With 30th of June fast approaching, accountants, financial planners and trustees of trusts should be aware of the recent changes to the taxation of trusts as outlined in a recent decision of the High Court.
All trustees of discretionary trusts and testamentary trusts need to start planning for distributions from the trust and the potential consequences for beneficiaries and even for those beneficiaries who do not receive any distribution from the trust in a financial year.
The recent High Court case highlights the need for trustees to ensure that careful consideration is given to trust distributions before the end of every financial year.
In Commissioner of Taxation v Natalie Carter & Ors, the trustee of a trust did not pay, set aside or accumulate trust income prior to the end of the 2011 to 2014 financial years. According to the deed of the trust, the trustee held the trust income for those financial years on trust for the default beneficiaries.
The ATO assessed the default beneficiaries as being ‘presently entitled’ to the income of the trust for the 2011 to 2014 financial years. The ATO issued amended notices of assessment for these financial years to each of the default beneficiaries, notwithstanding that none of the beneficiaries had actually received the funds to which they were ‘presently entitled’.
The beneficiaries tried to disclaim their interest in the trust income for the relevant financial years. The initial attempts purported to disclaim the beneficiaries’ interest in the trust income in each relevant financial year. The beneficiaries signed a further disclaimer which was drafted taking into account relevant case law.
The High Court held that:
- notwithstanding the terms of the deed of disclaimer, the beneficiaries could not disclaim the trust income retrospectively;
- when considering whether a beneficiary was ‘presently entitled’ to trust income in a particular financial year, the position existing immediately prior to the end of that financial year is relevant; and
- any disclaimer made after the end of that financial year should not be taken into account.
Presumption of Assent
The High Court also rejected the beneficiary’s contention that they were not presently entitled to the income because the “presumption of assent” requires the recipient to assent to receiving the gift.
The High Court explained that the presumption of assent is not an evidentiary presumption that can be rebutted, it is a presumption of law, and that a gift can vest in the recipient before the recipient assents to receiving the gift.
What trustees should consider
Trustees need to make sure that trust beneficiaries are not adversely affected by decisions that the trustee has made (or not made) regarding trust distributions.
Trustees can do this by ensuring that:
- prior to 30 June each year, they seek tax planning advice regarding the income earned in the trust and how this income should be dealt with; and
- any disclaimer to distributions be prepared and documented in a timely manner to prevent any adverse tax issues.
Seek Legal and Tax Advice
This information and contents of this alert is general in nature. It should not be regarded as legal or tax advice. If you are concerned about any topic covered in the alert, we recommend that you seek legal and tax advice.
About Our Tax + Revenue Group
We work with business owners, investment groups and developers to navigate the complexity of tax and revenue law in Australia and overseas.
Our team has successfully defended clients in the Administrative Appeal Tribunal (AAT), Australian Tax Office and State Revenue audits and objections.
Helping our clients resolve tax and revenue disputes efficiently, Thynne + Macartney is a pivotal partner in the growth of their business and personal wealth.
Whatever your business needs – we’re with you.
About Danh Nguyen
With over 12 years’ legal and tax experience, Danh provides strategic taxation and commercial advice to clients on their existing businesses, investments and structures, as well as inbound and outbound investments.
He works for corporates, high net worth individuals, family offices, property developers, Australian and Asian based private equity firms and medium to large businesses to deliver solutions for tax efficiencies, capital raising, leveraged buyout, strategic partnerships and mergers and acquisitions.
About Vicky Martin
Vicky has more than 30 years’ experience working in the legal industry and is an Associate in the Wills + Estates team at Thynne + Macartney. She has the knowledge and skill to interpret the complexities of the law and deliver workable solutions to clients.
Vicky helps clients understand the most appropriate estate plan for their situation, and then helps them prepare their Wills, Enduring Power of Attorneys, Advance Health Directives, Binding Death Benefit Nominations and all other estate planning needs.