Disclaiming trust distributions and taxation consequences
In FCT v. Carter [2022] HCA 10 (Carter), the High Court of Australia has ruled that beneficiaries of trusts who are made presently entitled to trust income will be subject to tax on that income even if they validly disclaim rights to that distribution at a later time – after year end.
Trust taxation laws in Australia are complex and the taxation of trust distributions has been subject to multiple High Court cases over the decades. Historically the Australian Taxation Office (ATO) has expressed the view that where a beneficiary disclaims entitlement to the trust distribution, that person was not presently entitled and thus not subject to tax on that income. This view is likely to be withdrawn as a result of the ATOs win in Carter.
The case concerned a trust established in 2005 which failed to make any resolutions to distribute or accumulate income for the income year ended June 30 2014. Accordingly, the default beneficiary clauses in the trust deed applied and the trust income for that year was distributed to each of the five default beneficiaries. The Commissioner of Taxation (Commissioner) issued amended assessments to assess for tax the trust income that those five beneficiaries were made presently entitled to. The five default beneficiaries then proceeded to validly disclaim that income in an attempt to alleviate themselves of the tax assessment.
The High Court ruled that the liability to tax on trust distributions is determined immediately before the end of the income year and not any time afterwards. The Commissioner’s right to tax those beneficiaries under tax laws arises at that time even if the beneficiaries subsequently disclaim their rights under the trust and even if that disclaimer operated retrospectively. If the right to tax the beneficiary was determined at any time after the distribution was resolved this would create uncertainty under the tax laws and the High Court decided not to adopt this approach.
The High Court acknowledged that the construction it adopts may result in circumstances where beneficiaries are taxed on distributions of trust income without their knowledge. This case is a reminder to all trustees and tax practitioners to ensure trust distribution resolutions are validly made and all trust income is distributed to the correct beneficiaries in a timely manner.
Legal professional privilege
The claiming of legal professional privilege has also been subject to scrutiny and dispute over the past few years. In Commissioner of Taxation v. PricewaterhouseCoopers [2022] FCA 278, PwC claimed that approximately 44,000 documents relating to work done for a global meat processor, the JBS, SA Group was subject to privilege. Due to the quantum of documents in dispute, a sample of approximately 100 documents were selected for analysis in trial.
PwC in Australia is a multi-disciplinary practice involving accounting, finance, tax, legal and other services. The majority of partners in PwC Australia are not lawyers.
In disputing the claim of privilege over the documents, the Commissioner argued that a multi-disciplinary practice like PwC could not give rise to a lawyer/client relationship, the nature of the services provided by PwC were not legal in nature and rather, was of a commercial nature, and that the documents were not created for the purpose of providing legal advice.
The court found that a firm like PwC could engage in a lawyer/client relationship on the basis that lawyers within the firm were engaged for legal services even if non-legal staff assisted in the preparation of the advice or documents in question (which is common in traditional law firms, i.e. the assistance of a paralegal or law graduate).
However, the court found that a majority of the documents were not protected by privilege. Relevantly the court considered the context and contents of the communication, as well as, which parties (lawyers or non-lawyers) were communicating and whether the communication was required to provide legal advice.
Legal professional privilege (and the waiver of it) should always be considered when communicating and working with lawyers. However, whether privilege exists where communications or advice is provided by a mixed team of lawyers and non-lawyers becomes complex and each communication or document will need to be analysed based on the facts.
New Budget proposals – new patent box sectors
In 2021, the Australian federal government introduced a patent box regime for the medical and biotechnology sectors providing a concessional tax rate of 17%. Australia ordinarily taxes profits generated by patents at 30% or 25% depending on the size of the enterprise.
The new patent box regime promotes the research and development (R&D) and commercialisation of the related intellectual property in Australia. In the recent 2022–23 federal budget, two new sectors have been added to this new regime including, low emissions technology and agriculture.
Kelvin Yuen
Senior associate, DLA Piper
