Disclaimer of Trust interests beyond Family Court settlements – the risk for a vulnerable spouse?
The recent Administrative Appeals Tribunal (‘AAT’) case of The Beneficiary and Commissioner of Taxation (Taxation)  AAT 3136 (26 August 2020) highlights the impact unresolved tax issues can have in relationship breakdowns. The decision also demonstrates the fact that while a Family Court order may be effective in finalising a distribution of marital assets, it may not be effective from a tax law perspective.
The facts, in this case, are representative of a very common scenario where the financial spouse controls the finances and provides directions to the ‘family’ accountant, resulting in the non-financial spouse having little to no knowledge or control over the resulting financial or tax impacts. The case also highlights the fact that whilst the Family Court has a great deal of discretion, the same discretion does not always extend to the interpretation and application of tax law.
In this case, the former Husband who was also the trustee of a discretionary Trust made a resolution to distribute income to the former Wife. The decision to distribute income to the former Wife was made without her knowledge or agreement. The accountant engaged by the former Husband, prepared income tax returns for not only the former Husband and the Trust but also the former Wife, further highlighting the risks associated where an adviser continues to act in a position of conflict.
Counsel for the former Wife, who interestingly had acted for her both in relation to Family Law and tax issues, had attempted to disclaim the distribution by striking through the distribution on the draft tax return prepared for the former Wife and marking it as zero. This attempt by Counsel for the former Wife to disclaim the distribution on her behalf was found to be ineffective.
In objecting to the amended assessment, Counsel for the former Wife sought to rely (albeit on the day of the AAT hearing) on the following order of the Consent Orders as a disclaimer of the distribution:
“6. That the Husband forthwith retain as absolute his property and the Wife forthwith relinquish and/or transfer to the Husband all right, title and claim (if any) in and to the following:-……….The [Trust]”
In considering this ground for objection, the AAT acknowledged that a Family Court Consent Order may be a complete answer to an amended assessment arising from non-compliance with the said order, but ultimately decided the clause did not give effect to any relinquishment of the distribution or anything else. The decision was premised on the fact there was no evidence that the former Wife had not taken steps in response to the order to actually relinquish and/or transfer to the Husband her right, title or claim in the Trust. Importantly, the AAT noted all that was required of the former Wife to give effect to the order was to sign a written disclaimer.
The outcome for the former Wife was disappointing as it appeared clear on the facts she relied on others for advice in respect of her personal tax affairs, tax consequences arising the Family Court orders and with the objection to her amended assessment.
Arguments put forward by Counsel for the taxpayer that the former Husband controlled the couple’s finances and the former Wife did not understand the Trust structure, fell on deaf ears with the Tribunal noting they had ‘no general power to make orders for the purpose of protecting vulnerable spouses’.
The decision highlights the importance of ensuring tax issues are identified early in the Family Court settlement process and that independent advice should be obtained by a suitably qualified tax professional to ensure the risk of amended assessment post-settlement is reduced.
HOW CAN RSM HELP?