Commissioner of Taxation of the Commonwealth of Australia v Ramsden

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

RESPONDENT Q 98 OF 2004 BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

RESPONDENT Q 97 OF 2004 BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT THE COURT: 1 The principal issue for determination in these appeals is whether the respondents validly and effectively disclaimed their entitlement to a share of the income in the Steve Hart Family Trust ('the Trust') such that no liability to tax is imposed on the respondents under s 97 of the Income Tax Assessment Act 1936 (Cth) ('the ITAA') for the financial year ended 30 June 1996. 2 Subject to the immaterial qualification referred to in par 8 hereunder the parties agreed that the relevant facts are largely identical in each matter. In many cases only the documents relating to the respondent Tamara Ramsden were included in the appeal papers, and the appeals were conducted on the basis that the decision in the matter involving Tamara Ramsden would be determinative of the outcome in all three cases. Accordingly, the primary judge found it convenient to consider disclaimer in the context of the application of Tamara Ramsden, and we will also follow that course. 3 Section 97(1)(a) of the ITAA provides: 'Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate - (a) the assessable income of the beneficiary shall include - (i) so much of the share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and …'

Background 4 The Trust is a discretionary trust constituted by a deed of settlement ('the Deed') made on 1 June 1981 and at material times Steve Hart Family Holdings Pty Ltd ('the Trustee') was the Trustee of the Trust. 5 Under the Deed: - in each Accounting Period (i.e. a period of 12 months ending on 30 June in each year), or as soon as practicable thereafter, the Trustee is required to determine the net income of the Trust Fund (cl 3(a)); - at any time prior to the expiration of each Accounting Period until the Vesting Day, the Trustee may (inter alia) pay, apply or set aside all or part of the net income of the Trust Fund for that Accounting Period for (inter alia) any one or more of the General Beneficiaries (as defined in cl 1(b)) (cl 3(b)); - General Beneficiaries as defined included the Specified Beneficiaries; - the Trustee holds so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to the end of such Accounting Period pursuant to cl 3(b) in trust successively for the persons described in pars (a),(b) and (c) of cl 4, as though the last day of such Accounting Period were the Vesting Day (cl 3(e)); - the first to take under cl 4(a), (b) and (c) are the Specified Beneficiaries (as defined in cl 1(a) and the Schedule) who take as tenants in common in equal shares, descendants of a Specified Beneficiary taking the share of a Specified Beneficiary who does not survive to the Vesting Day (cl 4(a)). All of the named Specified Beneficiaries (Steven Irvine Hart, Troy Benjamin Hart, Philip Anthony Hart and Tammy Anne Petersen (now Tamara Ramsden)) survived to 30 June 1996; - any amount set aside by the Trustee pursuant to cl 3(b) or held by the trustee pursuant to cl 3(e) is excluded from the Trust Fund, and is thenceforth held by the trustee in a separate trust fund (called a derivative trust fund) (cl 3(f)); and - on the Vesting Day the Trustee holds the Trust Fund and the income thereof in trust for such of the General Beneficiaries as the Trustee may appoint and in default of appointment for the Special Beneficiaries' interests in common (cl 4(a)). 6 In the year ended 30 June 1996 the Trustee purported to distribute an amount of $429,000 to the Adcock Practice Trust ('the Adcock Trust') pursuant to the provisions of cl 3(b) of the Deed . The minutes of a meeting of directors of the Trustee dated 30 June 1996 recorded as follows, in relation to the appropriation of Trust income: 'APPROPRIATION OF Resolved that the Income of the Trust for TRUST INCOME: the Year Ended 30 June, 1996 be appropriated, set aside and applied to the beneficiaries: STEVE HART FAMILY HLDGS NO. 2 $ 17,295 STEVE HART FAMILY HLDGS NO. 3 $ 6,639 UNLIMITED AEROBATIC DISC TRUST $ 34,810 THE ADCOCK PRACTICE TRUST $429,000 TROY B HART $ 4,750 STEVEN I HART THE BALANCE VARIATION OF Resolved that should the Commissioner of Taxation INCOME disallow any amount as a deduction or include any amount in the assessable income of the Trust, such amount or amounts are to be deemed to be distributed on 30th June, 1996 in the same proportions as listed above to the beneficiaries listed above.' 7 The Adcock Trust was a discretionary trust established by a deed of settlement dated 29 September 1981, and Tinkadale Pty Ltd ('Tinkadale') was the trustee of that trust. It became common ground at first instance that the Adcock Trust was not a General Beneficiary under the Trust. 8 Each of the respondents to these appeals lodged an income tax return for the year ended 30 June 1996 on the basis that no distribution was received from the Trust, except the return for Troy Hart which included the sum of $4,750 referred to in the resolution appropriating Trust income. 9 On 19 July 2000 the Commissioner issued a Notice of Amended Assessment to each of the respondents increasing each respondent's taxable income by $107,250. The adjustment to each respondent's income was described in the Notice of Amended Assessments as: 'Trust Distribution Adjusted as a result of audit or investigation.' 10 The sum of $107,250 was arrived at upon the basis that it represents a quarter share of the sum of $429,000 referred to in the resolution passed on 30 June 1996 by the Trustee of the Trust, although this fact is not referred to in the amended assessments. 11 Each respondent swore an affidavit to the effect that whilst the respondent was aware that he/she was a beneficiary of the Trust, until receipt of the Notice of Assessment, each respondent had no idea that he/she might be entitled to receive a benefit from the trust for the year ended 30 June 1996. 12 On 19 September 2000 the respondents to these appeals lodged notices of objection against the amended assessments. The only objection reproduced in the appeal papers is that lodged by Tamara Ramsden. In that objection it was stated that the Commissioner should not have included the amount of $107,250 in the respondent's income, and that no part of the amount of $429,000 ought to have been included in the income of the respondent for the year ended 30 June 1996, apparently on the basis that the Adcock Trust was nominated as a beneficiary of the Trust, and was entitled to a distribution from that Trust, and the amount of $429,000 ought to have been assessed as income of the Adcock Trust to which that trust was presently entitled as at 30 June 1996. In the alternative (G7) it was put that if those contentions were not accepted, the failure to include that income was not the result of any lack of reasonable care, recklessness, intentional disregard of the law, or the taking of an unarguable position by the taxpayer for the year ended 30 June 1996. This submission was made in relation to penalties. 13 On 26 April 2001 the Commissioner gave his decisions on the objections. The submissions in respect of penalties were accepted and the penalties were reduced to nil. Again, it is only the decision in relation to Tamara Ramsden which is reproduced in the appeal papers. The reasons for decision make it clear that the Commissioner had determined that that apportionment of $429,000 to the Adcock Trust was void, thus enlivening the provisions of cl 3(e) of the Deed, hence an amount of $107,250, being a one quarter share of the invalid apportionment of $429,000 was included in the respondent's income. On the evidence, this was the first occasion on which there was a specific disclosure to Ms Ramsden of the basis on which the amended assessment had issued, although an inference may be available from the affidavits earlier referred to that she came to learn that this was so at about the time of receipt of the amended assessments. 14 Applications to the Court by way of 'appeal' from the objection decisions were filed on 5 June 2001. One of the issues which arose on the hearing of those 'appeals' was whether the respondents had disclaimed any entitlement to a default distribution under the Trust. Tamara Ramsden relied upon deeds of disclaimer which she asserted had been executed on 17 April 2002, 2 October 2003 and 8 October 2003. 15 In an affidavit sworn on 2 October 2003, Tamara Ramsden deposed as follows: '11. As I have no desire to receive any monies or benefits from any such potential entitlement I have disclaimed and disavowed the said entitlements by Deed of Disclaimer as drawn by counsel executed on 17 April 2002. Unfortunately, I am unable to locate a copy of that Deed. I have today executed a further deed of Disclaimer, identical in all respects to that said Deed, save for the date thereof, a true and correct copy of which is now produced and shown to me and marked with the letters "TR-1".' 16 Troy Benjamin Hart and Philip Anthony Hart have sworn affidavits to the same effect. 17 Shirley Ann Peterson was a director of the Trustee. In an affidavit sworn on 7 October 2003 she deposes that a draft deed of disclaimer had been received from a firm of solicitors and: '12. To the best of my recollection, the Deeds of Disclaimer were executed by Troy and Philip Hart and Tamara Ramsden in terms of the draft in my presence on 17th of April 2002. 13. I believed that I had forwarded the executed Deeds of Disclaimer together with the other executed documents referred to herein to my Solicitors shortly after the documents were executed and returned to me. 14. I am informed by Mr Eleftheriou, solicitor in the employ of Messrs Hawthorn Cuppaidge and Badgery, that he has no record of receiving the Deeds of Disclaimer but that he did receive the other executed documents referred to herein. 15. I cannot, despite having conducted an exhaustive search, presently locate the originals or copies of the executed Deeds of Disclaimer.' 18 The document described by Ms Peterson as a draft deed of disclaimer names Steven Hart as the beneficiary. The recitals in the deed record that the beneficiary denies any entitlement to any income under cl 4(a) of the deed of settlement, but out of an abundance of caution, desires to disclaim that income. The operative clauses in the deed (which is unexecuted but bears date 'February 2002') are as follows: '1. The Beneficiary disclaims any entitlement to any income of the Trust of the year ended 30th June 1996, except such as may have been specifically paid to or applied for the benefit of the Beneficiary and, in particular, disclaims any entitlement to any income which might otherwise have accrued under the abovementioned clause 4(a). 2. This disclaimer takes effect on and from 30 June 1996.' 19 The deed of disclaimer executed by Tamara Anne Hart on 2 October 2003 contains similar recitals to the deed referred to above. The operative clauses in this deed are as follows: '1. The Beneficiary disclaims any entitlement to any income of the Trust of the year ended 30th June 1996, except such as may have been specifically paid to or applied for the benefit of the Beneficiary and, in particular, disclaims any entitlement to any income which might otherwise have accrued under the abovementioned clause 4(a). 2. This disclaimer takes effect on and from 30 June 1996.' 20 On 2 October 2003 Troy Benjamin Hart executed a deed of disclaimer in similar terms. (The appeal papers do not include any deed of disclaimer executed by Philip Hart on 2 October 2003). 21 Each of these deeds incorrectly refers to the entitlement to income as arising under cl 4(a) of the Deed, whereas the entitlement arises under cl 3(e). 22 In a further affidavit of Ms Ramsden on 8 October 2003 she deposes that she has not received any benefit as a default beneficiary under the deed of settlement. As she does not wish to receive any benefits as a default beneficiary under that trust she has 'today' executed a deed of disclaimer which she exhibits to her affidavit. The exhibited deed bears the date 8 October 2002, that being a manifest error for 8 October 2003. The recitals are similar to the recitals on the deeds referred to above. The operative provisions are as follows: '1. The Beneficiary disclaims all the beneficiary's interest under clause 3(e) of the Trust Deed. 2. This disclaimer takes effect on and from the date of settlement of the trust.' 23 Troy Benjamin Hart and Philip Anthony Hart swore affidavits to similar effect, and executed deeds of disclaimer in similar terms. There was no cross-examination at first instance of any of the deponents upon whose affidavits the respondents relied.

A threshold question 24 A threshold issue which arose on the hearing below was whether disclaimers executed by the respondents after the objection decisions were made by the Commissioner could be relied upon by the respondents having regard to the provisions of s 14ZZO of the Taxation Administration Act 1953 (Cth). Under s 14ZZO, an 'appellant' against an objection decision bears the burden of proving that the Commissioner's objection decision was wrongly made, and unless the Court otherwise orders, the 'appellant' is limited to the grounds stated in the taxation objection to which the objection decision relates. Here, of course, the deeds of disclaimer were not brought into existence until after the making of the objection decision, and thus necessarily were not referred to in the objection. 25 The primary judge resolved that question in favour of the respondents. The Commissioner abandoned the grounds of appeal which challenged the primary judge's decision in this respect. Senior Counsel for the Commissioner conceded in the course of his submissions on the appeal that if an otherwise effective disclaimer of the interest in question was made, albeit after the issue of the notices of assessment, then that would be sufficient to negate a present entitlement on the part of the disclaiming beneficiary to a share in the income of the trust estate under s 97(1)(a) of the ITAA for the year ended 30 June 1996. Therefore, the question whether the operation of s 97(1)(a) is so qualified is not an issue the Court is required to decide in these appeals.

The decision of the primary judge - was the interest effectively disclaimed? 26 The primary judge found that the various disclaimers made by the respondents were effective to disclaim any interest which any respondent had in any part of the distribution of the $429,000. In so finding his Honour: (a) held that just as a person may not be compelled to accept a gift, a person cannot be compelled to accept the exercise of a power which a donee has conferred upon a trustee to make a gift in the person's favour: In re Gulbenkian's Settlement (No 2), Stephens v Maun [1970] 1 Ch 408, 418; (b) held that just as a person may disclaim an appointment of income made to the person as a discretionary beneficiary, the person is entitled to disclaim where the entitlement to income arises in default of an appointment by a trustee; (c) held that although an entitlement under a trust is valid notwithstanding that the beneficiary has no knowledge of it, the beneficiary may disclaim that entitlement on its coming to his or her knowledge: Vegners v Federal Commissioner of Taxation (1991) 91 ATC 4213, 4215; (d) accepted that the respondent was free to chose whether to avail herself of her entitlement to her share in the failed distribution until such time as she unequivocally disclaimed, or unequivocally accepted it: Re Stratton's Disclaimer [1958] Ch 42, 54; (e) accepted that disclaimer need not be effected by a formal deed; any evidence of actual dissent is sufficient: Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394, 401-402; (f) held that a beneficiary of a discretionary trust may disclaim for each exercise of the discretion, that is to say that the fact that the beneficiary has accepted benefits previously does not bar a disclaimer in respect of later exercises of the discretion: In re Gulbenkian's Settlement (No 2), Stephens v Maun [1970] 1 Ch 408; (g) held that the respondents at no stage accepted the interest in the sum of $429,000 which accrued to them under the terms of the Trust for the financial year ended 30 June 1996. 27 The primary judge did not make a specific finding as to whether or not deeds of disclaimer were executed by the respondents on 7 April 2002. His Honour expressed his findings on disclaimer as follows; and there may be room for doubt as to whether the 'various disclaimers' includes the deeds which the respondents claim to have executed in April 2002: '80 … The various disclaimers constitute an absolute rejection of the distribution to her (i.e. Tamara Ramsden) as a Specified Beneficiary in default of appointment of income by the Trustee. The notice of objection is consistent only with her contention that there was no interest in her in any part of the $429,000 that had been appointed to the Adcock Trust. A beneficiary will be taken to have accepted the interest where the beneficiary is made aware of it and does not, before a reasonable time has elapsed, seek to disclaim it: Hodge v Griffiths [1940] 1 Ch 260. The act of disclaimer must, usually, occur before any act constituting assent to the distribution. At all times the applicant has disputed that she had any entitlement to any part of the $429,000, and in my judgment she has at no time done any act signifying assent to the distribution to her. 81 In my opinion, the disclaimer was effective to disclaim any interest she had in the distribution to her contended for by the Commissioner. 82 The same view follows in relation to the disclaimers by Philip Hart and by Troy Hart.'

The Commissioner's submissions on appeal 28 In his written outline of submissions, the Commissioner submitted that, in reaching his decision his Honour erred in: '(a) identifying the beneficiary's interest under the Trust sufficient to found a valid and effective disclaimer as each exercise of the trustees' discretion in the appointment of income; (b) applying In re Gulbenkian's Settlement (No 2) to a purported disclaimer of the exercise of a trustee's discretion resulting in a past entitlement to income; (c) holding that a donee is free to disclaim until such time as he has either unequivocally disclaimed or unequivocally accepted the gift; and (d) holding that the respondent had, at no time, done any act signifying assent to her interest as a default beneficiary.' 29 As we understand it, par(a) above is intended to reflect the Commissioner's submission that for a disclaimer to have retrospective effect, and extinguish an entitlement to trust income ab initio, the disclaimer must be valid and effective to disclaim the entirety of a gift to a donee under that trust unless there are several independent gifts, in which case a donee may, in general, accept one or more of the gifts and disclaim another or others: Theobald on Wills 15th Ed at 142. In the Commissioner's submission the Deed does not provide a Specified Beneficiary with two or more gifts, one of which he or she may disclaim and the other or others which he or she may accept. The Specified Beneficiaries' entitlements under the Deed to receive an appointment of income in the discretion of the trustee and to take in default of appointment are not 'independent gifts'. Rather, in the Commissioner's submission, a '[S]pecified [B]eneficiary's equitable interest created by the ...[D]eed is a single gift', and for a disclaimer to be effective as such, the beneficiary must disclaim the entirety of the interest that has accrued to him or her in the past, or which may accrue to him or her in the future in the income or corpus of the trust fund. There is only one gift, which, if it is to be disclaimed must be disclaimed in its entirety; in the words of Senior Counsel for the Commissioner 'the gift is making them [Specified Beneficiaries']. The disclaimers on which the respondents rely do not extend so far, and are thus ineffective.

Disclaimer of the entire interest in the trust 30 Until disclaimer, a beneficiary's entitlement to income under a trust is operative for the purposes of s 97 of ITAA from the moment it arises notwithstanding that the beneficiary has no knowledge of it (Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274; (1991) 91 ATC 4213 at 4215). A beneficiary may disclaim an entitlement on its coming to his or her knowledge. At law an effective disclaimer operates retrospectively, and not merely from the time of disclaimer. 31 To be effective, a disclaimer must constitute an absolute rejection of the gift, as a qualified disclaimer may constitute a form of assent to the gift. Any gift is the donor's gift, and must be assented to or disclaimed on the donor's terms. Thus a gift of residue by will, although comprising many assets, can only be disclaimed in its entirety. A residuary gift is one gift, not several. Whether there is one gift, or more than one gift, as for example a gift of a house and its contents is a matter of construction. See, generally Crago, Principles of Disclaimer of Gifts 28 WALR 65, Theobald on Wills 16th Ed at 14-25 and cf In re Pearce, (Deceased) [1926] NZLR 698. A disclaimer operates only in relation to the gift disclaimed. As Professor Crago points out (at p 80) it follows that, as in Hodgev Griffiths [1940] Ch 260, where the same person is both specific devisee or legatee and also residuary beneficiary, disclaimer of the specific gift does not prevent the same property passing to the donee under the residuary gift. If it does, then it will pass free of whatever conditions may have been attached to the specific gift. 32 The question which then arises is what gift or gifts or property were made to a Specified Beneficiary under or by virtue of the provisions of the Deed as a discretionary trust. The expression 'discretionary trust' is not a term of art, but merely a useful description. The term serves a useful purpose in emphasising the instability of the interests and prospective interests of those taking under the deed: Chief Commissioner of Stamp Duties for NSW v Buckle (1998) 192 CLR 226 at 243. The term refers to the directions of the creator of the trust which confer the discretion rather than to the instrument in which these directions are contained. A single instrument may contain both discretionary trusts, as well as fixed trusts: Ford & Lee Principles of the Law of Trusts. 33 A Specified Beneficiary under the Deed: - is one of the General Beneficiaries in whose favour the net income of the trust for each accounting period may be applied in the exercise of the Trustee's discretion pursuant to cl 3(b) of the Deed; - is entitled by virtue of cl 3(e) of the Deed (subject to cl 29, which allows the Trustee to declare that par 3(e) shall not apply for a particular Accounting Period), to share in so much of the net income of the Trust Fund for any Accounting Period as shall not be the subject of effective determination pursuant to cl 3(b) of the Deed; and - is one of the General Beneficiaries in whose favour the corpus of the Trust Fund may be appointed in the exercise of the Trustee's discretion on the Vesting Day, pursuant to cl 4 of the Deed, and a taker in default of appointment pursuant to cl 4(a).

34 The Commissioner's primary submission is that the Specified Beneficiaries are the recipients of a single gift consisting of 'their equitable interest created by the …Deed' being 'a vested interest from the time the gift was given', and that a disclaimer is ineffective unless it disclaims the benefit of the trust altogether. However, as the High Court observed in MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) (1999) 198 CLR 494 at 509, the use of terms such as 'beneficial interest' is apt to mislead when applied to beneficiary's interest in a discretionary trust. That observation would also apply to the term 'equitable interest'. The Commissioner's primary submission cannot be accepted having regard to the various entitlements to the income or corpus of the Trust estate which may accrue to a Specified Beneficiary in consequence of the exercise of discretions given by the Deed or as a taker in default. The designation of named persons as Specified Beneficiaries is simply a drafting technique to shorten the description of persons who may have or acquire an entitlement under cl 3(b)(i), 3(e) or 4 of the Deed. Use of the term does not signify that there is but a single gift, nor does it evidence an intention on the part of the settlor that a Specified Beneficiary must accept all or none of the various gifts which may accrue to a Specified Beneficiary under the terms of the Deed.

35 No entitlement to income or other property passes to a Specified Beneficiary under cl 3(b)(i) or 4 of the Deed unless and until the Trustee exercises its discretion in favour of that beneficiary. Until appointment, a Specified Beneficiary has only a hope that the Trustee's discretion will be exercised in his or her favour, and a right to apply to a court to secure due administration of the Trust. The Trustee's discretion to appoint under cl 3(b)(i) arises in relation to each Accounting Period. Each exercise of the discretion for an Accounting Period results in a gift to the person in whose favour the discretion is exercised. Different persons may take in different Accounting Periods.

36 When, and if, a gift is made under cl 3(b)(i) or 4, it is consistent with principle that the Specified Beneficiary should be entitled to accept or reject the subject matter of that gift, because a person cannot be forced to accept a gift of property unwillingly. The subject matter of a gift under cl 3(b)(i) is the net income of the trust for a particular Accounting Period. The subject matter of a gift made under cl 4 on the vesting day is the corpus of the Trust Fund. There is no reason in principle why a Specified Beneficiary should lose his or her entitlement to disclaim a particular gift merely because he or she has accepted some other gift from the Trustee in the past although acceptance of the earlier gift may have relevance to the question whether that person had knowledge of his or her interest in the Trust under which the latter gift was obtained and to whether the reasonable time had elapsed within which that person could disclaim that interest. If and when gifts are made pursuant to these clauses or as a result of the operation of these clauses, they are independent gifts, and a donee may accept one or more of the gifts and disclaim the benefit of the interest under another clause or clauses: Theobald on Wills 16th Ed at 14-25, and this is so whether or not the respective interests are vested interests. 37 The respondents' entitlements to a distribution of income of the Trust Fund for the Accounting Period ended 30 June 1996 arises under cl 3(e) of the Deed, rather than under cl 3(b). A gift under cl 3(e) of the Deed arises by virtue of the operation of the Deed, and is not dependent on the exercise of a discretion in favour of the Specified Beneficiaries. In that respect the interest arising under cl 3(e) in favour of a Specified Beneficiary is different in nature from any 'interest' which a Specified Beneficiary may have as a discretionary object. A person taking an interest under cl 3(e) is a taker in default of appointment. A taker in default of appointment is ordinarily regarded as having a vested interest in the property to be taken, though liable to be divested by an exercise of the trustee's power to appoint elsewhere: Hardingham & Baxt Discretionary Trust (2nd Ed). The interest although vested, is defeasible. As takers of the Trust Fund on the Vesting Day in default of any appointment by the Trustee, the Specified Beneficiaries also have a vested defeasible interest in the corpus of the Trust (cl 4(a)). The Commissioner submitted this was the same interest as that established in cl 3(e). We are unable to agree. As discussed above the circumstances are sufficient in this case to show that the two interests are separate interests. 38 In the present case, the respondents relied on the provisions of cl 3(f) of the Trust Deed as denying that the Specified Beneficiaries had a vested interest in the annual income of each Accounting Period. However, cl 3(f) does not have that effect. The clause does not deny the existence of a vested interest in the annual income of each Accounting Period arising by virtue of the Deed, and prior to the gift becoming indefeasible by default in appointment. Clause 3(f) merely requires that upon the gift becoming indefeasible, the property the subject of the gift should be held in "a derivative trust fund". 39 The interest which the respondents acquired in the Trust income by virtue of cl 3(e) was assignable even though the interest was defeasible by the exercise of the cl 3(b) power of appointment, or by virtue of cl 29. As the High Court said in Buckle (supra) (at 238) these provisions might render the content of the respondents' interest under cl 3(e) unstable, and the vicissitudes may be such that the interest has little value (at 243), but nonetheless there is a vested interest. 40 Accordingly, a Specified Beneficiary could disclaim the interest acquired under cl 3(e) in the net income of the Trust without necessarily disclaiming all of the other entitlements which accrued or might accrue to the Specified Beneficiary under other provisions of the Deed. 41 A further question which arises having regard to the form in which the first two disclaimers were cast (assuming, on their proper construction, that they related to cl 3(e)) is whether a disclaimer confined to the income arising under cl 3(e) for the year ended 30 June 1996 was necessarily ineffective because it was so confined. 42 The subject matter of a cl 3(e) gift is income arising in each accounting period not the subject of a cl 3(b) appointment. To be effective, a disclaimer must extend to the whole of that subject matter, hence a disclaimer confined to one only of those accounting periods is necessarily ineffective. 43 In Case X30 (1990) 90 ATC 287 the Administrative Appeals Tribunal held, in a context similar to the present, that whilst a taxpayer could disclaim the benefit of a trust, a disclaimer confined to the income of a particular year is ineffective. That was a case in which the income of each year was given to the beneficiaries in equal shares, whereas the disclaimer was confined to the income in one year, and to that extent the decision is not inconsistent with the conclusion we have reached. However, to the extent that the decision supports the view that a beneficiary must necessarily disclaim the benefit of a trust, rather than of a particular gift made to the beneficiary under or by virtue of that trust, we would respectfully disagree. Whether or not the disclaimer must extend to the benefit of the trust as a whole depends upon whether the provisions of the deed result in the making of more than one gift. 44 The first submission on the part of the Commissioner (see 29 above) fails insofar as that submission contended that the entirety of the gift consisted of all benefits under the Trust. We accept that the form in which the first two deeds of disclaimer were cast is such that they are necessarily ineffective.

Application of Re Gulbenkian's Settlements [1970] 1 Ch 408 45 An effective disclaimer of a gift operates by way of avoidance, rather than by way of disposition: Re Paradise Motor Co Ltd [1968] 1 WLR 1125. An effective disclaimer defeats the donor's intention to give the property to that donee under the terms of the particular disposition in question. 46 The primary judge cited In re Gulbenkian's Settlements (No 2) in support of, or at least, in association with, his holding that a beneficiary under a discretionary trust may disclaim for each exercise of the discretion, although the issue for determination was whether the interest of a taker in default under cl 3(e) could be disclaimed, which is a different question. The Commissioner submits that this case concerned the fundamentally different question as to whether a trustee could be released by deed from the duty of considering the future exercise of its discretion in favour of the former objects of the power. In the Commissioner's submission, it has no relevance to the circumstances in which the respondent seeks to disclaim a past entitlement arising from her vested interest in the trust as a default beneficiary. 47 Reduced to its essentials, In re Gulbenkian's Settlements (No 2) was a case in which under a 1929 settlement, trustees were entitled to pay or apply the income of the trust property for all or any one or more members of a specified class of persons, including N. Until 1957 the trustees paid the greater part of the income to N, but thereafter began to accumulate the income because of doubts as to the validity of the trust. In 1958 N entered into an agreement (the 'Lisbon agreement') under which he renounced his right to the income of the trust. Thereafter, the validity of the trust was upheld. Plowman J held that as and from the date of the Lisbon agreement, N ceased to be an object of the discretionary trust and that consequently as and from that date it was no longer competent for the trustees to exercise their discretion in his favour. His Lordship held that just as a man cannot be compelled to accept a gift, he must be equally free to refuse to accept the exercise of a power which the donor has conferred on the trustees to make a gift in his favour. His Lordship applied principles of disclaimer to the gift under consideration, so as to enable N, in effect, to disclaim the proposed gift prospectively in relation to the period after 1957. The fact that N had received income distributions in the period up to 1957 by reason of the exercise of the power was not regarded as a disqualifying factor. 48 The decision of Plowman J does support the proposition for which the primary judge cited it, (see par 26(f) above), although this is but a particular application of the general principle that where there are independent gifts, acceptance of one does not preclude a disclaimer of another. 49 The second submission on the part of the Commissioner (see 28(b) above) fails, although we accept that In re Gulbenkian's Settlements (No 2) is not determinative of the issue which arises in the present appeal, and has little, if any, bearing upon the resolution of that question.

Loss of a beneficiary's right to disclaim 50 As we understand it, the Commissioner's submission recorded in par 28(c), (d) above is intended to reflect the Commissioner's contention that to be effective, a disclaimer must be made within a reasonable time of the donee becoming aware of the relevant gift and cannot be made after assent to the gift. There is no evidence that the respondents were aware of, or assented to, their interest as default income beneficiaries under cl 3(e) of the Deed before receipt of the amended assessments for the year ended 30 June 1996 in July 2000. 51 Where a donee asserts disclaimer, mere silence or inactivity will not be sufficient: there must be 'some act to show his dissent': Federal Commissioner of Taxation v Cornell at 401. The right to disclaim will be lost if a beneficiary accepts the gift: Re Stratton's Disclaimer [1958] Ch 42. In that case, Jenkins LJ said (at 54) that the beneficiary is free to choose 'whether to avail himself of (the gift) or not until such time as he has either unequivocally disclaimed or unequivocally accepted the gift'. 52 Subject to one possible qualification, it was common ground on the hearing of the appeal that a beneficiary may not disclaim after acceptance of the relevant gift. The possible qualification arises out of the observations of the Queensland Supreme Court in Lewis v Lohse [2003] QCA 199 that a bequest may be disclaimed after initial acceptance provided that no prejudice has been occasioned to another. Whether or not that is the law in relation to a bequest, Re Paradise Motor Co at 1143 decides that the position is otherwise in relation to an inter vivos gift: see also Lady Nass v Westminster Bank Ltd [1940] AC 366 at 401 and Hardoon v Belilious [1901] AC 118 at 123. 53 A donee may indicate acceptance of a gift by positive conduct. In addition, if a donee knows of a gift, and does not disclaim it within a reasonable period having regard to the circumstances of the particular case, the donee is ordinarily treated as tacitly accepting it: J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd [1985] VR 891 at 930-931. In that case McGarvie J pointed out that the significance of inactivity over time is that it may operate in an evidentiary way to found an inference that the beneficiary has accepted the gift. At 931 his Honour said: 'In the absence of positive conduct by which the donee indicates acceptance, the right to disclaim is lost because the court makes a presumption of fact or draws an inference. The presumption or inference is that by remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted. The inference in the case of a donee is easy to draw because it is human nature to accept gifts. With a gift such as one under a trust deed or a will it is not normally considered necessary to indicate acceptance, but a beneficiary who desires not to receive what is given would commonly indicate that desire. Inaction by the beneficiary is consistent with acceptance. ... The test for whether a beneficiary is entitled to disclaim is whether in the circumstances he has accepted by words or conduct or has remained silent for so long that the proper inference is that he has determined to accept the interest.' 54 The Commissioner submits that the respondents knew of the gift under cl 3(e) of the Deed at least by April 2001 when the Commissioner gave his decision on the objections, and for disclaimer to be effective, it must occur within a reasonable time thereafter. In the Commissioner's submission, a disclaimer made in April 2002, or thereafter, was not made in a timely manner, and is for that reason ineffective. 55 The primary judge accepted on the authority of Hodge v Griffiths that a beneficiary will be taken to have accepted the interest where the beneficiary is made aware of it and does not, before a reasonable time has elapsed, seek to disclaim it. It may be assumed that the primary judge recognised that the question is not answered by measurement of the period of time that has elapsed simpliciter, but by whether in all the circumstances acceptance of the gift should be inferred from the absence of dissent from the donee, and the passage of time. No express finding by his Honour on the issue of whether the disclaimers made on 8 October 2003, which were in respect of the beneficiaries' interest under cl 3(e) of the Deed, were made after a reasonable time for such disclaimers had elapsed. 56 The first step in determining whether there has been a loss of a beneficiary's right to disclaim is the identification of the subject matter of the gift which is said to have been disclaimed. The primary judge identified the relevant gift as being the respondents' interest in the net income of the Trust for the year ended 30 June 1996 arising in consequence of a failure by the Trustee to make an effective determination pursuant to cl 3(b) of the Deed in relation to that Accounting Period. It was that gift, in his Honour's view, to which the respondents did not signify assent, and which they could disclaim. His Honour fell into error in this respect. 57 As we indicated earlier, the relevant gift was made by virtue of the execution of the Deed on 1 May 1981 rather than as a result of the subsequent exercise by the Trustee of discretions created by the Deed. The subject matter of that gift is the net income for each Accounting Period thereafter which is not the subject of an effective determination under cl 3(b) of the Deed. By virtue of the Deed the respondents were given a vested interest in the Trust income for the duration of the Trust, albeit that interest was liable to be divested with respect to any particular Accounting Period by an effective determination under cl 3(b) or by the operation of cl 29. 58 The primary judge did not make a specific finding in relation to the relevant question, being when the respondents became aware of that gift, as his Honour's focus was on a gift said to have been made in 1996, rather than upon a somewhat different gift which, in our view, was made in 1981. That was also the focus of the respondents' evidence, which was to the effect that until the notice of amended assessment for the year ended 30 June 1996 was received, some time shortly after 19 July 2000, each respondent 'had no idea that I might be entitled to receive any benefit from the Steve Hart Family Trust for the year ended 30th June 1996'. However, we are as well placed as the primary judge to make a finding upon that relevant question. 59 In the absence of any other evidence, an inference is available that the respondents became aware of the gift made by virtue of cl 3(e) of the Deed some time shortly after 19 July 2000. Alternatively, the probabilities are that the respondents (if only by their advisers) became aware of that gift by the time that the notices of objection against the amended assessments were lodged on 19 September 2000. In any event, the respondents (if only by their advisers) must have known of that gift at the end of April 2001 when the Commissioner gave his decision on the objection. The Commissioner was content to submit that the respondents had knowledge of the interest by April 2001. 60 Thus from September 2000, or April 2001, the respondents had to determine whether they wished to disclaim their interests under cl 3(e), such a disclaimer having effect from the commencement of the Trust. Whether the respondents wished to accept the entitlement which accrued to them for the year ended 30 June 1996 was not the question. They had to determine, within a reasonable time from September 2000 or April 2001, whether they would renounce the vested interest they had in the annual income of the Trust for the duration of the Trust. The fact that the respondents were then contesting whether cl 3(e) had been enlivened in relation to the year ended 30 June 1996 is beside the point. 61 Once the respondents became aware of their vested interests in the Trust income, they had to determine whether they wished to disclaim those interests. The respondents could not stand by for a period of about three years before purporting to disclaim those interests. As McGarvie J said in Broomhead (at 931): 'The presumption or inference is that by remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted. The inference in the case of a donee is easy to draw because it is human nature to accept gifts. With a gift such as one under a trust deed or will it is not normally considered necessary to indicate acceptance, but a beneficiary who desires not to receive what is given would commonly indicate that desire. Inaction by the beneficiary is consistent with acceptance.' 62 The period between September 2000, or April 2001 and 8 October 2003 was well in excess of a reasonable period. The failure of the respondents to disclaim their entitlements under cl 3(e) until the day before the trial justifies an inference that they were reluctant to disclaim those entitlements. The limited and ineffectual disclaimers which the respondents assert that they made in April 2002, and again on 2 October 2003 (with the possible exception of Philip Hart) are consistent with an intention not to disclaim their entire interests in the Trust income and, therefore, are also consistent with tacit acceptance of those interests. 63 It was open to the respondents to contest the premise on which each of the Commissioner's amended assessments of 19 July 2000 was based by showing that cl 3(e) of the Deed did not operate because a valid determination under cl 3(b) of the Deed had been made, and/or disclaiming any cl 3(e) entitlement for the duration of the Trust. The notices of objection against the Commissioner's amended assessments only relied upon the former ground. The conduct of the respondents in this respect is consistent with their approaching their objection on the basis that, if the circumstances were as asserted by them, they would not disclaim their interests under cl 3(e). The assertion in the notice of objection in relation to penalties is also indicative of an acceptance on the part of the respondents of the cl 3(e) gift, as it assumes the operation of the clause. 64 Again, whilst the primary judge did not make any specific finding to this effect, we infer from the evidence of the respondents and the surrounding circumstances that their advisers were aware at the time of the preparation of the notice of objection that the Commissioner's amended assessments were premised on the operation of cl 3(e) of the Deed. On that basis, the assertions in the notices of objection lodged in September 2000 are also consistent with an implied acceptance of the cl 3(e) gift. The terms of the notices of objection are inconsistent with any desire on the part of the respondents to disclaim that gift. 65 For those reasons, subject to the matters raised by the notice of contention, we are satisfied that there has not been a valid disclaimer of the cl 3(e) gift and the Commissioner's appeal should be upheld.

Notice of Contention 66 The respondent contends that the primary judge erred in holding against the following contentions advanced on behalf of the respondent: '(a) Any entitlement of the Respondent (Applicant) pursuant to the default distribution clause contained in the Steve Family Trust Deed (sic) ("the Trust Deed") arose in the year of income ended 30th of June 1997, not the year ended 30th of June 1996; (b) the resolution of Steve Hart Family Holdings Pty Ltd ("SHFH") as trustee of the Steve Hart Family Trust ("the SHFT") to distribute "THE BALANCE" to Steven Irvine Hart ("Mr Hart") had the effect of including the relevant share of the income of the trust estate in Mr Hart's assessable income, not that of the respondent; (c) the Commissioner of Taxation has to take the world as he finds it, and accordingly in the absence of any objection to the distribution by any person entitled to challenge the decision of the trustee to distribute to the Adcock Practice Trust ("the APT"), the APT remained entitled to the relevant income; (d) the resolution to distribute to the APT had the consequence that the respondent was not entitled to a share of the income of the trust estate within section 97 of the Income Tax Assessment Act 1936 ("the ITAA36"), in that any entitlement of the respondent did not arise in consequence of the exercise in the respondent's favour of any discretion to pay or apply income to or for the benefit of the respondent, within section 101 of the ITAA36; (e) because it was open to a Court and/or the Trustee to rectify the Trustee's failure to exercise its discretion properly and regularly, and/or because the Trustee has rectified its error, any "entitlement" of the Applicant pursuant to the default distribution clause was too precarious to be characterised as a present entitlement, for the purpose.'

Ground (a): What year of income? 67 Even if it be accepted that a Specified Beneficiary had a vested interest in the net income of the Trust for the year ended 30 June 1996, the Specified Beneficiary would not be 'presently entitled' to that income unless the special beneficiary also had a present legal right to demand and receive payment of the income: Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271 (and cf s 95A(2)). Present entitlement to the income must arise, if at all, at the latest by (in the sense of before the end of) the end of the year of income in question: Trustees of the Estate Mortgage Fighting Fund Trust v Commissioner of Taxation (2000) 102 FCR 15 at [37]-[38]. 68 It was open to the Trustee to make a determination under cl 3(b) of the Deed 'at any time prior to the expiration of each Accounting Period'. The discretion under cl 3(b) subsisted until the expiration of the year ended 30 June 1996. The interest of a Specified Beneficiary under cl 3(e) was defeasible throughout the whole of that year. The interest of a Specified Beneficiary became indefeasible at the expiration of 30 June 1996, and contemporaneously a Specified Beneficiary became presently entitled to the income in question. 69 The contrary conclusion reached by Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) ATC 4111, was a conclusion with which the primary judge disagreed. His Honour held that the default clause in the present case was similar to the clauses in the trust deeds considered in Commissioner of Taxation v Marbray Nominees Pty Ltd (1985) 81 FLR 280, and East Finchley v Federal Commissioner of Taxation (1989) 90 ALR 457, and in those cases the Court indicated that the income for the relevant year, where there was an ineffectual appointment by 30 June, went to the takers in default. 70 Although none of these cases lays down any general principle, and they are of limited assistance in determining the proper construction of the Deed: see In re Pearce (Deceased) [1926] NZLR 698 at 712 it has not been shown that the construction applied by his Honour was erroneous and the Notice of Contention must fail on this point.

Ground (b): Default distribution to Steven Hart 71 The primary judge said (at 287): 'In the view I take of the matter, the appointment of income to the Adcock Trust not being effective, Steven Hart, being the beneficiary entitled to the "balance of the income", did not take the income ineffectively appointed to the Adcock Trust. That appointment being ineffective the Settlor has specified the consequences.' 72 We agree with this construction. 'The Balance' does not include the amounts which precede 'The Balance' in the resolution of 30 June 1996. 'The Balance' is the income of the trust for the year ended 30 June 1996 other than the amounts which precede it in the resolution in question, whether effectively appointed or not.

Ground (c): Distribution effective until set aside 73 The respondent contended that the Commissioner is not entitled to challenge the validity of trust transactions in the absence of any challenge by any beneficiary, and that the Commissioner could not determine that the application of the $429,000 in favour of the Adcock Practice was invalid without hearing from the Adcock Practice Trust. Alternatively, it was contended that the beneficiaries of the Trust acquiesced in this appointment, and the Commissioner must take the world as he finds it. 74 The primary judge held that the purported appointment in favour of the Adcock Trust was ultra vires, and thus a nullity, and not merely voidable following a challenge by disappointed beneficiaries. 75 We agree with the primary judge's conclusion. The Commissioner had a duty to assess whether the respondent, as a default beneficiary of the Trust, was presently entitled to the income in question for the year ended 30 June 1996. Once it was accepted that the Adcock Trust was not within the class of beneficiaries in whose favour an appointment might be made, whether the default beneficiaries were 'presently entitled' to the income in question depended on the proper construction of the Deed and the efficacy of the disclaimers. Those matters are to be determined under the general law, and the income tax consequences then follow: Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64 at 79 (reversed on other grounds in Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520).

Ground (d): 76 This issue was not dealt with by the primary judge, as it is not a matter which was raised at first instance. Section 101 of the Act has no application in the circumstances of the present case, as the respondent's entitlement did not arise as a result of the exercise of a discretion by the Trustee in favour of the respondent. The Commissioner's case was and is that the respondent had a present entitlement to a share of the income in a trust estate pursuant to s 97 of the ITAA, independently of any operation of s 101 of the Act.

Ground (e): No present entitlement because of possible remedial action 77 The respondent contends that a court of equity will require the trustee to make an effective appointment pursuant to cl 3(b) at the instance of a beneficiary and that the existence of this power to rectify the consequences of the trustee's acts leads to the conclusion that the respondent has not derived the income in question, and in particular, she cannot be said to be presently entitled to it. 78 There are at least two answers to this submission. First, no such application to a Court has been made by a beneficiary, and for all that is known, no such application may ever be made. Second, cl 3(e) of the Deed specifies the consequences of a failure to make an appointment pursuant to cl 3(b). Clause 3(b) creates a mere power. The settlor's intention was that if no determination was made under cl 3(b) at all, or if any determination that was made was ineffective, the Specified Beneficiaries are absolutely entitled to the income in question. There is nothing 'precarious' about that entitlement, and no reason why the Court should interfere with the settlor's declared intention. The Trustee's power to make an appointment pursuant to cl 3(b) expired at the end of the Accounting Period, and a court cannot order the Trustee to make an appointment after the power to make it is spent.

Conclusion 79 The appeal is allowed with costs. The orders made by the primary judge are to be set aside and in lieu thereof it is to be ordered that the 'appeals' to this Court are dismissed with costs. I certify that the preceding seventy-nine (79) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellant: D K Boddice SC; M Brennan

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondents: L Harrison QC; P Bickford