Carter v Commissioner of Taxation [2020] FCAFC 150

Facts

This was an appeal from the Administrative Appeals Tribunal (‘AAT’) (see The Trustee for the Whitby Trust and Commissioner of Taxation (Taxation) [2019] AATA 5637) to the Full Court of the Federal Court of Australia (Thawley, Davies and Jagot JJ). The Applicants were discretionary beneficiaries of the Whitby Trust (‘the Trust’), whose trustee is the Whitby Land Company (‘the Trustee’).

Pursuant to cl 3.7 of the Whitby Trust Deed (‘Trust Deed’), in the event that the Trustee failed to make an effective distribution during the financial year, then the Trustee was deemed to hold, at the end of that year, the income of the Trust on trust for the Applicants. Consequently, the Applicants were takers in default of appointment.

For the 2011-2013 period, the Applicants were issued income tax assessments in respect of these default distributions. The Applicants disclaimed these default distributions by signing deeds of disclaimer, which the Commissioner of Taxation (“the Commissioner”) accepted.

However, in 2014, the Trustee again failed to make an effective distribution and the Applicants again took income in default of appointment. They executed deeds of disclaimer in the same terms as those which were previously accepted by the Commissioner, except for the 2014 income tax year (“the Second Disclaimers”). On this occasion, the Commissioner refused to accept the Second Disclaimers as effective. In response to the Commissioner’s position, the Applicants executed further deeds of disclaimer (‘Third Disclaimers’) seeking to disclaim the default distributions made to them in 2014, addressing the purported faults raised by the Commissioner with the Second Disclaimers.

The Third Disclaimers were also not accepted by the Commissioner, as the Commissioner took the view that they had not been made within a reasonable time, and because the Second Disclaimers (because they were ineffective) amounted to a partial acceptance of the income. Thus the Applicants sought a review in the AAT. The AAT found for the Commissioner, and the Applicants then appealed to the Federal Court.

Arguments

Among a series of other arguments concerning the validity of the Trust’s resolutions, the Applicants primarily argued that the AAT was wrong to decide that the Second and Third Disclaimers were ineffective. The Second Disclaimers were argued to be effective as a matter of law and proper construction. The Third Disclaimers were said to be effective because they were executed within a reasonable time, contrary to what the AAT said.

The Commissioner sought to argue that a disclaimer of income tax could never operate retrospectively, such that once the distribution of income was made – even if the recipient was not aware of it – they could not disclaim it after the fact.

Decision

The Full Federal Court allowed the appeal with costs, agreeing with the Applicants that the Third Disclaimers were effective and were made within a reasonable time, and that if the Second Disclaimers were not effective, they did not constitute “part acceptance” of the income. The Full Federal Court also disagrees with the Commissioner’s argument that a disclaimer could not operate retrospectively, and dismissed the Commissioner’s notice of contention raising this point.