Carter – High Court of Australia finds that trust beneficiaries were taxable on income to which they were entitled at year end notwithstanding their subsequent disclaimer

The Australian tax legislation, as judicially interpreted, required (somewhat similarly to ITA s. 104(24)) the inclusion in a beneficiary’s income of the beneficiary’s share of the trust’s income for a year if, at the end of the trust year, the beneficiary’s interest in the trust income was both vested in interest and in possession, and the beneficiary had a present legal right to demand and receive payment of the income. The High Court of Australia found that this test was met where, under the terms of the trust, the trust beneficiaries (the children of the settlor) were entitled at the end of the trust’s income year to receive pro rata portions of the trust’s income for that year – even though, subsequently to that year end, they disclaimed all right, title and interest to that income.

The beneficiaries’ submission that the above test should be applied on the basis that “for ‘a reasonable period’ after the end of the income year, later events could subsequently disentitle a beneficiary who was presently entitled immediately before the end of the income year” was rejected on the basis inter alia that this interpretation “would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate.”

Neal Armstrong. Summary of Commissioner of Taxation v Carter, [2022] HCA 10 under s. 104(24).