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The Carter Case changed everything. You can no longer disclaim a trust distribution for income tax purposes.
The Carter Case
In the Carter Case the High Court found 5:0 that once a beneficiary has become presently entitled, they can no longer disclaim their entitlement for tax purposes.
This is a big change from how it used to be. So far you could disclaim your entitlement to trust income as long as you did it within a reasonable time – six months. That is what the Full Federal Court had unanimously ruled 3:0 in 2020. You were able to disclaim trust income even after year-end. But this has now changed following the Carter Case – the High Court ruling of 2022.
In the Carter Case, you have Mr. AC and the C probably stands for Carter. Mr. AC is the director of the corporate trustee of the Whitby Trust, and the Whitby Trust has four primary beneficiaries, Christina, Alisha, Nicole, and Natalie, which are probably Mr. AC’s daughters or wife and daughters.
And now something seriously wrong happens to the distributions from this trust, which will change the landscape for the disclaimer of trust distributions forever. Here is Andrew Henshaw of Velocity Legal in Melbourne with the details.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
The Carter Case
So how did the High Court rule in the Carter case? Can you disclaim income after you have become presently entitled to it?
Spoiler alert, the answer is no. The High Court ruled 5:0 that for tax purposes you can’t disclaim income after the 30th of June after you have become presently entitled.
Default Beneficiary
This has huge consequences for default beneficiaries. Once they have become presently entitled, there is no way back for tax purposes. The taxable income from those distributions goes to them.
Lack of Knowledge
Remember that the trust deed – and if within the deed the trustee – can nominate anybody as a default beneficiary or a primary beneficiary. There is no consent required, no notification, nothing. If the trustee marks you as beneficiary – and the deed gives the trustee the power to appoint you – then that portion of trust income goes into your tax return.
No Disclaimer
If you now – as soon as you become aware – try to disclaim this entitlement, you no longer can. Once you are presently entitled, you got the income for tax purposes. Whether the income was actually paid out to you is a different story. The trust might have a UPE (unpaid present entitlement to you) and no assets left. So you pay the tax but got no access to the income you paid the tax for.
Conclusion
So this is obviously an issue. It opens the door to all sorts of shams. Hope is that the legislator will clean all this up one day.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 30 August 2022
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
