The ATO has released a Decision Impact Statement following the matter of Commissioner of Taxation v Carter in which the High Court provided clarity on the tax consequences of situations involving legally valid trust disclaimers.
The High Court’s decision in Carter settled a practical question as to how trust income is to be taxed when relevant trust entitlements are validly disclaimed by a beneficiary sometime after year end.
Importantly, the Court’s decision does not adversely impact people who are beneficiaries of a trust and wish to retain their trust entitlements.
The ATO funded the taxpayer’s costs in this matter because the uncertainty in how the tax law operated when a beneficiary disclaims an entitlement was significant to tax administration.
- In particular, the ATO was concerned that a beneficiary could intentionally avoid the incidence of tax by disclaiming an entitlement after year end and that, in certain cases, a late disclaimer could have been part of a scheme with the effect that the underlying income was never taxed to anyone.
- the actions of such a beneficiary could have adverse implications for others with an interest in the trust, without them knowing or having a say in this.
As the end of the financial year approaches, it is important for beneficiaries to be aware of their trust entitlements as well as the steps they can take to call for payment of their entitlement, and for trustees and beneficiaries to be aware of the taxation consequences which flow from trust entitlements.
The ATO encourages trustees and taxpayers with trusts in their family groups to consider the tax implications from proposed entitlements before the end of the financial year, and to give themselves time to seek advice, if necessary, so that the tax implications are understood by both the trustee and the beneficiaries before the proposed entitlements are made.
The ATO also encourages beneficiaries of trusts to exercise particular caution before disclaiming an entitlement from a trust. Further, if they have a tax obligation arising from an entitlement and the entitlement is not subsequently distributed to them, to seek advice as to how to compel the trust to distribute that amount.
This is consistent with the reality that trustees have broad obligations to act in the interests of their beneficiaries and cannot act to deliberately manufacture unfair outcomes for them.
Further detail on the ATO’s view on this matter is now available through a Decision Impact Statement.