Following on from recent posts, another decision arising out of family law proceedings that is worth remembering is International Litigation Partners Pte Ltd v FCT  FCA 671.
If you would like a copy of the decision please email me. In this particular case, the Tax Office had sought access to material filed in the family court proceedings to assist in determining the tax residency of various related entities of the husband. While the former wife consented to access being granted, the husband opposed access.
The court must use its discretion to determine whether access to family court documents is appropriate on a case by case basis.
The exercise of the discretion involves the weighing of a number of competing interests, and in particular, whether the Tax Office was likely to derive any substantial benefit by breaching the confidential nature of personal documents filed in family court proceedings.
The court should also take into account practical difficulties in separating documents that might be of use to the Tax Office and those that disclose personal issues (including those concerning the children of the relationship).
Also of relevance is whether the spouse to the marriage is party to a Tax Office litigation (in this case, the husband was not a party). As set out in earlier posts, in the Darling matter, the husband was a party to Tax Office audit activity.
For those that do not otherwise have access to the Weekly Tax Bulletin, the most recent published article by fellow View Legal Director Tara Lucke and I is extracted below.
As explored at 2014 WTB 27 , there are a range of issues often overlooked in relation to distribution resolutions.
Impact of any default provisions.
"Knowing recipient" is a principle that evolved out of situations where a trustee (who holds property on trust on behalf of the beneficiaries of a trust) appropriates trust funds for the benefit of a third party who has knowledge of the trust relationship.
The concept gives the "wronged" beneficiaries the right to make a personal claim against the third party on the basis that the third party received the trust property, whilst having knowledge of the relationship between the property in question, the trustee and the beneficiaries.
The treatment of disallowed deductions turns largely on the way in which the relevant distribution resolution is crafted.
the amount will be treated as an accumulation to the trust and the trustee will be taxed at the highest marginal tax rate is applied.
In FCT v Ramsden  FCAFC 39, the court held that the purported disclaimers by particular beneficiaries were ineffective. However, it was confirmed that any interest acquired in the net income of a trust under the default provisions of a deed could be disclaimed by a beneficiary separately from any other entitlements which might accrue to that beneficiary under other provisions of the deed.
It was also confirmed that a disclaimer can be made retrospectively, provided it is made within a reasonable period of time from the beneficiary first becoming aware of the relevant interest that they wish to disclaim.
A court may use the equitable remedy of rectification where there is an error in a trust document which does not reflect the intentions of the parties and in turn, results in an invalid distribution.
if the rectification order was granted, it would correct the mistake and match the parties' intentions.
Importantly, rectification will not be granted where there is simply an inadvertent financial result that occurred due to a misunderstanding of the consequences of a deliberate act.
From a trust law perspective, default capital provisions, and in some cases, default income provisions, under discretionary trusts are generally seen as important to ensure that the trust is valid at law.
From a tax perspective, the main objective of a default distribution clause, particularly for income, is to ensure that the default beneficiaries are assessed on the failed distribution, rather than the trustee being assessed at the top marginal rate.
The case of BRK (BRIS) PTY LTD v FCT (2001) 46 ATR 347 is arguably the leading example in this regard. In this case, the default distribution clause of the relevant trust required, where there was a failure to distribute, that the trustee "divide the Fund equally among the beneficiaries named in the Schedule hereto".
However, the clause was crafted such that the distribution did not take place until a date after the end of a tax year.
Based on the drafting of the relevant clause, the court confirmed that while the provisions were valid from a trust law perspective, the trustee was unable to make the required distribution to the default beneficiaries until after the end of each tax year. This, in turn meant that all undistributed income was in fact effectively accumulated for tax purposes each tax year. Therefore, all undistributed income was taxed to the trustee at the top marginal rate.
Given the range of significantly adverse consequences that can result where a purported trust distribution is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.
thought applied to the exact factual scenario that the trustee is addressing, in the context of the trust deed and tax laws.
Whereas the original decision prevented the Tax Office from accessing certain information disclosed by the husband in his family court affidavit, the Tax Office was ultimately given access to the material on appeal.
While the court acknowledged that they did not want to create an environment that discouraged those involved in family court proceedings from making full and frank disclosures, it was also the case that, given the family court had an inherent ability to refer matters of tax evasion to the Tax Office, any further access granted on a case by case basis was unlikely to have a significant impact.
3 the Tax Office was engaged in a significant and targeted audit in relation to the husband – i.e. the Tax Office was not engaged in some form of ‘fishing expedition’.
Overall, it was deemed to be in the public interest to allow the commissioner access to the material.
Next week’s post will consider the Decision Impact Statement recently released by the Tax Office.