Present entitlement and the dissenting beneficiary

Appointment of trust income to an object is invariably a unilateral act of the trustee.

However, a trustee cannot mandate that a presently entitled beneficiary accept an allocation of income. A beneficiary, for many reasons, may not wish to possess a trust interest, but the ability of a beneficiary to effectively disclaim an appointment of trust income is not often a straightforward proposition.

This is particularly the case where an unwitting beneficiary is deemed to have “tacitly” accepted and/or constructively derived the interest. Indeed, the potential tax outcomes facing the beneficiary are usually invisible until professional advice is sought, and this is frequently the case after a notice of amended or default assessment has been issued by the Commissioner.

In his article in June's issue of Taxation in Australia, excerpted in this post, Frederick Mahar discusses the trust law concept of present entitlement, when present entitlement is taken to have been conferred, and how a beneficiary may otherwise become presently entitled to trust income.

The article also explores the notion of acceptance of trust privileges by way of constructive entitlement and/or constructive derivation, then moves to consider the requisite actions of a beneficiary to validly and effectively disclaim an entitlement.

Discussion then turns to the potential tax implications of disclaiming or surrendering a trust interest after acceptance, and concludes with the view that proving a timely, valid and effective disclaimer of a trust interest is an onerous task and consistently a matter beyond that of the average taxpayer.

Looking at some of the challenges in defining present entitlement, Frederick's article goes on to cover default distribution clauses/takers in default, constructive derivation and constructive entitlement, and beneficiaries right to disclaim trust interest. He also looks at some tax implications of disclaimer or surrender after acceptance of interest.

The article concludes that effecting a valid trust interest disclaimer is out of the reach of the average taxpayer. Indeed, case law demonstrates that the mandatory burden of proof requirement is onerous, dictating that the actions of a beneficiary must be positive, timely, unequivocal and intentional but, nonetheless, premised on the beneficiary having actual knowledge of the trust entitlement.

This, in itself, is a difficult proposition since most presently entitled beneficiaries are oblivious to the income tax outcomes that follow trust entitlements; they don’t know whether they really want the entitlement and by the time they decide, it is often too late.

Frederick Mahar is Managing Principal at FM Mahar & Associates.

Members can access the full article by Frederick in the June issue of Taxation in Australia.

Written by practitioners for practitioners, Taxation in Australia is continually ranked as Australia's leading tax journal.

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