ATO Decision Impact of High Court Carter decision ' Disclaiming an interest in a discretionary trust must be done before 30 June

• Published date: 13 July 2022
• Law Firm: Pointon Partners
• Author: Mr Tony Pointon and Andrew Pointon

The High Court case of Commissioner of Taxation v Carter [2022] HCA 10 confirmed that the right to trust income is decided by the Trustee on or before 30 June of any year and any retrospective disclaiming is of no effect in respect of income taxation liability. It is noted that this is the effect of the construction of section 97 of the Income Taxation Act 1936 that deals with trust income.

The provision set out the entitlement to income and with entitlement comes the taxation liability. This is regardless of the receipt of the income by the beneficiary, although at law the beneficiary should be able to legally recover the amount. Practical issues concerning recovery of a beneficiary entitlement from the trustee may mean this becomes an unhappy situation for the beneficiary where the process of taking action itself or the recovery of money becomes problematical. The tax debt will be real and recoverable by the Commissioner against the beneficiary regardless of the beneficiary being able to access the money.

Generally the beneficiary of a trust is connected by family to the trustee and will be aware of the decision of the trustee and their entitlement. A problem will however arise if the trustee does not advise the beneficiary. This may happen inadvertently or during family disputes.

If you believe there is a significant risk of receiving an entitlement, but not likely to receive the entitlement, being reasonably able to access the money upon request or sure that the taxation liability is to be paid, you may wish to consider disclaiming an interest in the trust.

Further, if you believe that you are a beneficiary who has not been paid their entitlement then you may consider taking legal action for recovery against the Trustee. This will especially be the case when the beneficiary first becomes aware of the beneficiary entitlement but is unhappy with the explanation of the Trustee as to how the taxation liability is proposed to be or is being attended to. If the taxation liability arises and remains unpaid against the beneficiaries expectations, the beneficiary will be personally liable and must take action against the Trustee.

The position does differ from the position of disclaimer for inherited interests in wills for capital gains tax whereby the right can be disclaimed when a beneficiary first becomes aware of the right. An effective disclaimer must be intentional and show unequivocally that the nominated life or remainder owner rejects their interest...