Disclaimer of an Interest in a Trust – Can This Be Tax-Effective? by Sam Campbell, Will Monotti and Ashleigh Eynaud, Sladen Legal
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A matter OF TRUSTS Disclaimer of an interest in a trust – can this be tax-effective? by Sam Campbell, Will Monotti and Ashleigh Eynaud, Sladen Legal Disclaimer by a beneficiary of their interest in a discretionary trust may be tax-effective depending on the nature, and their knowledge, of the interest and the timing of any disclaimer. Introduction disclaimed their interests and any that the Adcock Practice Trust did not fall Depending on the timing and level of entitlement to income that might otherwise into the category of a beneficiary of the knowledge of the particular beneficiary have accrued to them under the trust for SHFT for that financial year, and nor could of their interest, a valid disclaimer the earlier income year. it be appointed as a beneficiary. With the by a beneficiary of their interest in a distribution failing, it was the view of the Ramsden’s case and the discretionary trust may result in them Commissioner that the amount of $429,000 making of an effective had been distributed to the default averting tax liability that may otherwise disclaimer beneficiaries (split four ways, $107,250 flow from that interest. On being informed of an entitlement to any each). Promises to never make a part of the income of a trust, a beneficiary The issue for the court was whether claim may wish to disclaim that entitlement. disclaimers entered into by the default A beneficiary or beneficiaries of a trust may Notwithstanding that it is helpful to beneficiaries a number of years after seek to disclaim their interest in a trust by formalise a disclaimer in a written receiving the assessments from the ATO way of releasing the trustee from all claims, document, it is not obligatory to do so. were effective in validly disclaiming the actions, proceedings, accounts, costs, Any disclaimer of an interest in a trust by distributions. Ultimately, it was held that damages, entitlements, demands and a trust beneficiary must be made to the they were not. other amounts whatsoever that they may trustee of that trust. For a disclaimer to The issue was not that the disclaimers be entitled to as against the trustee and in be valid, it must be supported by some were retrospective. In Ramsden, Lee, respect of the administration of the trust. evidence that the beneficiary is disclaiming Merkel and Hely JJ stated the following:6 This could include a disclaimer from trust their interest. Silence or otherwise passive “Until disclaimer, a beneficiary’s entitlement 1 distributions. behaviour will not suffice.4 to income under a trust is operative for the purposes of s 97 of ITAA from the moment it Why would a disclaimer be In the High Court decision of Cornell, 5 arises notwithstanding that the beneficiary has implemented? Latham CJ noted the following: no knowledge of it (Federal Commissioner of “A devise, however, being prima facie for the A beneficiary of a trust may wish to Taxation v Vegners (1989) 89 ATC 5274; (1991) devisee’s benefit, he is supposed to assent to it, disclaim their interest in the trust for: 91 ATC 4213 at 4215). A beneficiary may until he does some act to show his dissent. The personal or family reasons (acceptance disclaim an entitlement on its coming to his or her law presumes that he will assent until the contrary of a distribution might trigger a family knowledge. At law an effective disclaimer operates be proved; when the contrary, however, is proved, dispute); retrospectively, and not merely from the time of it shows that he never did assent to the devise, disclaimer.” possible bankruptcy concerns; and and, consequently, that the estate never was relationship breakdown concerns. in him.” The Commissioner has accepted the retrospective operation of a valid There may also be financial reasons for A crucial aspect of Ramsden was the disclaimer:7 wishing to disclaim an interest in a trust, determination that any gift disclaimed by including ensuring that an unwanted capital a trust beneficiary must be of the gift in its “If a discretionary beneficiary repudiates a benefit 2 gain is not derived. If there are unwanted entirety. The four applicants in Ramsden of the trust when he or she becomes aware of his or her entitlement, such a disclaimer would have capital gains tax outcomes from receiving were the default beneficiaries of the Steve a retroactive effect and the transfer of property a gift from an inter vivos discretionary trust, Hart Family Trust (SHFT), a discretionary would be void ab initio. The trust probably revests for example, a beneficiary may wish to trust. From the minutes of a meeting of in the trustee and, in effect, it never passes from disclaim their interest. directors of the trustee company, the the trustee”. The Full Federal Court decision of trustee purportedly distributed an amount Ramsden,3 a landmark decision in relation of $429,000 to a trust known as the Adcock The failure of the disclaimers in Ramsden to disclaimers, looked at whether a group Practice Trust during the financial year was due essentially to two factors: (1) that of beneficiaries to a trust had successfully ending 30 June 1996. It was held, however, the disclaimers had purported to only 538 TAXATION IN AUSTRALIA | APRIL 2016 A matter OF TRUSTS disclaim part of the distribution; and the abandonment, surrender or forfeiture of that distribution. That the beneficiary (2) because the disclaimers had not, within of the interest. For practical purposes, subsequently wished to reverse this a reasonable time of becoming aware of where the cost base and market value distribution in order to bring about a better the distribution, disclaimed it. of this interest is nil, then there may not tax outcome was not a reason in itself for be a capital gain. This position may be the trustee to resile from the distribution A disclaimer must be an actual different, however, if the beneficiary has an (resolution) that had been made. disclaimer of all interest interest in either the assets or the income The default beneficiaries in Ramsden of the trust before or after the exercise Timing of an effective attempted to disclaim only the entitlement of any discretion by the trustee as to the disclaimer – Alderton resulting from the failed distribution to allocation of those assets or income (such Any disclaimer of interest in a trust must the Adcock Practice Trust in the income as in the case of a default beneficiary). be prompt to ensure validity. In Ramsden, year ending 30 June 1996, in lieu of the In these circumstances, a capital gain is the disclaimers were not made for a whole distribution. In general terms, the more likely to be made by the beneficiary number of years, and the court described nature of a gift given to a trust beneficiary (assuming their interest was acquired the period between the receipt of the will depend on the way the trust deed is on or after 20 September 1985) on the ATO’s notices and the disclaimers as termed. In Ramsden, the court was able basis that the interest at the time of being “well in excess of a reasonable to distinguish between the entitlements renunciation, even if it has nil cost base, period”.13 Any beneficiaries wishing to received by default and by discretionary may have significant value.9 While any disclaim an entitlement resulting from a beneficiaries pursuant to provisions such CGT consequences would usually sit distribution from a trust should therefore of the trust deed. The interest of a with the beneficiary, the consequence of do so as soon as practicable after they default beneficiary in the trust was to be amendments to a trust deed to exclude a have become aware of the entitlement characterised as a single entitlement, beneficiary from a discretionary trust deed being created. whereas each distribution of trust income need to be considered as this may, unless The recent AAT decision of Alderton, to a discretionary beneficiary in any given any such change is either made pursuant supporting the analysis reached accounting year was to be deemed a to a valid exercise of a power under the in Nguyen on the timing of a valid separate and discrete entitlement. This trust deed or varied with court approval, disclaimer, provides further clarification meant that any disclaimer by a default result in the creation of a new trust and as to the timing of a valid disclaimer.14 beneficiary of the trust had to be of the the occurrence of CGT event E1.10 In Alderton, the applicant, Ms Alderton, interest in the trust in its entirety, meaning had been in a de facto relationship for that the claimants in Ramsden could not When considering the effectiveness of a 10 years with her partner, Mr Trapperton. effectively disclaim only their interest in removal of a beneficiary of a discretionary Ms Alderton relied entirely on her partner the income of the trust for the income year trust compared to a disclaimer of an for financial support. Initially, funds were ended 30 June 1996. This is confirmed by interest in a trust, the outcome in the AAT 11 transferred from Mr Trapperton’s bank an earlier decision of the Administrative case of Nguyen and FCT should also account to Ms Alderton’s bank account. Appeals Tribunal (AAT) in which it was be considered. In Nguyen, the applicant, Some years into the relationship, this held that a disclaimer must be “an actual a beneficiary of a discretionary trust, arrangement changed and Mr Trapperton disclaimer of all interest”.8 attempted to renounce her interest as a discretionary object of a trust.