Overview of key tax developments in Australia

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Waiver of Trust Distributions and Tax Consequences

In FCT v. Carter [2022] HCA 10 (Carter), the High Court of Australia held that beneficiaries of trusts who are currently entitled to trust income will be subject to tax on that income even if they validly disclaim the rights to that distribution at a later date – after the end of the year.

Trust tax laws in Australia are complex and the taxation of trust distributions has been the subject of several High Court cases over the decades. Historically, the Australian Taxation Office (ATO) has expressed the view that where a beneficiary waives their right to distribution from the trust, that person was not currently entitled to it and therefore not subject to the tax on this income. This view is likely to be retired in the wake of the ATOs win at Carter.

The case involved a trust established in 2005 that had no resolution to distribute or accrue income for the income year ended June 30, 2014. Therefore, the default beneficiary clauses of the deed of trust applied and the income of the trust for that year was distributed to each of the five default beneficiaries. The Commissioner of Taxes (Commissioner) issued amended notices of assessment to assess for tax purposes the trust income to which these five beneficiaries were currently entitled. The five default beneficiaries then made a valid waiver of this income for the purpose of relieving themselves of taxation.

The High Court has ruled that the liability to tax on trust distributions is determined immediately before the end of the year of income and not at any time after. The Commissioner’s right to tax such beneficiaries under the tax laws arises at that time even if the beneficiaries subsequently waive their rights under the trust and even if such waiver applies retroactively. If the beneficiary’s right to tax were determined at any time after resolution of the distribution, it would create uncertainty under the tax laws and the High Court decided against taking this approach.

The High Court has recognized that the interpretation it adopts may result in circumstances where beneficiaries are taxed on income distributions from the trust without their knowledge. This case is a reminder to all trustees and tax practitioners to ensure that trust distribution resolutions are validly taken and that all trust income is distributed to the correct beneficiaries in a timely manner.

Legal professional secrecy

The claim of solicitor-client privilege has also been the subject of scrutiny and challenge in recent years. In Commissioner of Taxes v. PricewaterhouseCoopers [2022] FCA 278, PwC claimed that approximately 44,000 documents relating to work performed for a global meat processor, JBS Group, SA were subject to the privilege. Due to the amount of documents in dispute, a sample of approximately 100 documents was selected for analysis during the trial.

PwC in Australia is a multidisciplinary practice involving accounting, finance, tax, legal and other departments. The majority of PwC Australia partners are not lawyers.

In challenging the claim of privilege over the documents, the Commissioner argued that a multi-disciplinary practice such as PwC could not give rise to an attorney/client relationship, that the nature of the services provided by PwC were not of a legal nature and was rather commercial in nature and that the documents were not created for the purpose of providing legal advice.

The court found that a firm like PwC could enter into an attorney-client relationship on the basis that attorneys within the firm were engaged for legal services even though non-legal staff assisted in the preparation of advice or documents in question (which is common in traditional law firms, i.e. the assistance of a paralegal or law graduate).

However, the court concluded that the majority of the documents were not protected by privilege. Relevantly, the court considered the context and content of the communication, as well as the parties (lawyers or non-lawyers) communicating and whether the communication was necessary to provide legal advice.

Legal privilege (and its waiver) should always be considered when communicating and working with attorneys. However, the question of whether a privilege exists when communications or advice is provided by a mixed team of lawyers and non-lawyers becomes complex and each communication or document will have to be analyzed on the basis of the facts.

New budget proposals – new sectors patent box

In 2021, the Australian Federal Government introduced a patent box regime for the medical and biotechnology sectors offering a concessional tax rate of 17%. Australia usually taxes profits generated by patents at 30% or 25% depending on the size of the company.

The new patent box regime promotes research and development (R&D) and the commercialization of related intellectual property in Australia. In the recent 2022-2023 federal budget, two new sectors were added to this new regime, including low-emission technologies and agriculture.

Kelvin Yuen

Senior Partner, DLA Piper

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