Family Trust - Distribution Statement (Telephone if you are building 10 or more)
Can a beneficiary disclaim their entitlement?
Each financial year your Family Trust gets an income. It may be from passively renting out property. It may be from operating your business. Someone has to pay tax on that income. Every year you get the choice of which beneficiary pays tax on the income. But can a beneficiary disclaim their entitlement?
The beneficiaries that you distribute to rarely see or get any of the money. You are just using up their low marginal tax rates. (The money owed to beneficiaries are called Loan Accounts or, more correctly, Unpaid Present Entitlements. Each year the children or beneficiaries sign a Debt Forgiveness Agreement to reduce the money the Family Trust owes them to zero.)
Can a beneficiary disclaim their entitlement to Family Trust income?
Let’s say you made a distribution to your mum. But now realise that it affects her Centrelink benefits. Can she renounce? The Trust Distribution Statement can’t be changed from 30 June. That is a problem. However, the ATO states that:
‘A beneficiary may disclaim an entitlement to trust income or capital arising from a resolution within a reasonable time of becoming aware of their entitlement.
If a beneficiary has made a valid disclaimer, you (the trustee) may be assessed on a share of the trust’s net (taxable) income.’ Trustee resolutions QC 25912
Legal Consolidated believes that the ATO is correct. We base our opinion on these cases:
Federal Commissioner of Taxation v. Cornell
(1946) 73 CLR 394
8 ATD 184
3 AITR 405
Commissioner of Taxation v. Ramsden
 FCAFC 39
2005 ATC 4136
(2005) 58 ATR 485
Nemesis Australia Pty Ltd v. FC of T
 FCA 1273
2005 ATC 4881
61 ATR 119
Vegners v. FC of T
91 ATC 4213
(1991) 21 ATR 1347
Until disclaimed, a beneficiary’s entitlement to trust income operates under section 97 ITAA1936. This is from the moment it arises. This is the case even if the beneficiary has no knowledge of it: Vegners v. FC of T 91 ATC 4213 at 4215; (1991) 21 ATR 1347 at 1349.
A beneficiary may disclaim an entitlement when they find out. A disclaimer does not need a formal deed. However, the beneficiary must do some act to show their dissent. Silence or inactivity is not sufficient to disclaim the interest: Federal Commissioner of Taxation v. Cornell (1946) 73 CLR 394; 8 ATD 184; 3 AITR 405).
An effective disclaimer, once made, operates retrospectively: not merely from the time of disclaimer.
Tax Office v Ramsden
To be effective, a disclaimer must be made within a reasonable time of the beneficiary becoming aware of the relevant gift. The gift must be disclaimed in its entirety: Commissioner of Taxation v. Ramsden  FCAFC 39; 2005 ATC 4136; (2005) 58 ATR 485.
Identify clearly the disclaimed gift. The whole gift is disclaimed – not just some of it. In Ramsden, the ATO argued that the entire income earned in the Family Trust was a single gift. The Court said that was silly.
The ATO then argued that a beneficiary who had assented to a gift of income in a previous year could not make a disclaimer for a subsequent year. Also false.
The Court found that each entitlement was a separate gift – the subject matter of that gift being the income for that year. Further, the Court found that the interest of a default beneficiary was a separate gift arising by operation of the trust deed. The beneficiary was not prevented from disclaiming this gift merely because they had accepted gifts from the trustee in the past.
In this case, the beneficiary validly disclaimed their entitlement to the trust’s income. This is because they advised the trustee that they had no desire to receive the income appointed to them. This was 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 ITAA 1936. Thus it was not assessable on any of the trust’s net income for that year.
If the Minutes are deficient the income is then assessed to the trustee: see Nemesis Australia Pty Ltd v. FC of T  FCA 1273; 2005 ATC 4881; 61 ATR 119. However, if the Minutes are correctly structured then the next group of beneficiaries named in the Minute gets the assets. Our Minutes achieve this.
But your Trust Distribution Minutes must allow it. Our Trust Distributions allows for disclaiming and renouncing.
Can beneficiary disclaim their entitlement? Yes, but only if the Trust Distribution Minutes allow.
Disclaimer of trust distribution ineffective: The Beneficiary v FCT  AATA 3136
The beneficiary of a trust failed to satisfy the Court that she effectively disclaimed a trust distribution of $80,000. See The Beneficiary and FCT  AATA 3136 (AAT, Olding SM and Pola SM, 26 August 2020).
Facts of The Beneficiary v FCT case
The taxpayer and her ex-husband are the primary beneficiaries of a family trust. The family trust has a company as a trustee. This is called a ‘corporate trustee‘. The ex-husband is the director of the corporate trustee. The ex-wife states she does not want the $80,000 from the family trust. But, the ATO amends her tax return. The ATO adds the $80,000 trust distribution.
The ex-wife had not included the $80,000 trust distribution in her tax return. However, PAYG instalments of $31,248 relating to the taxpayer which were paid by the trustee during the year were included in her return. This resulted in her getting a refund of $31,328. (A wonderful double dip, if you lack moral integrity. No wonder her lawyer’s wanted to keep her name out of the public records.)
The trust’s accounts showed that, as at the end of the income year, she owed the trust $63,000. This is taking into account the trust distribution and advances made to her during the year of $96,000.
She objected to the ATO’s amended assessment. This is on the basis that she had disclaimed the trust distribution on 6 April 2018. She did this by signing a document entitled “Disclaimer of Trust Income”. Later, she adds to the grounds of objection to include that the distribution was disclaimed in March 2015. This was when her family lawyer struck through the distribution in a draft income tax return sent to her by the accountant. The accountant acts for her, her former husband and the trust. (I can see a negligence claim coming on based on conflict of interest.)
What the court decides
The Court said that the ex-wife had the burden of proving that she had disdained the trust distribution. The Court said she fails. She fails to discharge the burden of proving that she had not accepted the trust distribution. In particular:
- she is dishonest in claiming credit for the amount of the PAYG instalments paid to the ATO by the trustee and retaining the refund. This is inconsistent with her not accepting the distribution (I pity the poor bloke that married this horror of a woman, no wonder the Court keeps her identity a secret);
- it is inferred from her inaction over the period between becoming aware of the distribution by late March 2015 and finally disclaiming it in April 2018, around the time her objection was lodged, that she had accepted the distribution;
- the Court was not satisfied that the actions of her family lawyer in striking through the distribution in the draft tax return were sufficient to disclaim it. On her own evidence, she had no concept of disclaimer in mind when this occurred. Nor was there any evidence that she told the alleged disclaimer to the trustee either directly or through the accountant.
Beneficiaries effectively disclaimed entitlement to trust income
– Carter v FCT
The Full Federal Court has held that adult beneficiaries of a discretionary family trust had effectively disclaimed their entitlement to trust income: Carter & Ors v FCT  FCAFC 150 (Full Federal Court, Jagot, Davies and Thawley JJ, 10 September 2020).
Facts of Carter v FCT
The Whitby Trust operates a property development business. Its main asset is land, purchased for $28m. The land is developed and sold in small parcels. The primary beneficiaries (and default beneficiaries) of the trust are 5 siblings. One is a minor. Under 18. And therefore under a ‘legal disability.
The ATO does an audit. The ATO argues that the trust distributing resolutions are ineffective. Therefore, the income for each of those years vests in the five default beneficiaries. This is in equal shares (20% each). The ATO, therefore, issues new assessments:
- for 2011 to 2013 – assessing the trustee under s 99A of the ITAA 1936 in respect of 80% of the estimated net income of the trust, on the basis that Deeds of Disclaimer executed by the 4 adult beneficiaries in June 2014 (the first disclaimers) were effective (to disclaim their entitlements to the income of the trust for those years); and
- for 2014 – under s 97 of the ITAA 1936 to the 4 adult primary beneficiaries assessing each for 20% of the estimated trust net income. This is as default beneficiaries. This is on the basis that Deeds of Disclaimer signed in November 2015 for the 2014 income year (the second disclaimers) are ineffective. Further Deeds of Disclaimer are signed in September and October 2016 for all entitlements from the trust (the third disclaimers).
As the ATO at first accepts the first disclaimers. The second disclaimers are in the same terms as the first ones. The third disclaimers are signed as a result of the ATO stating the second ones are ineffective.
In the first instance, it seems that the first and second disclaimers fail to disclaim all of those entitlements within a reasonable time, or at all. As a result, the lower court states that the disclaimers are ineffective. The third disclaimers are also ineffective. This is because of the implicit acceptance of the gift by virtue of the terms of the Whitby Trust Deed through a failure to disclaim it in its entirety. Further, there was delay from the time of initial awareness of the entitlement that precluded later disclaimer (see 2020 WTB 1 ).
The Court at first instance decision means that the four adult beneficiaries are each ‘presently entitled’, as default beneficiaries, to 20% of the trust income for the 2011 to 2014 income years. The 2014 assessments issued to the adult beneficiaries under section 97 were therefore upheld. For the 2011 to 2013 income years, however, the only assessments before the first court were those issued to the trustee under s 99A. The AAT upheld those assessments. This is because the grounds of objection were not wide enough to allow the AAT to conclude the s 99A assessments were invalid because the default beneficiaries were presently entitled to a share of the income of the trust.
Decision of Carter v FCT
The Full Court firstly upheld the AAT’s decision that the income of the Whitby Trust was not validly appointed to another trust. This is because there is insufficient evidence showing there was a valid resolution of the Whitby Trust to distribute the income, or that the meeting at which the resolution was allegedly made actually took place.
However, the Full Court overturned the AAT’s decision that the adult beneficiaries had not validly disclaimed their entitlement to the income of the trust for 2014.
The Full Court agreed with the AAT that the second disclaimers (and thus the first disclaimers also, which the ATO nevertheless accepted to be effective) did not reject the entirety of the gift in the trust deed and were thus ineffective. However, in the Court’s view, there was nothing in the terms of the first and second disclaimers to support the inference that the adult beneficiaries intended to accept the default income distributions. It was plain from the terms of the first and second disclaimers that the adult beneficiaries did not intend to accept any interest for the 2011 to 2014 income years. Consequently, any purported acceptance by them of any trust income occurred without full knowledge and intention.
Conclusion of Carter v FCT
The Full Court said that the adult beneficiaries’ conduct was consistently directed towards one end – to reject any right to any income from the Whitby Trust. The AAT was, therefore, wrong to argue that the beneficiaries had implicitly or tacitly accepted the income of the trust for 2014. Since the third disclaimers were effective to disclaim the default distributions in 2014, the s 97 assessments issued to the adult beneficiaries were invalid.
The Full Court also rejected an argument by the ATO that the disclaimers did not operate retrospectively, as the effect of a disclaimer “is that the beneficiary must be treated as never entitled to the income for the purposes of s 97 in respect of the relevant income year”. Moreover, there was nothing in the legislative scheme concerning the taxation of trust income (Div 6 of Pt III of the ITAA 1936) to indicate that a beneficiary’s liability under s 97 “is to be determined once and for all by reference to the legal relationships then in existence” in the income year in question.
But I won’t know the income of my family trust until after 30 June
The ATO has stated that:
‘your resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled…’ (Trustees Resolutions QC 25912).
The Resolution you are building states that a beneficiary gets the income up to their marginal tax rate, and then to someone else up to their marginal tax rate. As the ATO states:
‘A resolution is effective if it prescribes a clear methodology for calculating the entitlement …’
Why build Distributions Statements for each financial year?
Since 1994, as a tax lawyer, I have provided a Family Trust Distribution Statement for each financial year. I attend a lot of ATO audits. My doctorate was in tax. The tax laws change. The ATO changes its mind. We prepare the Distribution Statements that reflect those particular rules for each unique financial year.
Does a resolution have to be in writing?
Read your Trust Deed to find out. Do you have a Brett Davies Lawyers or Legal Consolidated Family Trusts Deed? All our Deeds allows for the Distribution Minute to be in writing or oral. Whether the resolution must be recorded in writing depends on your trust deed. However, a written record provides better evidence of the resolution and avoids a later dispute. You don’t want fights with the beneficiaries and the ATO.
A written record is essential to stream capital gains and franked distributions. A beneficiary is specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing.
Update the Family Trust for Bamford streaming only:
Or, update Bamford streaming PLUS update the rest of the Deed:
Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:
Or just update the Trustee:
Or just update the Appointor:
To deal with Division 7A (loan or UPE from your company to the Family Trust):
Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):
Change the name of your Family Trust:
To wind up and vest the Family Trust, when you no longer want it:
Telephone us for legal advice on building this document.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
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