Commissioner of Taxation v Carter  HCA 10 (Carter)
On 6 April 2022, the High Court delivered its judgment in Carter and confirmed that a resident beneficiary (with no legal disability) will be ‘presently entitled’ and so taxed on the income of a trust under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) – notwithstanding that a reasonable period has not yet elapsed after the end of the income year for the beneficiary to have disclaimed that entitlement.
Relevantly, the High Court held that Division 6 of the ITAA 1936 taxes a resident beneficiary who is ‘presently entitled’ to a share of the income of the trust estate immediately before the end of an income year, and the term ‘presently entitled’:
- is expressed in the present tense
- is directed to the position existing immediately before the end of the income year
- is determined at a point in time just prior to midnight at the end of the year of income
- targets those beneficiaries who have an interest in income of the trust that is vested in interest and possession.
Notwithstanding that a beneficiary could subsequently disclaim their interest, the beneficiary had a present legal right to demand and receive payment of a share of the income of a trust estate.
The court also explained that there is a presumption of assent which:
- is not an evidentiary presumption that can be rebutted, but is rather a presumption of law
- recognises that a gift can vest before the donee actually assents
- is based on the fundamental attributes of human nature
- presumes a donee has accepted the gift until disclaimer
- applies immediately before the end of the income year.
The presumption of assent meant that regardless of whether the subsequent disclaimers were effective, they could not have been effective to ‘retrospectively expunge’ the rights of the Commissioner against the taxpayers, which were in existence at midnight on 30 June 2014 and which gave rise to the assessments.
The High Court held that to find otherwise would:
- be contrary to the text and object of Division 6 of the ITAA 1936
- give rise to uncertainty that could not be resolved for a substantial period of time
- give rise to uncertainties that would not be fair, convenient or efficient for the Commissioner, trustees, beneficiaries and even settlors.
Beneficiaries who subsequently discover their entitlement to income should be careful before disclaiming their interest – because while the disclaimer may be effective at law, it will not be effective to retrospectively expunge their tax liability.
For further information regarding the above, please contact the author, or any member of our Tax team.
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