Edited version of your private ruling

Authorisation Number: 1012463150681

Ruling

Subject: Disclaiming a trust distribution

Question

Did the beneficiary validly disclaim their entitlement to trust income, which arose from the trustee exercising a power to appoint income to them as a discretionary object of the trust, with the result that the beneficiary was not presently entitled to any income of the trust for the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You are a beneficiary of a Discretionary Trust.

The trustee has lodged the relevant trust tax return in the subsequent year, showing a distribution to you. You have not received payment of the distribution.

Once you were aware of this distribution you sent a letter to the trustee disclaiming your entitlement of any trust distributions. You have provided a copy of this letter. In the letter you have disclaimed your entitlement to trust income for the relevant financial year and all future financial years.

You lodged your relevant income year tax return on 31 October in the relevant year with no disclosure of trust income.

You are going through a divorce and the court orders for the case were delivered. Statements in the court order and reasons for judgment indicate that you have not received any cash payment of the distribution and that you will be excluded from all business activities conducted by the trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Reasons for decision

Until disclaimer, a beneficiary's entitlement to income of a trust is operative for the purposes of section 97 of the ITAA 1936 from the moment it arises notwithstanding that the beneficiary has no knowledge of it (see Vegners v. FC of T 91 ATC 4213 at 4215; (1991) 21 ATR 1347 at 1349).

A beneficiary may disclaim an entitlement on its coming to their knowledge. A disclaimer does not need to be effected by a formal deed, however the beneficiary must do some act to show their dissent - mere silence or inactivity is not sufficient to establish that the interest has been disclaimed (see Federal Commissioner of Taxation v. Cornell (1946) 73 CLR 394; 8 ATD 184; 3 AITR 405).

An effective disclaimer, once made, operates retrospectively and not merely from the time of disclaimer.

To be effective, a disclaimer must be made within a reasonable time of the beneficiary becoming aware of the relevant gift and the gift must be disclaimed in its entirety (see Commissioner of Taxation v. Ramsden [2005] FCAFC 39; 2005 ATC 4136; (2005) 58 ATR 485 (Ramsden )).

So, the first step in determining whether a disclaimer is effective is to identify the gift said to have been disclaimed. In Ramsden, the Court rejected the Commissioner's contention that the entirety of the interests created in a beneficiary under a deed establishing what is commonly known as a discretionary trust was a single gift. On the Commissioner's view a beneficiary who, as a discretionary object or default beneficiary, had assented to a gift of income in one year could not make a disclaimer in relation to any later year.

The Court found that each entitlement arising as the result of the exercise of the trustee's discretion to appoint income was a separate gift - the subject matter of that gift being the income (as defined by the deed) for the relevant accounting period. Further, the Court found that the interest of a default beneficiary was a separate gift arising by operation of the trust deed. That gift relates to all accounting periods such that a disclaimer confined to one only of those accounting periods is necessarily ineffective whilst an assent in one year will prevent a disclaimer in a later year.

In this case, the appointment of income of the relevant income year to the beneficiary as a discretionary object was a separate gift from those made in earlier years. The beneficiary was not prevented from disclaiming this gift merely because they had accepted gifts from the trustee in the past.

While acceptance of an earlier gift might be relevant to the question whether the beneficiary had knowledge of their interest in the trust under which the later gift was obtained and whether a reasonable time had elapsed within which that beneficiary could disclaim the later gift, there was no evidence to suggest that it was so in this case.

In this case, the beneficiary validly disclaimed their entitlement to the trust's relevant income because they advised the trustee that they had no desire to receive the income appointed to them upon becoming aware of their entitlement.

Accordingly, the beneficiary was not presently entitled to a share of the income of the trust for the purposes of section 97 of the ITAA 1936 and thus was not assessable on any of the trust's net income for that year and will not be in future years as they have disclaimed all entitlements for future years.

The information in the Court order and reason for judgement supports the conclusion that they will not be entitled to any distributions in future years.

Note that the share of net income in respect of which the beneficiary would otherwise have been assessed will be assessed to the trustee (see Nemesis Australia Pty Ltd v. FC of T [2005] FCA 1273; 2005 ATC 4881; 61 ATR 119).