The taxpayer (prominent mother of a newspaper man) was a life tenant under four trusts. Under this arrangement, the taxpayer was entitled to the income of the trusts for her lifetime. Her son (now a resident of New York) the remainderman, was entitled to the assets of the trust after her death. The taxpayer entered into a deed of release whereby she gave up her rights under the trusts. She received a lump sum payment as well as the income of the trusts. The taxpayer argued that the payment was received due to a breach of the duties of the trustee. She claimed that the trustee had been focused on the capital growth of the assets of the trust and did not balance this with her entitlement to income. The taxpayer was not entitled to any capital growth of the trust. The Commissioner assessed the lump sum payment ($80m) as a receipt of income, and the AAT upheld this assessment. The AAT considered the rules regarding lump sum receipts where the nature of the receipt is determined by looking at it in the hands of the recipient taxpayer. As the taxpayer in this case was only entitled to income of the trust, any amount of compensation that she received for the loss of that income must also be income. Tip: The release could have been structured differently to avoid this result
9th-May-2008 | 