• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Carter (S62/2021).

FC of T v Carter & Ors

Judges:
Gageler J
Gordon J
Edelman J
Steward J
Gleeson J

Court:
High Court of Australia, Full Court

MEDIA NEUTRAL CITATION: [2022] HCA 10

Judgment date: 6 April 2022

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Gageler, Gordon, Steward and Gleeson JJ

1. This appeal concerns Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ), headed " Trust income " . The primary provision in Div 6, s 96 ^[1] See Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 at 502 [22] . , states: " Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate " . Section 96 reflects that, in Div 6, the basic income tax treatment of the net income of a trust estate is to assess the beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate ^[2] 1936 Act, s 95AAA. . The trust is the mere conduit through which the beneficiaries under the trust receive income and are assessed ^[3] Bamford (2010) 240 CLR 481 at 502 [20] , quoting Ford, “ Income and Estate Taxation Affecting Trusts ” (1958) 1 Melbourne University Law Review 419 at 420. .

2. That basic income tax treatment, from the perspective of the beneficiary, is addressed in s 97(1), which relevantly states:

" Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate :

• (a) the assessable income of the beneficiary shall include:
  • (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia … " (emphasis added)

3. A criterion on which s 97(1) operates is that a beneficiary " is presently entitled to a share of the income of the trust estate " (emphasis added). For the purposes of that sub-section, a beneficiary is presently entitled to a share of the income of a trust estate " if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment " ^[4] Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271 , quoted in Bamford (2010) 240 CLR 481 at 505 [37] . .

4. The issue in this appeal is one of timing. Specifically, is a beneficiary ' s present entitlement under s 97(1) - the present legal right to demand and receive payment of a share of the income of a trust estate - to be

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determined immediately prior to the end of a year of income by reference to the legal relationships then in existence, or can events after the end of the year of income, which may affect or alter those legal relationships, be considered?

5. That issue arises in the following circumstances.

6. The Whitby Trust was settled on 27 July 2005. Mr Allen Bruce Caratti and his daughter Alisha were joint Guardians. The power to appoint income, contained in cl 3.1 of the Trust Deed for the Whitby Trust, provided that:

" At any time before the expiration of any Accounting Period, the Trustee may, with respect to all or any part of the net income of the Trust Fund for that Accounting Period, determine:

• (1) to pay, apply or set aside all or any part of the income to or for any one or more of the Beneficiaries living or existing at the time of the determination; or
• (2) to accumulate all or any part of the income. "

" Accounting Period " was relevantly defined as each period of 12 months ending on 30 June. In the Accounting Period ended 30 June 2014, the income year in issue in this appeal, the Trustee failed to appoint or accumulate any of the income of the Trust Fund.

7. Clause 3.7 of the Trust Deed then provided for the default distribution of income if the Trustee failed to make a determination under cl 3.1. Clause 3.7 stated:

" If in relation to any Accounting Period, the Trustee has made no effective determination pursuant to the preceding provisions of this clause in respect to any part of the income of that Accounting Period immediately prior to the end of the last day of that Accounting Period , then the Trustee shall hold that income in trust successively for the persons who are living or existing on the last day of that Accounting Period and who are successively described in clauses 4.1 to 4.5 (inclusive) as though that last day of the relevant Accounting Period were the Vesting Day. " (emphasis added)

8. As is self-evident, the purpose and effect of the default distribution clause was to ensure that in each Accounting Period the whole of the income of the Whitby Trust was distributed, if not otherwise dealt with. No income remained with the Trustee. Clause 3.7 operated " immediately prior to the end of the last day of [the] Accounting Period " and distributed all of the income of the Whitby Trust successively to the persons identified in cll 4.1 to 4.5.

9. Clause 4 relevantly provided:

" As from the Vesting Day, the Trustee shall hold the Trust Fund:

• 4.1 in trust for such one or more of the General Beneficiaries for such interests and in such proportions and for one to the exclusion of the others as the Trustee may subject to clause 16 appoint by deed before the Vesting Day and the appointment may be either revocable or irrevocable (but if revocable shall be revocable only until the end of the day preceding the Vesting Day when it shall become irrevocable);
• 4.2 in default of appointment and subject to any partial appointment under the preceding paragraph , in trust for such of the Primary Beneficiaries as shall be living at the Vesting Day as tenants in common in equal shares BUT if any Primary Beneficiary dies before the Vesting Day leaving issue living at the Vesting Day, that issue shall take as tenants in common in equal shares per stirpes the share which the deceased Primary Beneficiary would have received had he or she survived to the Vesting Day … " (emphasis added)

10. The Trustee having failed to appoint or accumulate the income of the Whitby Trust in the 2014 income year, the income of the Trust was distributed to the Primary Beneficiaries of the Trust, who were Mr Caratti ' s children - Natalie, Alisha, Nicole, Christina and Benjamin ^[5] Natalie, Alisha and Nicole are the respondents in this appeal. . As a result, consistently with cl 4.2, one-fifth of the income of the Trust was distributed to each of Mr Caratti ' s children. Thus, the combined operation of cll 3.1, 3.7 and 4.2 was such that " immediately prior to the end of the last day " of the 2014 income

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year, one-fifth of the income of the Whitby Trust was held on trust for each of Mr Caratti ' s children.

11. On 27 October 2015, the Commissioner of Taxation ( " the Commissioner " ) issued an amended assessment to each respondent for the 2014 income year which included as assessable income one-fifth of the income of the Whitby Trust on the basis that the respondents were " presently entitled " to that income within the meaning of s 97(1) ( " the 2014 Assessments " ).

12. On 3 and 4 November 2015, the respondents executed deeds of disclaimer in respect of their default distributions under cl 3.7 for the 2014 income year. Those disclaimers were ineffective. On 30 September 2016, the respondents executed further disclaimers ( " the Third Disclaimers " ) disclaiming any and all right title and interest conferred by the Trust Deed to any income and, without limiting the generality of that disclaimer, disclaiming any and all right title and interest conferred by cl 3.7 of the Trust Deed.

13. The respondents objected to the 2014 Assessments, contending, among other grounds, that each had validly disclaimed the relevant cl 3.7 distribution by the Third Disclaimers.

14. The Administrative Appeals Tribunal held that the Third Disclaimers were ineffective because they were made after the respondents, with knowledge, had failed to disclaim and had accepted the gifts.

15. The respondents appealed to the Federal Court of Australia on a question of law against, among other things, the Tribunal ' s finding that the Third Disclaimers were ineffective. By notice of contention, the Commissioner relevantly contended that the Third Disclaimers, even if effective at general law, did not retrospectively disapply s 97(1) of the 1936 Act.

16. The Full Court of the Federal Court held that the Third Disclaimers were effective and dismissed the Commissioner ' s notice of contention. Relevantly, the Full Court held that there was nothing in s 97(1) of the 1936 Act to indicate that a beneficiary ' s liability was to be determined once and for all at the end of the income year by reference to the legal relationships then in existence. The Commissioner appealed to this Court on the sole ground that the Full Court erred in finding that the Third Disclaimers operated retrospectively so as to disapply s 97(1) in respect of the 2014 income year.

17. The appeal turns on the proper construction of Div 6 of Pt III of the 1936 Act and, in particular, s 97(1) ^[6] Bamford (2010) 240 CLR 481 at 501 [17] . See, eg, Harmer (1991) 173 CLR 264 at 271 . See also Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd (2017) 106 ATR 151 at 172-173 [103]-[108] . . The basic income tax treatment of the net income of a trust estate under Div 6 has been stated above - to assess the beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate.

18. Consistently with that stated object, s 97(1) provides that, where a beneficiary " is presently entitled to a share of the income of the trust estate " , the " assessable income " ^[7] 1936 Act, s 6(1) definition of “ assessable income ” , incorporating definition of “ assessable income ” in Income Tax Assessment Act 1997 (Cth) ( “ the 1997 Act ” ), s 995-1(1), which provides that “ assessable income ” has the meaning given by ss 6-5, 6-10, 6-15, 17-10 and 17-30 of the 1997 Act. Relevantly, s 6-5(2) provides that, in the case of an Australian resident, assessable income includes “ ordinary income … derived directly or indirectly from all sources … during the income year ” (emphasis added). of the beneficiary shall include, relevantly, so much of that share of the " net income " ^[8] 1936 Act, s 95(1) definition of “ net income ” . of the trust estate as is attributable to a period when the beneficiary was a resident.

19. The phrase " is presently entitled to a share of the income of the trust estate " in s 97(1) is expressed in the present tense ^[9] cf Smeaton Grange (2017) 106 ATR 151 at 179 [136] . . It is directed to the position existing immediately before the end of the income year for the stated purpose of identifying the beneficiaries who are to be assessed with the income of the trust - namely, those beneficiaries of the trust who, as well as having an interest in the income of the trust which is vested both in interest and in possession ^[10] See Dwight v Commissioner of Taxation (1992) 37 FCR 178 at 192 , citing Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496, 501 . See also Gartside v Inland Revenue Commissioners [1968] AC 553 at 607 . , have a present legal right to demand and receive payment of the income.

20. In some cases, the two limbs of " presently entitled " recognised in
Federal Commissioner of Taxation v Bamford ^[11] (2010) 240 CLR 481 at 505 [37] . will overlap ^[12] cf Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 at 451-452 . . For present purposes, the relevant criterion in s 97(1) is the present legal right of the beneficiary to demand and receive payment of a share of the distributable income of a trust estate. The criterion for liability looks to the right to receive an amount of distributable income, not the receipt ^[13] Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 at 215-216, 219 ; Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608 at 618 ; see also 1936 Act, s 95A. . That position is expressly reinforced in s 95A(1) - enacted in response to the decision of this Court in
Union-Fidelity Trustee Co of Australia Ltd v Federal Commissioner of Taxation ^[14] (1969) 119 CLR 177 at 182 . See Commissioner of Taxation v Harmer (1990) 24 FCR 237 at 248-249 ; Hart v Federal Commissioner of Taxation (2018) 261 FCR 406 at 434 [53] . - which makes clear that a present entitlement of a beneficiary under s 97(1) does not depend upon receipt of the income. Section 95A(1) was enacted to ensure that a present entitlement retains its character as such even if the income has been

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" paid to, or applied for the benefit of, the beneficiary " . Indeed, there may be a right to demand payment even though the trustee does not have funds available to pay it ^[15] Bamford (2010) 240 CLR 481 at 505 [37] , quoting Harmer (1991) 173 CLR 264 at 271 . .

21. The fact that s 97(1) is directed to identifying the legal right of the beneficiary immediately prior to the end of the year of income is important. In relation to each trust estate, once the beneficiaries with those rights are identified, it permits the balance of s 97(1) to operate and, consistently with the stated purpose of Div 6, provides for those beneficiaries to be assessed on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate. As this Court recognised in Bamford , the beneficiaries may be presently entitled immediately before the end of the income year " whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment " ^[16] (2010) 240 CLR 481 at 505 [37] , quoting Harmer (1991) 173 CLR 264 at 271 . .

22. Put in different terms, the taxation liability of the beneficiaries is determined by ascertaining the proportion of the distributable income of the trust estate to which each beneficiary is presently entitled at that point in time - just prior to midnight at the end of the year of income - and then applying that proportion to the " net income of the trust estate " . That has practical significance. The stepped process in s 97(1) identifies the beneficiaries who are to be assessed at the end of the income year, permits the " net income of the trust estate " to be determined for that income year in the usual way and then enables the quantum of tax payable by the beneficiary to be calculated and subsequently assessed ^[17] Income Tax Act 1986 (Cth), ss 5 and 7. See Bamford (2010) 240 CLR 481 at 507-508 [45], quoting Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 74-75 . .

23. The other relevant criteria in s 97(1) - that a beneficiary is not under any legal disability and is a resident - reinforce the conclusion that a beneficiary ' s present entitlement is determined immediately before the end of the income year. Those criteria, ascertained during and at the end of the income year, are conditions or circumstances which cannot be altered by facts and matters subsequent to the relevant income year. Moreover, ss 98, 99 and 99A also operate by reference to facts, events and legal relationships in existence at the end of the income year ^[18] The same approach applies for the purposes of taxing the net income of a partnership under Div 5 of Pt III of the 1936 Act: Federal Commissioner of Taxation v Galland (1986) 162 CLR 408 at 414-415, 418-419, 422, 424 . , which cannot be altered after the end of the income year.

24. The respondents ' contention that the phrase " is presently entitled " should be construed to mean " really is " presently entitled (emphasis added) for that income year, such that, for " a reasonable period " after the end of the income year, later events could subsequently disentitle a beneficiary who was presently entitled immediately before the end of the income year, is rejected. The respondents ' construction is contrary to the text of s 97(1) and the object and purpose of Div 6 identified above. It would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate and the subsequent assessment of those beneficiaries. On the respondents ' construction, whether a beneficiary was presently entitled to a share of the income of a trust estate may not be resolved for a substantial period of time and, in some cases, such as the present, for years ^[19] cf Smeaton Grange (2017) 106 ATR 151 at 157 [22] . . The uncertainties that would arise, and which would apply with equal force to the Commissioner, trustees, beneficiaries and perhaps even settlors, would also not be fair, convenient or efficient ^[20] cf Smith, An Inquiry into the Nature and Causes of the Wealth of Nations , 4th ed (1850), bk v, ch ii at 371-372. .

25. For those reasons, the question of the " present entitlement " of a beneficiary to income of a trust must be tested and examined " at the close of the taxation year " ^[21] Union-Fidelity (1969) 119 CLR 177 at 182 ; see also 183. , not some reasonable period of time after the end of the taxation year.

26. This Court recognised in
Bamford ^[22] (2010) 240 CLR 481 at 500 [17] . that in competing constructions of Div 6 examples can readily be given of apparent unfairness in the resulting administration of the legislation. Thus, in addressing the fact that a beneficiary might ultimately not receive the trust income to which they were entitled, the Court in
Bamford ^[23] (2010) 240 CLR 481 at 507-508 [45] , quoting Zeta Force (1998) 84 FCR 70 at 74-75 . recognised that any such insufficiency arises because the beneficiary ' s tax liability under s 97(1) is determined by reference to the " net income " of the trust estate, not the distributable income. Similarly, here, the construction which has been adopted means that a beneficiary might be presently entitled at the end of an income year but be unaware of it. That unfairness arises because Div 6, and s 97(1) in particular, is drafted

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to tax a beneficiary by reference to present entitlement, not receipt ^[24] Bamford (2010) 240 CLR 481 at 505 [37] , quoting Harmer (1991) 173 CLR 264 at 271 . .

Presumption of assent

27. Given the construction of s 97(1) which has been adopted, it is unnecessary to address the content and effect of the Third Disclaimers. Whether or not they were effective to vary the rights and obligations of the Trustee and the respondents, they were not effective to " retrospectively expunge[] " ^[25] Smeaton Grange (2017) 106 ATR 151 at 181 [146]. the rights of the Commissioner against the respondents which were in existence at midnight on 30 June 2014 and which gave rise to the 2014 Assessments ^[26] See Federal Commissioner of Taxation v H (2010) 188 FCR 440 at 448 [39] . .

28. It is appropriate, however, to address and reject the respondents ' contention that they were not presently entitled to the income within the meaning of s 97(1) because the presumption of assent - that the donee (the beneficiary) assents to a gift - is an evidentiary presumption or inference that may be rebutted and that the Third Disclaimers were evidence of the rebuttal. The respondents ' contention was that, when the " evidentiary presumption " is rebutted, the result is that " one of the elements necessary for an effective gift is, and at all times has been, missing " .

29. There is a distinction between legal and evidentiary presumptions. In
Masson v Parsons ^[27] (2019) 266 CLR 554 at 575-576 [32] (footnotes omitted). See also R v Falconer (1990) 171 CLR 30 at 83 ; Weissensteiner v The Queen (1993) 178 CLR 217 at 242-243 ; Phipson on Evidence , 19th ed (2018) at 172 [6-19]; Cross on Evidence , 13th Aust ed (2021) at 383-384 [7255]-[7260]. , six members of the Court said:

" A presumption of fact, or evidentiary presumption, is a traditional inference, based on logic and common sense, which a tribunal of fact ordinarily draws from basic facts, particularly circumstantial evidence. By contrast, a presumption of law is a legal rule that gives additional force to some basic facts in the proof of the presumed fact, by permitting or requiring an inference from the former to the latter. If a presumption of the latter kind is rebuttable and so merely facilitates proof of the presumed fact, it is properly to be conceived of as a rule of law ' relating to evidence ' " . (emphasis in original)

30. The presumption of assent - that when there is a transfer of property to a person, the donee assents even before they know of the transfer - is a " strong presumption of law " ^[28] Matthews v Matthews (1913) 17 CLR 8 at 44 ; see also 20, 43. . Recognising that a gift " requires the assent of both minds " ^[29] Hill v Wilson (1873) LR 8 Ch App 888 at 896 , quoted in Matthews (1913) 17 CLR 8 at 20 . and that the subject matter of a gift can vest in a donee before the donee actually assents ^[30] Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394 at 401-402 . See also Thompson v Leach (1690) 2 Vent 198 at 202-203 [86 ER 391 at 393-394]; Siggers v Evans (1855) 5 El & Bl 367 at 382 [119 ER 518 at 524]; Standing v Bowring (1885) 31 Ch D 282 at 290 ; London and County Banking Co Ltd v London and River Plate Bank Ltd (1888) 21 QBD 535 at 541 ; Mallott v Wilson [1903] 2 Ch 494 at 502 ; Matthews (1913) 17 CLR 8 at 20 ; Federal Commissioner of Taxation v Taylor (1929) 42 CLR 80 at 86 ; Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347 at 1349 . , the law supplies that assent based " on fundamental attributes of human nature " ^[31] Matthews (1913) 17 CLR 8 at 44 . . It " presumes a donee ' s assent until disclaimer " 9F ^[32] Crago, “ Principles of Disclaimer of Gifts ” (1999) 28 University of Western Australia Law Review 65 at 65. See also Thompson (1690) 2 Vent 198 at 206 [86 ER 391 at 396]; Townson v Tickell (1819) 3 B & A 31 at 38, 39 [106 ER 575 at 577, 578]; Petrie v Bury (1824) 3 B & C 353 at 355 [107 ER 764 at 765]; Cornell (1946) 73 CLR 394 at 401 . . That presumption takes a basic fact - a transfer of property - and gives additional force to that basic fact by supplying the assent to the transfer of that property. It is not an evidentiary presumption in the sense of an inference drawn from basic facts. It is a presumption of law, and Div 6 - and, in particular, the criterion of " is presently entitled " in s 97(1) - is consistent with, and operates on, the presumption of law of assent. On the facts in this appeal, that presumption applied immediately before the end of the 2014 income year to the operation at law of cl 3.7 of the Trust Deed.

31. The argument made by the respondents about assent is met by the presumption of law described in
Matthews v Matthews ^[33] (1913) 17 CLR 8 at 44 ; see also 20, 43. . The premise of the respondents ' argument, that assent to distribution is necessary, was not disputed by the Commissioner. Argument proceeding as it did, this is not the case to examine whether any wider questions arise about distributions or disclaimers.

Conclusions and orders

32. The appeal should be allowed. Orders 1 and 2 of the Full Court of the Federal Court of 10 September 2020 should be set aside and, in their place, it be ordered that the appeal is dismissed.