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4 Sep 12
Beware the changing definition of beneficiary

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Yazbek v FCT [2012] AATA 477

A recent decision of the Administrative Appeals Tribunal (AAT) is a timely reminder about the definition of a beneficiary for tax and arguably trust law purposes.

Facts of the case

The case was an interlocutory proceeding where the applicant appealed against the Commissioner’s amended assessment on the basis that he was not a beneficiary of the Lewis Yazbek Family Settlement (Trust) in the 2005 tax year.

The applicant was an individual who was a member of an ‘Eligible Class’ of persons who could benefit under the terms of the Trust.

‘Eligible Class’ was defined in the deed to include the applicant’s father, mother and a substantial number of individuals totalling approximately 129 people at 30 June 2005. The applicant was a member of this class at all times in the 2005 tax year.

In the applicant’s 2005 tax return he submitted that he received no distributions from the trust. However, $60,000 of the distributable income of the trust was allocated to his wife and the remainder to a company, Rocbit Pty Ltd.

The Commissioner initially issued an assessment to the Applicant for the 2005 tax year in April 2006. However during April 2010, the Commissioner issued an amended assessment in respect of the Applicant for the 2005 year in which an additional amount of $2,144,843 was included. 

Issues

The applicant objected to this amended assessment and included, as one of the grounds of objection, that the Commissioner had exceeded the time limit allowed for amending the taxpayer’s assessment.

The Commissioner’s power to amend an assessment is limited by the Income Tax Assessment Act 1936 (Cth) to a period of two years from the date the Commissioner gave notice of the assessment. Thus here, the time limit would have expired in April 2008, unless it was able to be extended. 

An extended period of four years is available to the Commissioner if:

 ‘the individual is a beneficiary of a trust estate at any time in that year unless the trust is a STS taxpayer for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for the year’

As neither the STS taxpayer nor the full self-assessment exemptions applied, the threshold question for the AAT was whether the applicant was in fact ‘a beneficiary of a trust estate’.

The applicant raised four arguments on this point in his application, namely:

  • that the ordinary legal meaning that underpins the concept of ‘beneficiary’ is such that only a person who received a benefit or is entitled to receive such a benefit under a trust is in fact a beneficiary
  • that if the ordinary legal meaning of the word ‘beneficiary’ is broader than the above, (as argued by the Commissioner) that a narrower interpretation than the ordinary legal meaning was appropriate here due to the context and the construction of the legislation
  • that the legislation imposes a special, more rigorous tax regime and accordingly should be read in plain terms and in favour of the applicant to the extent of any ambiguity, and
  • finally, that the construction advanced by the Commissioner would produce unlikely, improbable and surprising outcomes and therefore should not be preferred.

The Commissioner contended that as the applicant was a member of the ‘Eligible Class’, the applicant was a beneficiary of the trust estate during the whole of the 2005 tax year and accordingly the assessment was within time.

Decision

All four of the applicant’s arguments were dismissed by the AAT.  The AAT held that despite receiving no distributions from the Trust for the year in question, the applicant was at all relevant times a beneficiary under the Trust and the amended assessment was issued in time.

Implications of the decision

Although the main issue in this case was whether the Commissioner was within time in issuing an amended assessment, it also confirmed that, at least from an income tax perspective, a beneficiary of a trust is not simply a person who as a matter of fact has obtained some tangible benefit from the trust.

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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