A disclaimer of trust interests can have potential application in some common scenarios, such as those set out below.
Mary finds out in March 2021 that she has been identified as a potential beneficiary for a discretionary trust operated by her father. Her father appoints income to her as at 30 June 2020. The appointment of income has not been paid to Mary. In fact, as at 30 June 2020, the trust has no assets or the ability to pay the beneficiaries of the trust.
Question: Is Mary liable for the tax payable on the income appointed to her? Can Mary do something so that she is not liable for tax on amounts that she has not been received? In particular, can Mary disclaim her interests and will it be effective for income tax purposes, retrospectively and/or prospectively?
You are a trustee of a trust, and you appoint income or capital to beneficiaries. Are they obliged to receive that amount?
Question: Can the beneficiaries avoid, disclaim or gift back the entitlement? What is the effect (including tax consequences) on the residuary beneficiaries or the trustee of the trust for those actions? Is the amount that is disclaimed or gifted back assessable income or capital gains for the trustee, and who pays tax on the amounts disclaimed or gifted back (if at all)?
A company owned and controlled by you has been issued with payroll tax assessments totalling $500,000, and was put into liquidation by you.
The Commissioner of State Revenue determines that the insolvent company is grouped for payroll tax purposes with a trust controlled by your brother and a trust originally established for your parents. Grouping occurs because you are a discretionary beneficiary of the trust controlled by your brother and the trust established for your parents, such that you are taken to have a controlling interest in each of those trusts (as well as the insolvent company that you own).
Your parents’ trustee of their trust and your brother’s trustee of his trust are not thrilled with the prospect of joint and several liability for your insolvent company’s payroll tax liability.
Question: can you disclaim your entitlement (retrospectively) in your parents’ trust or your brother’s trust so that those trusts are not jointly and severally liable for the payroll tax liability?
DISCLAIMERS VERSUS TRUST DEED VARIATIONS
Clients are advised to seek specialist advice about the income tax, payroll tax and duty consequences of:
- a beneficiary disclaiming trust interests; and
- a trustee (and possibly beneficiaries) varying a trust deed to remove a beneficiary.
USE OF DISCLAIMERS
For Private Client areas of the firm, disclaimers are used for a variety of circumstances, including:
- in estate law matters, a beneficiary may not wish to receive a testamentary gift, and upon suitable income tax and duty advice, a disclaimer of that entitlement under a will can occur;
- in family law matters, a former spouse may be required to state in writing that they forfeit their interests as beneficiaries of the trust, which can show financiers that the former spouse has no interest in a trust; and
- in revenue and taxation advice and tax controversy matters, disclaimers can be used to manage the tax risks for children and other beneficiaries who are sometimes surprised to find they have tax liabilities for tax law net income in respect of amounts that they have no knowledge of.
For Business and Corporate and Commercial Advisory areas of the firm, disclaimers are considered (in the context of other solutions) in a variety of circumstances, including:
- to manage payroll tax liabilities for groups where grouping occurs;
- to prevent unnecessary Foreign Investment Review Board (FIRB) consequences for beneficiaries who do not participate in a discretionary trust; and
- to manage the risks of additional foreign purchaser duty and land tax surcharges where the class of beneficiaries includes foreign persons.
WHAT IS THE STATE OF THE LAW?
There are some key cases of recent times that have looked at the common law, and the corresponding payroll tax and income tax effects of disclaimers.
The recent case of Carter involved an application by the Commissioner of Taxation to appeal a federal court judgement (Carter v Commissioner of Taxation  FCAFC 150) to obtain clarity on how disclaimers work from an income tax perspective.
The application for special leave to appeal to the High Court was granted on Friday 16 April 2021, and the outcome of that case will be a matter of significant interest for both general law and income tax purposes.
TOP ISSUES FOR DISCLAIMERS
Here are some of the legal issues that arise in relation to disclaimers:
- Can someone be a beneficiary of a trust without their knowledge?
- Is it possible for a potential beneficiary to have disclaimed their right as a discretionary object, independent of whether or not they are a residuary or taker in default beneficiary?
- Whether it is possible for a residuary or taker in default beneficiary to have disclaimed their rights in:
- Trust entitlements in respect of one or more specific years of income or amounts appointed; or
- the whole of any interest in a trust?
- Does a beneficiary’s right as a discretionary object amount to “property” and, therefore, is there any property interest to disclaim?
- If the trustee exercised its discretion to appoint capital or income to the beneficiary, is that time (and only that time), the time at which a beneficiary can disclaim the proposed distribution?
- Should a disclaimer of rights be effected by a deed poll, and without consideration provided to the surrender of those rights? Can it be done without a deed poll?
- When is a beneficiary considered to have accepted its position as a residuary or taker in default beneficiary, or a discretionary object of the trust?
- Whether disclaimers can operate retrospectively at common law?
- Whether disclaimers that purport to operate retrospectively are effective in relation to payroll tax liabilities?
- Whether disclaimers that purport to operate retrospectively are effective for income tax purposes?
HOW WE CAN HELP
McInnes Wilson Lawyers can assist you by:
- advising on the risks associated with the state of flux in which retrospective disclaimers are put because of the appeal to the High Court in Carter;
- drafting discretionary trust deeds to limit the risks associated with having beneficiary classes cast too widely, which can trigger income tax, payroll tax, and (more recently) additional foreign acquirer duty, land tax foreign surcharge and FIRB restrictions;
- advising on who should be the residuary or taker in default beneficiary (if at all) in new trust deeds, given the risks for disclaimers given by that category of beneficiary;
- advising a trustee on whether a purported trust disclaimer by a beneficiary or potential beneficiary is effective;
- advising a beneficiary or potential beneficiary on whether a purported trust disclaimer is effective;
- advising on the income tax effects of a disclaimer;
- advising on whether payroll tax grouping (and the resulting joint and several liability for payroll tax) can be managed by use of a retrospective or prospective disclaimer; and
- advising on the transfer duty, and other state tax effects of disclaimers and changes to beneficiaries of trusts.