mean practically known about whether or not they seek to disclaim?

MR WALKER:   No, no, it is not a question of practicality, it is in the nature of the status of a person who initially had been the object, or purported donee, putative donee of this gift.  What the law says about that is assent is necessary.  It makes no sense to say that assent is necessary if the lack of assent plays no part in an appreciation of what exists, under presumption ‑ ‑ ‑ 

GORDON J:   I am sorry, Mr Walker, I was unclear in my question.  In response to your answer to Justice Steward, as at 1 July 2014, is it your position that there is no liability for tax purposes until it is known whether or not they seek to disclaim?

MR WALKER:   Yes, with one addition, or it is too late…..circumstances, by reasons of those circumstances and delay, amounting to assent.  May I say this about assent?  Again, tautologously, we mean actual assent, but of course that may be either express or implied.  This case does not provide facts by which that can be tested.

EDELMAN J:   Mr Walker, by “express or implied actual assent” ‑ ‑ ‑ 

MR WALKER:   Yes.

EDELMAN J:   ‑ ‑ ‑ do you mean express or implied assent as manifested by the conduct in all the circumstances of the beneficiary, rather than any subjective thoughts that may or may not be communicated by the beneficiary?

MR WALKER:   Yes, yes.  Yes, there is no fingers behind the back, I want this gift so long as it carries no tax.  There is none of that, and indeed, as is known from other decisions, anxiously considering consequences and getting wrong advice about it will not necessarily help you either.  No, no, no, it is objective.  This is a case that throws up the plainest of all objective circumstances, which I hope to turn to our advantage in seeking to persuade your Honours about the meaning of “is presently entitled” in section 97.

The obvious way for the objective assent, that is, actual assent objectively to be found, whether expressly or by implication, is by somebody in the beneficiary’s position putting his or her hand out for the payment, demanding payment, let alone, of course, suing for the requisite accounts in order to ascertain its amount.  There is no need for conduct of that kind, which may be quite personal conduct, the son asking the father for the annual subvention from the trust, or the full nullity of a letter before action maturing into litigation for accounts and an order for payment of some found due.

There is no need in either of those dealings, informal or formal, for the word “assent” or any synonym of it to be expressed either for the annual appointment possibility or for the one that pertains in this case, the initial gift defeasible by different annual appointments because that is the plainest of implication, the demand for the payment.  The suit for the accounts and payment are unequivocally consistent only with an entitlement.  It is asserting a right. 

Now, we distinguish completely between that conduct which one might be tempted to say kills two birds with one stone, supplies assent and then seeks to enforce the entitlement, at least, in the case of the litigation. But rather, we would say there is a sequence of matters logically which occurs perhaps uno ictu and the sequence of matters is first supply of the assent by which the entitlement comes into existence, if I have to add the tautology “actual existence” not “presumed existence” and second, steps taken consistent only with that entitlement, namely, the demand for payment and if resistance litigation to achieve it.

It is our submission that, going back to Justice Steward’s question - I apologise if I did not elaborate this sufficiently the first time round, on 1 July the position still remains, as I said, depending on disclaimer, which is excessive shorthand on my part, the position then remained that the entitlement which is the critical criterion of liability of tax, remains yet to be known by reference to the extant possibility, that is, still existing possibility, of disclaimer. 

That is seamlessly and in principle, the same as the different but with opposite effect, of course, analysis by Chief Justice Barwick whereby an entitlement as at the end of the year did not exist if it had previously been discharged.  It is the same requirement to attend to the nature of the subject matter which is explicitly, we submit, called up by the reference to trust in the criterion of liability to tax. 

STEWARD J:   Mr Walker, could I just ask one more question for clarification?  On that proposition, namely, that on 1 July, there is not yet any beneficiary who is presently entitled to the net income of the trust, why on that basis would not the trustee then be liable to pay tax on the net income?  If you want to take that on notice, that is fine, and come back to it.

MR WALKER:   I think Mr Lewis would prefer that I did, your Honour.

EDELMAN J:   Mr Walker, would the practical effect of your submission be that the way that section 97 would operate is that upon the Commissioner issuing the assessments, there would be a reasonable period of time during which the liability or the present entitlements could not be known, but after the expiry of that reasonable period of time, being a reasonable period to disclaim, then the present entitlements would have crystallised?

MR WALKER:   Yes, and they crystallise as at the relevant point at the end of the tax year in question.  Yes, is the answer.

EDELMAN J:   So the certainty for the Commissioner is a certainty that does not come as at 12.01 on 1 July, it comes upon the expiry of a reasonable time after issuing the assessment?

MR WALKER:   Yes, and it shares that character with some very common or garden tax liabilities, including whether a trader makes any profit at all, depending upon accounts yet to be understood.  So there is absolutely nothing remarkable about there being a tax liability in an amount yet to be ascertained.  That is of course not a matter against us, but a matter that we embrace. 

That is why when answering Justice Steward’s question, I again apologise for not having elaborated, the notion of there being a liability with respect to a beneficiary under a trust necessarily involves an understanding of the law concerning what I am going to call property rights obviously…..of equity in relation to some or all of the property held by the trustee on the relevant trusts. 

The beneficial interest for a cestui que trust is something which relevantly exists or not and this tax statute directs attention to the particular character of the beneficial interest, being a character of course concerning which this Court authoritatively spoke in Harmer 173 CLR 271, to which I need not return, at least for the moment.

It is because of the notion of being entitled always involving the existence of a right - the words are not the same, but their legal content is relevantly the same - the person is entitled because they have a right; the person with a right is entitled – one necessarily needs to go to that quality of a – I will call it a distribution, either the initial one or the annual appointment – to named persons who can conveniently if not always accurately be called beneficiaries, as being an entitlement.  You have to look always in that context to the assent necessary.

To put it another way, there is nothing in section 97 that removes by a kind of radical surgery that element of the relations between people concerning property, namely assent, being necessary from the notion of being presently entitled to a share of the income of the trust estate.

GAGELER J:   Mr Walker, can I ask a question to clarify my understanding of your submissions in paragraphs 1 and 2 of your outline and proposition.  As I understand it, you say that the presumption of assent is entirely a presumption of fact and that the effect of a disclaimer is entirely evidentiary.  Is that overstating your position?

MR WALKER:   Yes, but not completely at all.  There is no magic or significance in my using the word “fact” or my using the word “evidence”.  Assent is factual in the sense that it may be inferred indirectly from evidence, as opposed to stated directly in evidence.  “I assent” is the direct evidence of assent.  Conduct unequivocally consistent only with entitlement involving assent will lead to an inference.  It is not imputed.  It is inferred, and it is inferred as what ultimately is an actual state of mind but objectively displayed. 

That does not place it apart from many, many areas of the law, such as in contract the consensus ad idem is objectively displayed but it is intended to describe an actual state of mind.  It is simply that one cannot be heard to say that you are walking both sides of the street.

GAGELER J:   Mr Walker, on one version of your argument one would not know until there is a trial.  On another view, though, one knows as at 30 June in any year whether or not the presumption has been displaced.

MR WALKER:   Yes, your Honour.  I do understand that is a very important frame for the choice, yes.  We do not seek to duck away from - we have to embrace as entirely in the nature of things, given the subject matter which provides an understanding of the words used in 97, that by legal definition of the concepts in question it will not be known until there is (a) assent, (b) disclaimer or (c), without either of those having been expressed, the combination of circumstances and conduct which makes it too late to disclaim.

STEWARD J:   Mr Walker, in a world in which there are serious penalties for a taxpayer to fail to include in their assessable income, income, when will such a taxpayer know that reasonable time to disclaim has expired and that they must now include this income in their tax return?  They seem to be weighing a risk of penalties here, which I would not envy.

MR WALKER:   Your Honour will not hear any argument from me that penalties are a mere bagatelle.  We can put that to one side as a petty point of argument for us.  But your Honour raises, with great respect, an important question concerning what might be seen as the workability aspects of the rival contentions. 

In principle, the answer to Justice Steward’s last question is that the person who has the power or liberty to disclaim is scarcely in a position to complain if time has passed with sufficient knowledge - now that is the critical component - with sufficient knowledge and nothing has been done one way or the other, that proves an invidious topic of conversation with one’s tax accountant.

That would not trouble the court about any such difficulty for such a group of people.  It is entirely appropriate that they be worried about whether they are complying with the law.  But for somebody who does not have the requisite knowledge, and has not done anything because, not knowing, say, of the initial default distribution by way of gift, then, with respect, the notion that there is anything invidious for them can be rapidly raised and dismissed.

There will not have been disclaimer, if they do not have knowledge, requisite knowledge, and the idea of default distributions occurring like trees being felled in the unseen, unheard forest may exist in some of these trusts, but they are not such as to inform the proper interpretation of these generally applying provisions in 97.  One would not construe them from extremes, including what might be called delinquent extremes, where trustees do not bother to inform beneficiaries of the state of their accounts. 

GORDON J:   Mr Walker, is another way of putting your proposition, and it may be that this does not assist you, but is another way of looking at it to say that, absent disclaimer, assent is assumed, and that the phrase “is presently entitled” takes that assumption, takes the assumption of assent and works and builds on it?

MR WALKER:   In a sense, yes, your Honour, but there is a lot in that opening - my opening words.  Of course “is presently entitled to a share of the income”, for all the reasons I have been urging, bearing in mind it is income of a trust estate, and bearing in mind the relevant juridical character of the putative dealing as a gift, because of all of that, necessarily those words have to be taken as encompassing the role, potentially, I stress potentially, of disclaimer with respect to a state of affairs that has happened automatically and silently at midnight on 30 June, the so‑called default distribution in the absence of an effective appointment otherwise.

Now, it is our submission that, unless and until the Court were to construe “is presently entitled” in that context as having removed, for the purposes of tax liability, I stress, the liberty or freedom – it does not make sense to call it a right – it is a liberty or freedom of the putative beneficiary to disclaim the gift, either the annual distribution, by express appointment, or the original initial default provision, then, in our submission, it must be that these are words that carry with them and positively accept as the intended working out of the tax liability, that it is only those who can, by reason of entitlement, eventually call for money to be transferred to their account, who are within the ambit of section 97.

The only people who can do that are people for whom assent is effective because it remains presumed – that is not displaced by any disclaimer – or assent has actually occurred, which would always happen if they took some step themselves, either demand or litigation, to assert the putative entitlement ‑ ‑ ‑

GORDON J:   Is that construction, Mr Walker, consistent with section 95A?

MR WALKER:   Yes.  In 95A(2), your Honours see, for example, the case covered, which is:

a beneficiary has a vested and indefeasible interest . . . not presently entitled . . . deemed to be presently entitled –

and one could be forgiven for thinking that it is in order to keep 97 less verbose than it might otherwise have been because one can easily why – from what I might call a tax policy point of view – the difference between “vested” and “indefeasible”, but not “presently entitled” – it may not socially commercially appeal as a difference which should distinguish between those who should pay tax and those who should not.  Now, they have counter arguments of policy of course concerning what might be call liquidity, but that is a different thing.

So, my first point is that, under 95A(2), one similarly has a notion of vested and indefeasible interests, which of course will only be a state of affairs following – if you allow me to use of this general expression – a dealing – I do not mean consensual – a happening in relation to property between people in which there is assent in order for it to be accomplished – and one may presume assent but, in our submission, by definition, that does not supply assent.

If nothing is done to displace the presumption – just as with true evidentiary presumptions if no evidence is offered on the point – judgment can proceed on that basis.  That is the purpose of the law relevantly with respect to presumptions.  But if something is done to displace it, just as in the true evidentiary presumption, that does not mean that what was a fact is now no longer a fact.  It means that it was never the fact.  Same in relation to these property presumptions with respect to gift – namely that, upon the disclaimer, there is displayed to have been no gift, ever. 

So yes, it is consistent with the approach taken by 95A(2); 95A(1) of course was to overcome – address – Chief Justice Barwick’s, with great respect, correct black letter analysis of entitlement – and what happens when it has been discharged – namely it no longer exists.

Now, one might explain 95A in short as being an intention that the words “is presently entitled” can be given extended meaning to cover factual situations which manifestly fit within the parliamentary perception of the policy position being addressed.

Your Honours, that completes what I wanted to say about propositions 1 and 2.  Could I, with respect to Parsons in particular, remind your Honours of the language which my friend has already conveniently taken you to in Parsons [1943] 1 Ch 12? In our paragraph 31, we draw to attention – I do not want to labour the point – the significance of Lord Greene’s contrast of take or disclaim.

We are there in paragraph 31, admittedly, perhaps spending an extravagant amount of words on what now appears not to be in contest – namely, the effect of a disclaimer in relation to the presumed state of affairs – that is, it reveals – or renders – the presumed state of affairs as one that never existed.  If you have to add the tautology for clarity, never really existed.

With respect to each of Parsons and Stratton, the point that we seek to advance – particularly by the parts of our written submissions noted for propositions 4 and 5 – is that, I think to adapt an observation your Honour Justice Gageler raised with my friend that, of course, these are all cases like this case where the question concerns the meaning and effect – usually of taxing statutes – including by reference to the temporality element to which I am going to come – in light of the general body of law entailed in the concepts necessarily imported by the use of legal terms of art such as “trust”, not different but not special for trust any more that it would be special, say, for contract or agency, et cetera.

It is for that reason that Parsons is, notwithstanding its significance in what might be called the case law your Honours might find useful, nonetheless an authority concerning the meaning and application to those facts of the particular expression “competent to dispose of” in the particular provisions of the United Kingdom Finance Act. 

If – as unremarkably and surely not to be recontested in this Court – those words mean, as they were held to mean, having the ability to make a thing your own, then one can see just how far away that is from the nature of disclaimer for the purposes of the taxing criterion in our case in 97 which refers to present entitlement to a share of the income. 

Now, it is in the nature of a person in whose favour a putative gift has been made for which assent is presumed but in relation to which disclaimer may render that state of affairs never existing that that person whose conduct will be the source in the circumstances of a disclaimer or whose express factitive words I hereby disclaim will effect a disclaimer.  It is in the nature of that that they have an ability to make that entitlement their own by saying “I assent”.  The power of disclaimer is, of course, the power to put it beyond your power by the “once and for all” exercise of assent.

GLEESON J:   Mr Walker, I am not sure that the Court in Harmer said anything about assent as a requirement for a vested and indefeasible interest.  Is your contention consistent with Harmer or does it involve something more?

MR WALKER:   The first part of your Honour’s question, no, they do not, because it was not in issue.  The second part of your Honour’s question, no, because it was not an issue.  So, there is no inconsistency between us and Harmer.  Harmer was not concerned with the operation of the presumed assent and it is possible eventual displacement by disclaimer or the loss of the possibility of disclaiming by conduct inconsistent with it in circumstances including obviously delay.  So, your Honour is quite right, Harmer was not concerned with that question at all.  But, of course, nothing in Harmer…..Australian law had taken a 180 degree turn against the fundamental requirement for assent ‑ ‑ ‑

GORDON J:   Mr Walker, can I ask one other practical question about that?  Is it your proposition then practically that when the Commissioner gets to 1 July 2014 he has to, what – issue multiple assessments people in order to cover the field or is it that he has to make inquiries about whether or not the beneficiaries wish to disclaim notwithstanding the presumption of assent?

MR WALKER:   Your Honour’s question with its suggestion, horrors of inconvenience or administrative burden for the Commissioner, is perhaps ‑ ‑ ‑

GORDON J:   I do not think it is that, it is about the role of the presumption of assent.

MR WALKER:   No, quite.  It is perhaps – that is perhaps most calling for consideration in the common case of annual appointments and in the common case of annual appointments from among what are often a large and generically described list of possible objects, some of whom did not exist when the wording was settled, may well in the event that the trustee has not supplied the information in the trustee’s own return, require inquiry.

That is in the nature of things.  When one considers that we are talking about the possible operation of disclaimer, we know that we are talking about what presumably is always a tiny class of persons in whose favour there has been such an annual appointment, but who do not know about it - have not received the money under that guise and have not been told, “You have won the annual family lottery”.

With respect, it can hardly be said that as between Commissioner and such a person who has not yet disclaimed because they do not know about it, that there is some reason of policy – let alone, purpose – to be described in section 97, by which the position of the Commissioner with all the powers appertaining to that office, is somehow an indication that those persons not yet knowing enough to be able to disclaim, should nonetheless be regarded as taxable by an event of which they knew nothing when it was first done – that is, in the tax year – and have not made anything up to the point of opening the unpleasant mail from the Commissioner.

That is why there is nothing to be deprecated or deplored in the idea of a person, upon being informed by the assertions contained in an assessment, of the putative making of a gift in their favour – being able, within a reasonable time, to disclaim.  That, in our submission, is exactly what is entailed in the administration of section 97.  The notion of a present entitlement does mean what, if you will forgive the language, a perfected gift.  It does not make sense to talk about a person being presently entitled, though that is by reason of a presumption which, by occurrence of a disclaimer, will be displaced from ever operating.

It is for those reasons that when one sees the language of indefeasibility, one immediately knows one is – such as in subsection 95A(2), one immediately knows one is in an area of discourse - no longer controlled presumption because if a presumption can still be rebutted by disclaimer, it would be absurd to propose that such an interest was indefeasible.  Or, to put it another way, there are enough complications without introducing the concept of “defeasible indefeasibility”.

So that the language, all terms of art for trust law, it happens to include 95A(2), certainly in 97(1), that language is language that cannot be construed as having removed that fundamental, structural necessity of assent, therefore cannot be understood as having removed the role of presumption and in order to give presumption any real meaning as a presumption – and I stress that, as a presumption – it must permit displacement, rebuttal, whatever language one chooses- in this case by the so‑called disclaimer, sometimes called dissent.

That of course enables us to say – this is our proposition 9 – that one looks in vain in section 97 for any textual indication, including in the context of Division 6 as a whole and including the fundamental taxing provisions, section 5, et cetera, one looks in vain to the proposition that either the whole of the law of assent, presumed assent and displacement of presumption has been removed or, worse still, bits of it have been so as to leave in place a parody of a doctrine – namely, the presumption that cannot be rebutted because it will be too late with respect to the tax authorities.

When I say “cannot be rebutted”, I do not necessarily mean that upon that reading of the statute there cannot be as between trustee and beneficiary, and therefore of course trustee and possibly other beneficiaries, by a disclaimer operating after the end of the tax year an adjustment as between that trustee and those beneficiaries of what I am going to call the accounts by treating, for example, the disclaiming beneficiary as somebody who was never presently entitled, thereby swelling, as the case may be, depending upon the terms in question, the quantum of entitlement of other appointed or default distributed beneficiaries.

That would be, in our submission, a really extraordinary provision to read between the lines of section 97, bearing in mind, apropos section 96, the other provisions by which of course trustees are there as an object of the beady‑eyed attention of the Commissioner, depending upon how things turn out.

It is for those reason, in our submission, that section 97, which is at the heart of the whole case, ought not to be understood as a provision which either removes the whole of the doctrine of assent with its entailed presumption and disclaimer doctrines, nor, much worse, bits of it – there will be a presumption but there can never be a disclaimer if a tax year intervenes – and for those reasons, of course, in the familiar way that we seek to make good by the argument of our propositions 6, 7 and 8, in our submission what that amounts to is the clear position that “is presently entitled” does not include the position of a person who is merely presumptively presently entitled because that really, as a matter of grammar, is not the indicative mood, that is the conditional mood.  Your Honours, I have passed over ‑ ‑ ‑

GORDON J:   Can I ask one other question, Mr Walker, about this idea in reference to indefeasible.  Do you say that the indefeasibility carries with it the right to disclaim?  I want to understand what you mean by “indefeasible”.  Do you say that - is that your argument?

MR WALKER:   Your Honours, I was picking up the word in section 95A(2).

GORDON J:   That is what I am asking you about.

MR WALKER:   A “vested and indefeasible interest”, and I am submitting that having a vested and indefeasible interest does not countenance the notion of an interest which would be yours because of your later disclaimer.  Your Honours appreciate that one of the words that have been used in the authorities and the scholarship concerning disclaimer is that it works a kind of defeasance.  Now, I do not want to suggest that there is technical accuracy in that usage, but all I am saying is that the word “indefeasible” in 95A(2) is surely inconsistent with the notion of an interest that the court comes to regard as never having existed because of an effective disclaimer.

GORDON J:   I do not know - Mr Walker, the reason why I ask is – and I must say I had not understood this was part of your case – but there was a decision by Justice Stone in Colonial First State Investments back in 2011 which, in taking that phrase, in effect, recognised that it was nothing to do with voluntary acts by the beneficiary.  It was to deal with, as I understood the decision – I must say I have not read it for a while – but to deal with acts of third parties and the trustee.  I might be wrong, Mr Walker, but I had understood that that was ‑ ‑ ‑

MR WALKER:   No, I think, with great respect, your Honour has captured it, but that is not a case about disclaimer.  It is certainly ‑ ‑ ‑

GORDON J:   No, it is not about disclaimer.  It is about what constitutes a vested and indefeasible interest.

MR WALKER:   No, quite, and we do not have anything to say about Justice Stone’s reasoning or decision in that regard that as against – far from it.  But her Honour, if I remember correctly, is rejecting the notion that it is to be defeasance so as to repel the notion of indefeasibility by what I am going to call voluntary alienations, et cetera, et cetera, and of course that must be right.  After all, the thing that you alienate may have its value precisely because it is indefeasible. 

Now, it was not a case about disclaimer, but all we are pointing is that while disclaimer is still available to prevent an interest coming into existence…..and as a matter of trust law from being treated as ever having existed, that it would not be sensible to talk about indefeasible, and what we get from 95A(2) is therefore in the Tax Act itself. 

There is an understanding that it is a state of affairs which is, as I said in opening, really true, really is the case, because what indefeasible gives me by way of argument is the possibility of saying if our friend’s argument be correct, lo and behold we have uncovered a species of defeasible and indefeasible interest, which is surely more than the law needs.

GAGELER J:   Mr Walker, as I understand your argument, you would say that an interest that is disclaimable is an interest that has not vested.

MR WALKER:   That is right.

GAGELER J:   So you do not get to it, on your argument, I think.

MR WALKER:   I am so sorry, your Honour, there was a glitch in the transmission.  Your Honour, do not get to?

GAGELER J:   Defeasibility or indefeasibility – the interest as vested ‑ ‑ ‑ 

MR WALKER:   Quite so.  That is, it is not vested, at most it is presumptively vested.

GAGELER J:   Yes.

MR WALKER:   To say that something is presumptively vested is, by definition, to speak of a state of affairs where you cannot say there is or ever will be a possibility to say this has vested, that is, the historical statement of an accomplished outcome.  That is correct.  My excursion off into defeasibility comes because of 95A(2), about which your Honour is asking. 

Your Honours, in relation to proposition 5 - I do not want to alarm you by going back to my hat - I wanted to complete, in light of what I was saying about propositions 6, 7, 8, 9, and 10, I wanted to draw the distinction that we derive from the canonical description in Harmer between an ability to accept a gift, that is, the ability to assent, not disclaim, and to suggest that it is of its very nature and without any complexity or metaphysics, necessarily prior to, thus, different, that which will follow from your acceptance of the gift, and would not exist but for your acceptance of the gift, namely, a right, not a mere liberty, but a right to demand and a right to enforce that demand so as to receive payment of income.

Now, true it is that one can readily understand that it will be the same human conduct that first provides the assent and second, constitutes the attempted enforcement of the right, but that does not at all destroy the sequence as opposed to the simultaneity – simultaneity makes no sense whatever.  One cannot have a right without the entitlement; one cannot have the entitlement given by gift unless one assents.  It is not until there is assent that one moves from a presumptive position to an actual position. 

Now, it is true that there is a different analysis of that familiar position whereby that language of express assent, “conduct”, often by words in terms of a demand, stands for assent.  It is true that one could simply say the presumption continues to operate.  There is no different in the outcome, on our analysis.  You would certainly have lost, of course, by then forever your right to disclaim.

Your Honours, could I come then to the remainder of our proposition 10, which otherwise I have addressed.  Now we are seeking to deal with that which is manifest in section 97 as, not surprisingly, one will find it in many, many other provisions and the schemes in this legislation for the levying of annual income tax.  Periodicity is what renders timing critical.  We accept all of that, do not seek to avoid it.

Your Honours appreciate that we draw to attention what we submit is the orthodox, unsurprising, workable, not inexpedient understanding of Justice Hill in Oates v Commissioner of Taxation 27 FCR 289, and the passage to which we have directed your Honours in our written submissions starts at 300.

His Honour was, of course, faced with provisions which involved consideration of the operation together of bankruptcy legislation and taxation legislation where the occurrence of the sequestration order – that is, the coming into existence of the bankruptcy – was relevant to application of the tax law and where there was – after the bell had tolled at the end of the relevant tax year – a subsequent annulment, not a setting aside on appeal but an annulment. 

His Honour turned to the resolution of that question which concerned two bodies of law – though, with respect, they are all part of the one body of law – arguably different subject matters.  So, there was the law of bankruptcy, which is statutory, and the law of the taxing question, which is statutory.  However – and it is a very large “however” – both of them by reason of the judicial power and duty of statutory interpretation, also involving at least…..more accurately, a fairly heavy dose of judicial determination or decision.  What I am intent on ‑ ‑ ‑

GAGELER J:   Mr Walker, according to the current jurisprudence of the Court, would not this case be treated as in accordance with the Ferdinands principles, being one of reconciling two statutes?

MR WALKER:   Yes, your Honour.  That does not mean, however, it is alien to what we are doing.

GAGELER J:   As an exercise in harmonious construction, really.

MR WALKER:   The short answer is yes, but again, that does not remove it from relevance to what we are attempting, and the point of my last comments was, even where, as in this case, before Justice Hill, there has to be the harmonious interpretation of, there, two statutes, it does not mean that the result of the application of the common law of statutory interpretation, which is not a paradox or oxymoron, is remote from the exercise - indeed, it is at the heart of the exercise, and indeed is what is happening with so‑called harmonious construction.

In other words, there is nothing alien in the notion of the Court considering what follows from the rules of law which are relevant to the question before it, be they judge‑made, statutory, or, if your Honours will forgive me, judge‑interpreted statute, which I accept should be understood in principle as being purely statutory, but they do involve judicial interpretation which can vary from time to time. 

It is for those reasons, in our submission, that there is real force in the way Justice Hill embraced, rather than sidelined, the temporality, as I shall call it.  His Honour notes:

the broad submission of the Commissioner relying upon the literal words used –

which bear resemblance to ours:

reference was made to the undoubted principle that income tax is an annual impost.  Thus it was said that the liability of a taxpayer for income tax crystallised on the last day on the last day of the year of income so that that liability may not be affected by subsequent events.

As your Honours know, perhaps as an act of supererogation, we have in our written submissions said not so universally just as a matter of statute, although that is two-edged and I will come back to deal with that later.

The examples that his Honour immediately went to interestingly are examples of where judge-made law had been affected integrally by statute law.  The first example that his Honour draws on in order to find polled against universal validity for the Commissioner’s pseudo axiom refers to an act done by an attorney where, of course, for a long time and in different ways, those powers have been regulated by statute and not left simply to judge‑made law.

What his Honour says is obviously in the same broad field as ratification generally, which can be both bestowed as a possibility by statute and certainly regulated by it as well as, of course, created by general law.  Then his Honour refers to the judicial interpretation of provisions such as the spur to stamp duty payment from the former section 29 of the New South Wales Act, and his Honour seeks to extract principle as follows:

the income tax legislation must assume the existence of and follow the result of the general law –

and familiarly calling in aid Galland.  But the point that we get from that is that the general law in question is the law that applies by reason of judge‑made law as affected by statute.  We are not talking about just two statutes.  Even if we were talking about just two statutes, the basic principle of temporality that his Honour is dealing with is one which accepts as unremarkable and in the nature of the law being applied and followed that there will be what is sometimes called loosely a retrospective effect, which really means in place of a presumption there is now the knowledge that the thing had never happened. 

Is that a convenient time, your Honours?

GAGELER J:   Yes, thank you, Mr Walker.  The Court will adjourn for the luncheon adjournment.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.14 PM:

GAGELER J:   Mr Walker.

MR WALKER:   May it please your Honours.  May I restart by giving the answer to Justice Steward concerning the 1 July dawning, and the question of the tax liability.  Yes, if in relation to a particular beneficiary all that is known is that a default distribution has occurred, without previous assent to the terms of that kind of gift – or alternatively, all that is known is that there has been an annual appointment in favour of that beneficiary, without information to that effect having been given to that beneficiary, then in both those cases, the position will be that that beneficiary is not presently entitled, but is at most presumptively so, or, to use the grammatical forms of speech, they might turn out to be presently entitled at the relevant tax time from which it would follow by the dichotomous position that Division 6 contemplates – and I am oversimplifying, but not in a way that matters, we submit – the trustee would be liable and satisfyingly so, both as matters of what might be called expediency and policy because what we are talking about in both those cases, which would include this one, is a state of affairs where a beneficiary has been the object of activity either by a settlor or by an appointor – whether in either case trustee as well or not – designed on the part of that actor, settlor or appointor, to benefit the beneficiary, but without having informed the beneficiary accordingly.

So that, by definition, if there is to be a disclaimer still possible, then there must be a state of knowledge by which there will only be a relatively short time – and certainly a time within which distribution to others may be affected – for such a disclaimer.  It is entirely satisfying that it is the trustee who knows of the appointment and to encourage the obligation in equity to provide beneficiaries their full measure of beneficial interests from time to time and have a continuing obligation with respect to accounting to do so.

GORDON J:   Mr Walker, may I ask a question about that?  It is not just the trustee.  The disclaimer, in your circumstance, may very well mean that, as a result of the operation of the trust deed it would fall to others, other than the trustee, as it would in this case.  You would be cascading down clauses 4.1 to 4.5 in order to find the fact consistent with deficiency so the trustee is not entitled and therefore not be assessed to any of it.

MR WALKER:   Absolutely, but we are talking about a state of affairs where a disclaimer is still available, which, in practical terms, will mean the combination of an originating – or an original – as of 1 July – lack of knowledge, and the non‑expiry of a reasonable time after any knowledge. 

STEWARD J:   Mr Walker, could I ask a question.  In a case where the trustee is liable in, say, in this case, the year ended 30 June 2015, and the beneficiaries have no knowledge of the gift, but in the next year of income they acquire knowledge and do not disclaim, they say, yes, I want the gift, is there a possibility of double taxation on that income of a trust, or how do we prevent that from happening, on your approach?

MR WALKER:   It is going to be difficult to avoid one way or the other, requests for amended assessments, your Honour, if only to avoid that possibility.  But, with respect, so far as a beneficiary is concerned, it would not be a natural state of affairs for us to argue that the law should operate so that a trustee is spared taxations so that there may not be double taxation when the beneficiary’s interest, of course, is to argue against taxation of the beneficiary. 

Yes, the operation of disclaimer and the opposite operation of assent where disclaimer had remained open may produce from time to time factual circumstances such as Justice Steward has exemplified, that is in the nature of the general law called up by these terms of art in section 97. 

May I just complete what I wanted to say, including in further response to Justice Gordon’s inquiry in trying to answer Justice Steward’s question before the break.  In our submission, the position of other beneficiaries should not produce as a matter of the interpretation of section 97 that for which our friends contend.

Take, for simplicity, a pattern which would be true of this case.  There has been by default distribution - and it would not matter whether it had been by express annual appointment - the designation of beneficiaries A, B, C and D to share equally as tenants in common in what I will call the net income of the trust.  We know what, if that amounts to present entitlements, section 97 works by way of the tax liability of beneficiaries A, B, C and D and, for that matter, the non‑tax liability of trustee X. 

Now, it follows, that unless disclaimer has been expelled from the general law by section 97, and we think nobody argues that, then it must be that as between those beneficiaries A, B, C and D, a subsequent disclaimer, say, by A, will increase the share in net income of the beneficiaries B, C, D who have either not disclaimed or, more to the point, have assented not least by an initial receipt of a first instalment. 

It is in that regard, in our submission, that it is very difficult to see either by expediency let alone by the much less stable value of so‑called fairness or unfairness anything which should produce by way of statutory interpretation of 97 the removal from the body of general law concerning such gifts, such perhaps troublesome…..as the doctrine and effect of disclaimer.

The liability of the trustee, as I say, is particularly satisfying, given the hypothesis which, if not logically, practically always, factually will be true of such a case, namely, that beneficiary A did not know that he or she had been – had thrust upon him or her such boon.  That, with respect, has to be information from a trustee to a beneficiary or putative beneficiary of a kind which, as between trustee and that beneficiary, there can be little doubt where the favour of the law would fall in terms of the consequences of a beneficiary not knowing, and therefore having, as a matter of general law, still the possibility of disclaimer operating.

The next point I wanted to make concerned this question of the operation of the general law.  Justice Gageler drew to my attention that authorities I, and we have written about, that I was addressing, may be seen as authorities simply for the working out the harmonious operation of two statutes. 

I do not want to repeat what I have said already in that regard, but could I remind you in furtherance of the arguments I have already put concerning the approach we urge as being by reference to the general law, being a judge‑made statutory or, far more commonly, an amalgam, to the position where it does not appear any other statute was involved.

Your Honours have the reference, I do not need to read it, but you will find it in Sara Lee 201 CLR 520 at 533, in paragraph 20, where the general rule being referred to is a rule of the common law concerning ratification, uncomplicated by statute, and the same principle for which we have contended in our propositions 6, 7 and 8 was seen by this Court as simply and straightforwardly operating.

Your Honours, may I now turn to complete what I wanted to say by way of a specific response to proposition 11 of our learned friend’s outline and it is related to my last point.  It is said of those cases concerning relation back or ratification conditional escrow – or escrow – or rectification, et cetera, that they are distinguishable. 

Without assuming the conclusion, that is a dubious statement, with respect.  They are aspects of the law which operate.  They are not alien elements of the law and the question, earlier addressed, is whether section 97 operates against that background and, using the concepts that the law supplies from whatever source, to understand, for example, the notion of trust or beneficiary for present entitlement.  It is for those reasons that the notion of there being no general principle – as our learned friend’s proposition 11 concludes – ought to be rejected.

Could I then move to complete what we wanted to say in response to the matters that are designated proposition 14 in our friend’s outline.  This ambulatory or fluctuating effect is one which should not be overstated.  It is not as if there would be to or fro – that is, a real fluctuation.  Once disclaimed, forever gone.  Once disclaimed or lost by actual or contingent presumed assent, that is an end of it.

It is for those reasons that there is, at best, a deferred effect, or perhaps I really mean, in answering the argument I am, at worst a deferred effect, a deferral which is in the nature of the body of law called up by the notion of present entitlement by the operation of terms such as the default distribution terms in this case or by the operation of an annual appointment where that was in question.

The notion of there being unexpected and belated tax liabilities again should not be overdone.  We are talking about, in the main and probably always, a class of person to whom no distribution has been made.  My learned friend referred to transfer of legal title from time to time.  We are not talking about money having been paid or assets in specie having been transferred legally because no question of disclaimer arises, if that had happened and had not been, as it were, repelled.

In such a case we are talking about people who do not know that the tree has fallen in the forest and who still have a capacity to disclaim.  That is not a class which, with respect, threatens any so-called instability, let alone a creation of such tremendous inexpediency to the administration of the tax legislation from the point of view of the Commissioner as to indicate that the words of section 97 will somehow remove disclaimer from possible operation or resort.

EDELMAN J:   Mr Walker, does the uncertainty to which you are referring exist in other provisions of the 1936 Act; albeit other provisions that are not concerned with notions of present entitlement?  So, for example, provisions that are concerned with what assessable income is, or provisions that are concerned with derived income.  Does the concept of disclaimer apply generally to those concepts?

MR WALKER:   The doctrine of disclaimer applies generally to what I am going to call gifts, going back to the governing idea - policy of the law against thrusting a supposed boon in spite of the teeth of the putative donee.  But Justice Edelman’s question raises a matter which highlights, in our submission, the inappropriateness – if I may say so, the artificiality – of resorting to thought experiments as 1 July dawns.

Very few of us have our tax returns in and complete so early.  Matters of accounting, which either for sole traders or massive corporations, will be necessary in order to understand assessable income to be returned will not always – indeed, one wonders how often ever in sensible, ordinary practice – can be ascertained as 1 July dawns.

In short, there is a crystallising, to use the figure of speech with which Justice Hill was dealing by way of the argument he considered, a familiar notion in this area, and there is of course all the temporality of an annual incidence of taxation where liability comes, often by reason of a state of affairs existing at the witching hour on 30 June.  All of that is true, of course. 

But the notion of an uncertainty of administration, let alone this notion of an unfairness, should not be overdone.  The unfairness in question of people who have not disclaimed or, better, who have assented, is after all this rather odd unfairness of obtaining more money, on which they may be taxable, but they have made a self‑interested decision to accept it.  That is not a case that should for a moment deter your Honours from the interpretive path which we urge concerning what is within the words of section 97, particularly with respect to the operation of the law relating to trusts. 

It is for those reasons, in our submission, that the uncertainty is, at least in administrative terms, including in relation to what may be available from a trustee’s point of view by way of distributable net income, it may well be that people will not owe the amount until after accounts have been taken. 

A default distribution will usually, one would have thought, be in that situation.  The addition by way of so‑called uncertainty of the very clear effect which a disclaimer will have - that much is easily calculated – is, in our submission, not a matter which should play any principal role in your Honours’ interpretation of the meaning of section 97 and, in particular, the meaning of the humble word “is” found within it.

Very briefly, I just remind your Honours with respect to the Gulbenkian Case and the way our learned friend used it, great caution should be employed in reasoning anything relevant to our case from the release contained within a settlement of litigious controversy in that case by way of understanding the true nature of disclaimer.  The authorities upon which we have expatiated in our written submissions are, in our submission, not such as to be displaced or qualified to the slightest degree by the language in Gulbenkian.

Your Honour Justice Edelman asked my learned friend whether our learned friend’s argument or the relevant aspect of it would differ depending upon whether the gift in question, that is, the gift about which one might suppose the necessary component of assent was to a trustee rather than to a beneficiary.  Our submission is that that cannot possibly with respect to the doctrine of disclaimer make any difference, but of course a trustee may be in a very different position from a purely self‑interested beneficiary with respect to the exercise of the power of disclaimer.

It is not to be supposed that a trustee can, as it were, for example, frustrate a settlement already accepted with its burdens – including possible addition to the corpus – by purporting to exercise a right of disclaimer, say, so as to avoid yet more burdensome work and attention.

So, there is a difference between a beneficiary and a trustee.  A trustee may not act ever self‑interestedly in such matters, a beneficiary may always do so, but with respect to the operation of disclaimer where disclaimer is properly available to a trustee, then of course it would make no difference with respect to the intervention of the end of a tax year.  May it please your Honours.

GAGELER J:   Thank you, Mr Walker.  Mr O’Meara?

MR O’MEARA:   If your Honours please, a few short matters in reply.  The central submission advanced by the respondents orally was to the effect that section 97, when it referred to “is presently entitled” meant “really presently entitled” and this was opposed to “presumptively presently entitled”, and that operated to exclude any present entitlement which had not been accepted and, as at 30 June of the relevant year, the acceptance of which merely rested on a presumption of assent.

Now, in our submission, the correct analysis is as follows, in this case, that tested on 1 July 2014, the respondents were possessed of rights to require the trustee to pay them a share of the income of the trust estate.  Those rights were real.  They were not presumptive.  The reality was derived from the application of the trust deed to the facts which had happened.  They did not depend on the respondent’s assent, they did not even depend on the respondent’s knowledge.

In the latter respect, knowledge, your Honours, can I give you the reference to the decision of the Full Court in the Federal Court in Vegners v The Federal Commissioner of Taxation (1991) 21 ATR 1347 at 1349, where the Full Court decided that knowledge of a present entitlement was not necessary to the operation of section 97.

A subsequent disclaimer by a beneficiary being a disclaimer of the gift of the income of the trust estate, in our submission, releases the trustee from those rights but did not make them any less real as at the date when their reality was relevant for the application of the section, that is 30 June.  That is the central holding of Parsons and Re Stratton’s Disclaimer. 

EDELMAN J:   Mr O’Meara, just before you get into the effect of Stratton’s on “presently entitled”, would you accept that, if section 97 were focusing only on the share of the income, in other words, only focusing on the concept of income according to ordinary concepts, that that notion of income would pick up with it the general law notions of disclaimer?  I ask that because obviously that is a concept that runs throughout the 1936 Act.

MR O’MEARA:   There are two responses to that, your Honour.  It is perhaps not impossible, but it is rare that a gift will be income according to ordinary concepts.  So it would be that the question is one which not often arises.  But there is another, and perhaps this is the more pertinent response to your Honour’s question.  It is critical to bear in mind what section 97 is taxing.  It is not taxing the receipt by the beneficiary of the income of the trust estate.  It is taxing a share of the net income of the trust estate, which is derived by the existence of rights of the beneficiary to something else, that is, the distributable income of the trust estate as at a particular date.

EDELMAN J:   That tends, I think, against your argument, not in favour of it, because that approach really explains why the words “is presently entitled” are needed, because we are talking about – well, the section is talking about the particular equitable rights of a beneficiary under a trust.

MR O’MEARA:   Indeed it is, and it is rights to something which is the income of the trust estate, the distributable income, which rights, when their proportion is ascertained in relation to the income of the trust estate is then applied to something else, which is the net income of the trust estate, to ascertain the liability of the beneficiary.  So it is not, with respect, analogous to a case of ordinary income where what is being taxed is the receipt of the ordinary income.  It is the – the section is taxing in a different way altogether.

EDELMAN J:   I completely understand that.  I think my question to you, though, is concerned with what the words “is presently entitled” are doing in the section.  Are the words “is presently entitled” words that are concerned with the identification and location of the particular rights of a beneficiary under a trust, or are they doing something more than that, and saying, well, we are also excluding notions of disclaimer that would otherwise exist in relation to a gift of income or capital that arise under the general law?

MR O’MEARA:   What those words are doing is directing attention at a particular time, the end of the trust year, and saying, what rights does a beneficiary have to the income of the trust estate as at that date and then that is used as a criterion of operation to determine the amount of the net income of the trust estate on which that beneficiary is required and obliged to pay tax. 

If, on that date, the beneficiary has rights which entitle them to require the trustee to pay them a share of the income of the trust estate, whether or not those rights had been assented to, and whether or not they even knew about those rights, that satisfies the criterion of operation of the section, so that the beneficiary is made by application of the section liable to pay tax on an amount of the net income of the trust estate ascertained by reference to that proportion.

I hope that answers your Honour’s question.  If, against our submission, assent is a necessary aspect of the existence of a present entitlement at the end of an income year, in our submission, part of the taxable facts on which section 97 will operate is assent supplied by the presumption of assent which has not been negatived as at 30 June of that year by a rejection of the present entitlement.

The taxable facts on which the revenue statutes may operate, your Honours will recall, can include events which have occurred and, as your Honour Justice Gageler pointed out in Thomas v Federal Commissioner of Taxation 264 CLR 84, the legal consequences of those events. The events which occurred here were the application of the trust deed to the facts to generate rights of the respondents as default beneficiaries. The legal consequences of those can include, in our submission, that supplied by the application of the presumption of acceptance unrebutted as at the end of the income year to generate a present entitlement, if it is necessary, against our submission, that there be assent to that present entitlement as at that date.

Now, the impracticality of the respondents’ submission as to the operation of section 97 was, with respect, exposed by some of the questions put to my learned friend from the Bench during argument but there is another aspect of the impracticality which might be observed.  If a present entitlement, for the purposes of section 97, does not include what the respondents call a presumptive present entitlement, as opposed to a real, accepted present entitlement, one might have the following situation.

A beneficiary who has a presumptive present entitlement – that is to say, rights to require the trustee to pay them a share of the income of the trust estate, which have not been either accepted or disclaimed as at the end of the income year, is not on the respondents’ submission taxable under section 97 so, by hypothesis, the trustee must be taxable under section 99A.

But, if the beneficiary, being possessed of those rights, after the end of the income year, exercises them and requires the trustee to pay them their share of the income of the trust estate, then it would appear that the trustee is fixed with the liability which Division 6 has operated to impose on it, as at the end of the tax year.  The beneficiary will be entitled to receive the income of the trust estate by reason of their rights in equity but will have no liability under section 97 or otherwise, it seems, under Division 6.  That is an operation of the statute which, in our submission, is perilously close to absurd, and one which your Honours will not countenance.

GLEESON J:   Mr O’Meara, as I understood Mr Walker’s argument – and it would help me if you could comment on this – it would require the word “vested” in section 95A(2) to have a special meaning different from the one at general law because Mr Walker did not seem to cavil with the basic general law proposition that an interest is vested in this scenario unless or until it is repudiated.  So he has to accept that in this case the interest or the income is vested in the beneficiary, does he not?

MR O’MEARA:   I am not entirely certain, your Honour.  I rather apprehended at one point Mr Walker denied that prior to actual assent there was any vesting of rights, but in any event, in our submission, in section 95A(2), when the statute is referring to “vested”, it is speaking of vested in interest, so it is a right which is not in expectancy any more; it is a presently existing right.  That is how section 95A(2) was interpreted by I think Justice French, as a member of the Federal Court, in first instance in Harmer and again by Justice Hill in Dwight v Federal Commissioner of Taxation.

I think it is also plain that, as at the date of this trust deed, these respondents had a vested interest in the income of the trust estate in the sense that it was not dependent upon any contingency to create that right.  That right then existed.  But the right was, at that date, defeasible and the reference to “indefeasible” in section 95A refers to a vested right which might, thereafter, be defeated by – I think, as your Honour Justice Gordon put it – the trustee doing something or some third party doing something.  In this instance, the vested rights – as at the date of the trust deed – were defeasible by the trustee making an appointment under clause 3.1 of the trust deed.  So, section 95A(2) really gets my learned friend no further and the submissions placed on the basis of that were, in our respectful submission, misplaced.  I hope I have answered your Honour’s question in relation to that.

Can I make some submissions about the reliance on the decision of his Honour Justice Hill in Oates which was a case where the bankruptcy statute, the Bankruptcy Act, annulled a legal status – that is, bankruptcy ab initio, on his Honour Justice Hill’s interpretation of it, where that legal status was a circumstance which the operation of a provision of a tax law – and that was a provision denying the use of losses to a person who became a bankrupt was premised.  So, the operation of the tax law was premised on the continuing assumption of a legal status which another Act, the Bankruptcy Act, denied ever existed.

So it is, as your Honour Justice Gageler pointed out, an example really of the construction of two statutes and not one which, in our respectful submission, sheds a great deal of light on the resolution of this case.  It was put by my learned friend too that there was nothing remarkable about a tax liability yet to be ascertained at year’s end.  But, in our submission, what is at least unusual is that the tax liability is not ascertainable at year end, and that is the difficulty at the heart of the respondents’ submission because what it involves is the whole operation of Division 6 being made dependent on the effluxion of an undefined reasonable period of time after the end of which – after the end of the income year during which the beneficiaries might disclaim the present entitlement.

The operation of the revenue laws in that manner such that the obligations which it would otherwise create as at the end of the income year, operating in a way in which they are not ascertainable is one which would be an usual interpretation and one again which would not commend itself to your Honours. 

Unless there is anything further I can assist your Honours with, those are the submission in reply.

GAGELER J:   Thank you, Mr O’Meara.  The Court reserves its decision in this matter and adjourns until 10.00 am tomorrow.

AT 2.52 PM THE MATTER WAS ADJOURNED