A beneficiary of two trusts whose assessable income was increased from some $70,000 to some $13 million in respect of her entitlement to distributions from the trusts has been unsuccessful before the AAT in arguing that she had "disclaimed her interests" in the trusts.
The taxpayer was a beneficiary of two trusts, one of which ("Archer") was involved in investments in residential complexes in partnership, or as a "syndicate member", with another entity. Following an audit of the trusts (and an earlier settlement arrangement), Archer was denied deductions for significant "syndication" costs it had previously incurred, while the second trust ("Shee") was likewise denied significant deductions. The effect of these adjustments was to substantially reduce the deductible carried-forward losses of the trusts.
As a result, in May 2013 amended assessments for the 2006 and the 2007 income years were also issued to the taxpayer, as she was the beneficiary of the trusts and was entitled to 100% of the trust income from them. The amended assessments increased her taxable income from $9,000 to $10 million in the 2006 income year and from $60,000 to $3 million in the 2007 income year. In addition, a shortfall interest charge (SIC) of $3.2 million was imposed, as reduced by the Commissioner over certain periods of the audit and assessment process.
The taxpayer unsuccessfully objected to the amended assessments, and before the AAT argued the following:
- a "disclaimer of trust interests" she entered into in December 2015 was effective to disclaim any entitlement to the trust distributions;
- the Archer trust resolution to distribute "income" of the trust to the taxpayer was not valid in terms of the Archer trust deed;
- "default" resolutions made by both trusts to distribute the trust income to another party in the event that their deductions were denied by the ATO were valid and effective;
- the amended assessments were issued out of time;
- the denied carried-forward losses were in fact available to Archer; and
- the SIC should be remitted.
In dismissing the taxpayer's application on all grounds, the AAT found as follows.
Disclaimer of trust interest
The AAT ruled that because the taxpayer had not specifically raised the disclaimer issue in her grounds of objection, it would not be permissible to raise it in the application before the AAT. In arriving at its decision, the AAT also noted that, among other things, the relevant parties had had the benefit of the distributions, there was a significant passage of time between the distributions and the making of the disclaimer, and the taxpayer's husband (who managed the affairs of the trusts) could have arranged for the otherwise "retrospective" disclaimers to be made before the amended assessments had issued. Furthermore, the AAT found that it would not be in the interests of justice to give the taxpayer leave to extend the grounds of her objection, given that the objection never touched on the issue of disclaimer.
Validity of Archer trust resolution
The AAT concluded that the resolution made by the Archer trust to distribute the "income" of the trust to the taxpayer was not an invalid exercise of its power merely because it referred to "income" and not "net income" of the trust. Likewise, the AAT found that leave should not be granted to the taxpayer to expand the grounds of her objection to include that the Archer resolution was ineffective to distribute income to her. This was because the AAT said that the Commissioner would be "prejudiced" by such leave – he could have instead issued an assessment to Archer, making it liable for the tax on the trust income under s 99A of the Income Tax Assessment Act 1936 (ITAA 1936).
Validity of the default resolutions
The AAT also found that the "default" resolutions were not effective because neither they nor the "initial" resolutions were technically subject to a "contingency". The initial resolutions clearly intended, and had the effect of, making the taxpayer entitled (both in "interest" and "possession") to the whole of the income of the trusts – which, furthermore, was the "practical effect" of the resolutions. In addition, the AAT noted that the effect of the initial resolutions meant there was nothing left to be distributed under the default resolutions.
Assessments out of time
The AAT found that the amended assessments had not been issued to the taxpayer out of time as she had, in terms of s 170(7), item 4 of the ITAA 1936, consented to a relevant extension to the limitation period. She had done so in response to the Commissioner's request for such an extension, which was made during the audit process involving the taxpayer's tax affairs.
The AAT confirmed that the carried-forward losses had been correctly denied by the Commissioner. This was because the evidence indicated that deductions had been appropriately reduced for the amounts "actually incurred" in the relevant year by Archer in respect of the purchase of property by the syndicate, and for which it was claiming a deduction for its share of the outgoings as a syndicate member.
Finally, the AAT found that there was no grounds for further remission of the SIC imposed by the Commissioner. In doing so, it dismissed the taxpayer's arguments that she was unaware of the trust distributions or of the trusts themselves. The AAT noted that she had placed entire responsibility for her taxation and financial affairs on her husband, who was also her tax agent.
Re TVKS and FCT  AATA 1010, AAT, Ref No: 2015/4655- 4656, Forgie DP, 9 December 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/1010.html.