Recent posts have looked at some of the key issues to be aware of in relation to disclaimers by beneficiaries of a trust.
One other critical issue to be aware of relates to the tax consequences of a disclaimer, particularly in relation to any intended income or capital distribution that is disclaimed.
Where a disclaimer is made before the end of an income tax year, how the amount disclaimed will be taxed will depend on the factual matrix, and will likely result in one of the following outcomes, namely:
- If there is a valid default provision, then those default beneficiaries will be taxed (the key concepts in this regard are also explored in a previous post).
- If the distribution resolution validly sets out a ‘safety net’ distribution if the initial intended distribution fails, then that safety net provision will apply.
- If neither of the above scenarios apply, then the trustee is likely to be assessed on the disclaimed amount under section 99A of the Tax Act.
In particular, in Nemesis it was held that as the interest of a default beneficiary only arises at the date of the disclaimer, then if the disclaimer arises after the end of the income year the trustee will be taxed under section 99A. This is despite the fact that the disclaimer itself has retrospective effect back to the date of the purported distribution (ie which will generally be before the end of the relevant income year).
Where the trustee is taxed under section 99A, a flat rate of tax is imposed at the highest marginal rate. This means there is no splitting of income amongst beneficiaries, access to the stepped marginal tax rates nor the 50% general discount for capital gains on assets owned via trusts for more than 12 months.
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** for the trainspotters, the title today is riffed from the Pet Shop Boys song ‘Sad robot world’. Listen hear (sic):