financial legal trust structure

Trusts – A 21st Century Look At A Centuries Old Tool

Peter Bobbin Argyle Lawyers Pty Ltd

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© Copyright in this document and the concepts it presents is strictly reserved by The Argyle Lawyers Pty Limited, September 2011. Any reproduction, in part or whole, without permission is illegal. This document has been created for the educational benefit of referrers of legal services work to the Argyle Lawyers Pty Limited and to alert readers to the taxation and superannuation services and expertise of the Firm. The concepts expressed are based on the law current as at September 2011and is subject to change by parliaments, court decisions and revised thinking of relevant regulators of the law. Before relying on any aspect of this document you must ensure that the concepts remain appropriate at that time otherwise you may be negligent. You can avoid this by using the taxation and superannuation services of the Argyle Lawyers Pty Limited!

TABLE OF CONTENTS INTRODUCTION ........................................................................................................................... 1

1. CHECK YOUR TRUSTEES’ POWERS............................................................................ 3

2. THE SETTLOR ................................................................................................................. 9

3. STAMP DUTY LAWS ..................................................................................................... 14

4. THE APPOINTOR AND THE ISSUE OF CONTROL..................................................... 28

5. BENEFICIARY DISTRIBUTIONS................................................................................... 31

6. AMENDING TRUSTS - the tax considerations .............................................................. 41

7. FAMILY LAW AND TRUSTS.......................................................................................... 51

8. THE ALTER EGO TRUST FAILURE?............................................................................ 54

9. EXTENDING THE LIFE OF A TRUST? ......................................................................... 59

Trusts – A 21st Century Look At A Centuries Old Tool Peter Bobbin Page No 1

© Copyright in this document and the concepts it presents is strictly reserved by The Argyle Lawyers Pty Limited, September 2011. Any reproduction, in part or whole, without permission is illegal. This document has been created for the educational benefit of referrers of legal services work to the Argyle Lawyers Pty Limited and to alert readers to the taxation and superannuation services and expertise of the Firm. The concepts expressed are based on the law current as at September 2011and is subject to change by parliaments, court decisions and revised thinking of relevant regulators of the law. Before relying on any aspect of this document you must ensure that the concepts remain appropriate at that time otherwise you may be negligent. You can avoid this by using the taxation and superannuation services of the Argyle Lawyers Pty Limited!

INTRODUCTION

In this paper, I return to the basics, the fundamental principles upon which the law of trusts is built. Before you cry “how boring” and “what a waste of time,” just consider this:

Without doubt trusts are the most favoured investment and business vehicles today and yet most professionals will have only completed less than 40 hours formal education in the law of trusts and the taxation of these.

How relevant are the fundamentals?

Very relevant, just look at the approaches adopted by the courts in Bamford, Broomhead, Faucilles, and Nichols Cabramatta. These cases, and others, are briefly profiled in this paper.

A conservative approach

In this paper, I seek to identify a range of practice points for practitioners to follow. But before doing so, let me make my admission of having taken a conservative approach in its preparation. No doubt some will not agree with the strength of the warnings that I feel some of the cases and principles reviewed in this paper may give. My view in this regard, however, is that, if a conservative approach can be followed, and does not add significant cost or time delays, then on simple best practice grounds, why not follow it.

Structure of the paper

The paper has been broken down so as to look at the essential elements of a trust. In Section 1 I examine the nature of trustee powers, not so much from an argument as to whether they are fiduciary in nature, but rather as to their adequacy, and what to beware of when assessing this.

Section 2 considers the settlor, the person who will have been said to have created the trust. The goal is to identify who should be a settlor.

Section 3 examines some of the stamp duty issues connected with a trust. Whilst a view based on the NSW Duties Act is adopted, many issues are transportable across the states and territories of Australia.

With the continuing growth of the estate planning industry, control and succession have become important issues for the management of trusts. Section 4 looks to the person who has control of the trust through the power of appointment.

One of the major proclaimed reasons for the use of trusts in the 21st Century is their inherent flexibility. Section 5 examines some aspects of beneficiary distributions and in some ways challenges the validity of the claim of absolute flexibility.

Family law is often described as a law unto itself. It is for this reason that just a small section of the paper – Section 6 – is dedicated to family law and trusts.


© Copyright in this document and the concepts it presents is strictly reserved by Argyle Lawyers Pty Ltd, September 2011. Any reproduction, in part or whole, without permission is illegal. This document has been created for the educational benefit of referrers of legal services work to Argyle Lawyers Pty Ltd and to alert readers to the taxation and superannuation services and expertise of the Firm. The concepts expressed are based on the law current as at September 2011 and is subject to change by parliaments, court decisions and revised thinking of relevant regulators of the law. Before relying on any aspect of this document you must ensure that the concepts remain appropriate at that time otherwise you may be negligent. You can avoid this by using the taxation and superannuation services of Argyle Lawyers Pty Ltd!

Have a contrary view?

The views expressed in this paper are mine, developed over a number of years. If you have a contrary view, or perhaps come across a case which supports some of the approaches expressed in this paper, I would be pleased to hear from you. Send a fax or a quick note, or better still, give me a call; I look forward to hearing from you.



1. CHECK YOUR TRUSTEES’ POWERS

Those who remember the old Companies Act (1961) will recall the need to ensure that the Memorandum and Articles of Association were drafted with sufficiently broad powers to ensure that the company was able to enter into the modern transactions and investments of that time. Many will no doubt recall the need to respond to bank enquiries about whether the power of a company was sufficient to enable it to enter into certain financial transactions.

The sufficiency of the corporate powers were overcome with the introduction of ‘powers equivalent to ‘an individual’’, which are found in Part 2.B.1 of the Corporations Act 2001, Company Powers and How They Are Exercised. Unfortunately, there is no equivalent in the area of trusts.

Thus, it is important to ensure that the terms of a trust deed, and the powers that are vested by it in the trustee, are sufficient to accommodate the need to which the trust will be applied. Whether this is done by granting general powers equivalent to that of full ownership, or by specifically stating the respective powers that a trustee may employ, is a choice for the legal draftsperson.

When deciding what approach to adopt keep in mind that other parties who may interact with trustee for the benefit of the trust will often need to see an express power that is consistent with the interaction. The most common is the need to identify an express power in the trustee to borrow monies. There is no general or common law authority that allows a trustee to borrow. Indeed, in a trust-historical sense a trustee borrowing is not permitted under the general law, it is only if a trustee has a specific borrowing power that the trustee may borrow.

Certainly, it is important to ensure that the trustee power of amendment itself is sufficiently broad to enable a trustee to update the investment and administration powers of a trust so as to meet the ever-emerging new and synthetic ways of making investments and creating business relationships.

In the absence of the powers of investment and administration being sufficiently broad, there lies a real risk that a trustee will breach the terms of the trust.

What are the consequences of such a breach?

This will largely turn upon the nature of the trust. In almost all cases, the trustee may be liable to restore the assets of the trust. The real practical question though, is whether a third party, who has suffered loss as a result of the trustee’s breach, may trace through the trustee to base a claim against the beneficiaries.

In this regard, the relevant general principle is that, where a trustee incurs a liability in conformity with the terms of the trust, the trustee is entitled in equity to indemnity, not only out of the trust estate (Trustee Act 1925 (NSW), subs 59(4), and equivalent provisions in other jurisdictions), but also from each beneficiary who is sui juris and absolutely entitled beneficially to the trust property. The leading authority usually cited for this proposition is Hardoon -v- Belilios (1901) AC 118.

The principle is well recognised as part of Australian law: Paul A Davies (Australia) Pty Limited (In Liq) -v- Davies (1983) 1 NSWLR 440; J W Broomhead (Vic) Pty Limited (In Liq) -v- J.W. Broomhead Pty Ltd (1985) VR 891 (McGarvie J) (“Broomhead”); McLean -v- Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 (Young J); Rosanove -v- O’Rourke (1988) 1 Qd R 171; Countryside (No 3) Pty Ltd -v- Bayside Brunswick Pty Ltd, unreported, Supreme Court of New South Wales, Brownie J, 20 April 1994 (“Countryside”); Jacobs’ Law of Trusts in Australia (5th ed, 1986) at paragraph (2105); Ford and Lee’s Principles of Law of Trusts (2nd ed, 1990) at para 1404.2).



It is a well accepted principle in Australian law, therefore, that where a trustee acts at the direction of their fully entitled beneficiary and thereby suffers loss, then to the extent that the assets of the trust do not indemnify the loss by the trustee, the trustee may recover against the beneficiary.

As earlier stated, the original authority for this principle may be found in Hardoon -v- Belilios. In this case “the beneficial owner of shares was held to be personally bound, in the absence of a contract to the contrary, to indemnify the registered holder against calls upon them. “The plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burdens unless he can show some reason why his trustee should bear them himself.”

Standing alone, this case may not cause much concern. It involved a beneficiary who was fully entitled as to the assets of the trust, and who directed the trustee as to a particular course of action. It seems only fair, then, that the beneficiary should not escape responsibility for the directions given to the trustee.

But that is the point. The law of trusts is founded upon principles of equity and fairness. When called upon to consider how to approach new principles of law, the courts fall back upon the principles of fairness and equity.

This was the approach of the Victorian Supreme Court in J.W. Broomhead (Vic) Pty Ltd (In Liq) -v- J.W. Broomhead Pty Ltd (1985) VR 891.

In Broomhead a company which was trustee of a unit trust went into liquidation. Whilst conducting a building business for the unit holders it had properly incurred liabilities. The liquidator was unable to obtain a complete indemnity out of trust assets, and so he sought a personal indemnity from the unit holders. It was held that this right of personal indemnity extended beyond the well-established cases where there is only one beneficiary and that beneficiary is sui juris and absolutely entitled (such as Hardoon -v- Belilios). McGarvie J decided (at 936) that the right of personal indemnity extends to a case “where there is more than one beneficiary and all of them are sui juris and entitled to the same interest as absolute owners between them.”

A reference to “the same interest as absolute owners” should be read as meaning only that the interest must be a vested absolute interest, and not as requiring that each unit holder have the same number of units.

Further, it also appears from Broomhead (937) that a beneficiary with less than an absolute interest may be liable to the trustee if that beneficiary has requested the trustee to assume office or to incur what otherwise would be an unauthorised liability.

Exactly how these principles apply to trusts generally, is still a little uncertain. Certainly, these principles are relevant to unit trusts, particularly where all beneficiaries are fully entitled to the assets of the trust.

How this may apply to a discretionary trust, is somewhat more difficult to determine.

As can be seen from the above, one relevant principle that may be drawn from Broomhead’s case is that:

a trustee has a right to be protected from the denials of a beneficiary who directed the trustee to undertake a course of action. The law then enables a person who has rights against a trustee the benefit of subrogation or tracing of the right against and through the trustee to certain of the beneficiaries.



As mentioned earlier in this paper, Broomhead is not necessarily regarded as general authority that must be followed. From a practical sense, however, the issues raised by Broomhead, and in this section of the paper, apply daily in financing transactions. So what does this mean?

Consider the following Practice Point:

Practice Point

Seek to prepare active management minutes that reflect a trustee acting within its active trustee capacity and not at the direction of unitholders.

And so as to help reduce the risk of claims against beneficiaries of trusts through the actions of trustees that are without power:

Practice Point

Ensure that the investment management and administration powers are sufficiently broad to enable the trustee to carry out the investments, conduct the business, or administer the assets of the trust.

At least in this way, if a trustee has sufficient power to undertake all tasks, then it is less likely that a potential creditor may successfully claim against a beneficiary through the trustee acting at the direction of the beneficiary in breach of the terms of the trust.

From a practical point of view, this is particularly relevant for trusts that are likely to borrow money for investment purposes.

Some banks take a realistic approach, and will lend to a trustee provided that the bank has received a solicitor’s certificate to the effect that the trustee has power.

In my own experience, however, many a delay has resulted from a lender’s lawyers imposing the requirement that a trust deed be amended to incorporate an express power enabling the trustee to enter into the particular credit transaction. Not only does this raise time delays but also the further expense and anxiety that comes with preparing, signing, and implementing a deed of amendment to a trust.

A further Practice Point that may be drawn from the Broomhead case is:

Practice Point

Ensure that you provide a warning that the law in Australia may enable a creditor claiming against an insolvent trustee of a unit trust to trace a claim against the trust unitholders. Thus, it is not sufficient to have a corporate trustee of a unit trust and to believe therefore that asset protection exists.

If you want further confirmation of this, refer to the Supreme Court of New South Wales Court of Appeal decision of I.R. Causley & G.J. Causley -v- Countryside (No 5) Pty Ltd & Ors (1996).

In a unanimous decision, the Court of Appeal held:

(a) the trustee of the unit trust was entitled to be indemnified by unit holders (both original and those that became unit holders by subsequent application) in respect of the liability for



damages incurred by the trustee in circumstances where the liabilities exceeded trust assets;

(b) one of the unit holders was entitled to recover moneys from the trustee in respect of work done by it for the trustee, and where the trust assets were insufficient to meet that liability, that unit holder was also entitled to indemnity from the other unit holders in respect of the trustee’s unpaid liability to it.

Speaking for the Court, Cole JA stated:

It is established that, absent provision in the trust deed denying the right of indemnity, or circumstances indicating good reason why a trustee should not be so indemnified, a trustee is entitled to be indemnified by the cestui que trust in respect of liabilities incurred by the trustee in pursuit of functions within power where the cestui que trust is or, if more than one are the absolute beneficial owners of the trust property the legal title to which is vested in the trustee.

In the later decision of Countryside (No.3) v Best/Lawson [2001] NSWSC 1152 (14 December 2001), that court was asked to visit the issue of whether there was an indemnity and if yes, the amount of indemnity by the unitholders in respect of the trustee. There were mixed successes, depending on your view. The background to the facts were;

10 On 20 December 1983, a Unit Trust Deed (“the Deed”) was executed between Mr Buckley, Mr Savins, Mr Lawson and Mr Blair (an accountant who had replaced Mr McKerlie), who were called “the Managers”, Rokolat Pty Limited (a company which later changed its name to Bayside Brunswick Pty Limited (“Bayside Brunswick”)), the trustee, and Lex, which was the original unit holder. Lex paid $60 and took up one unit to establish the Brunswick Unit Trust (“the Trust”). The Deed was in general terms. I need not describe the terms other than to say that the Deed provided that the Managers should, subject to the overall control of the trustee, “administer and manage the affairs of the Trust”. The Managers were to collect and receive all income of the Trust and to pay out all costs and disbursements incurred on behalf of the Trust. The powers of the trustee were extensive but were limited by the words “as directed by the Managers”. It will be seen that it was intended that Bayside Brunswick would operate substantially as a bare trustee and that is effectively what happened. Decisions were taken by the Managers, although it seems that Mr Buckley, Mr Savins and Mr Lawson were also the directors of Bayside Brunswick and Mr Blair was its secretary. Probably, no clear distinction in functions was drawn.

The Court also approved the comments of Brownie J from the earlier Causley decision;

“The plaintiff’s claim was based on the statements of Lord Lindley, delivering the advice of the Judicial Committee, in Hardoon v Balilios [1901] AC 118 at 123-125: as between a trustee and a sole cestui que trust, who is under no disability, the plainest principles of justice, and the rules of equity require that the cestui que trust who gets the benefit of the trust property should bear its burden unless he can establish some good reason why the trustee should bear the burden himself; the right of the trustee to indemnity in respect of liabilities incurred by him within the scope of the trust is not limited to the assets of the trust, but extends to the imposition of a personal liability on the cestui que trust; and the liability of the cestui que trust arises from the mere fact of the relationship between the parties, and does not depend upon there having been any request from the cestui que trust to the trustee to incur the liability.”



33 However, in his conclusion, Brownie J relied, not merely on the fact that the unit holders were beneficiaries who were sui juris and absolutely entitled, but also upon the circumstance that Bayside Brunswick was established as the vehicle to carry out the particular venture . His Honour said:-

“On the evidence, the appropriate inference is that those who applied for units in 1984 did so as participants in some commercial arrangement, in the expectation of profit: they paid a total of $49,920 each for units in a trust the sole function of which was to pay for, subdivide, develop and then resell the land in question; and they did this in the expectation that the trustee would make a profit for them. To adapt the language of Lord Lindley in Hardoon, the plainest principles of justice require that the beneficiaries who get all the benefit of the trust property should bear its burden unless they can show some good reason why the trustee should bear it itself; and the fact that there are several beneficiaries, rather than one beneficiary, is not of itself a good reason.”

And later

38 I agree with the view expressed by Professor Ford that, in the case of multiple beneficiaries, in order to establish personal liability on the beneficiaries, there needs to be more than the mere fact that the beneficiaries are sui juris and absolutely entitled. An additional fact may arise from a circumstance such that the beneficiary is a settlor of the trust or contributed the funds which were managed or that the beneficiaries requested that the expenditure be incurred or approved of its being incurred or that the trustee was carrying on a business established for the benefit of the beneficiaries.

So it is not the nature of the trust and the beneficiaries interest in it, what is important are the facts and involvement of the beneficiaries in the actions of the trustee that gave rise to the liability. Perhaps, taken to its logical extreme, such a view could support a liability upon beneficiaries of discretionary trusts, where they where knowingly and directly involved with the actions of the trustee.

And later still….

44 In my view, GLI did not, by reason of this transaction (a subscription for units long after the initial establishment and subscription of the early unitholders), come under a liability to indemnify Bayside Brunswick in respect of the expenses which Bayside Brunswick had previously paid or incurred. In my opinion, no principle of trust law or of the law of unjust enrichment requires that GLI be held liable for debts incurred prior to that transaction. The transaction did not amount to adoption and approval of all that had previously occurred. It was merely a transaction whereby a modest sum was raised with a view to overcoming some of the problems which the venture then faced.

So the mere subscription for units at a later time did not make the unitholder/beneficiary liable for the past debts of the trustee.

When pressed, the court found that it could trace, for ‘debt’ purposes under the insolvent trading provisions, against the unitholders …..

Therefore, as Bayside Brunswick’s obligation was a debt, it seems to me that the corresponding obligation of each unit holder was likewise a debt for the purposes of s 592.



I do not accept the submission, which has been put to me on behalf of the defendants, that a trustee must necessarily have recourse to the Trust’s assets before seeking personal indemnity. The authorities are to the contrary.

However, on the facts, the insolvent trading provisions did not ‘make their way through’ the trust to the unitholders, but only because…..

67 On the facts before me, I cannot conclude, as a matter of probability, that, when Lex, GLI and Buckley Dowdle (the unitholders) took up their units, it was reasonable to expect that they or any of them would not be able to pay all their debts as and when they became due. On the evidence before the Court, both Countryside and the defendants expected that Bayside Brunswick would be able to pay the instalments of the purchase price due to Countryside.

Practice Point

A clear warning on the use of a trust and the interactions of the trustee and the beneficiaries seems appropriate. The more the interaction and involvement of the beneficiaries in the actions of the trustee, the more the likelihood they will be liable with the trustee for any excess of liabilities.



2. THE SETTLOR

The settlor is the person who first created the trust. As the name implies, this is the person who has given to the trustee the property over which the initial trust will be established (often cash). In practice, this person invites the trustee to accept the trustee role subject to the terms and conditions of trust powers that exist at general law, in statute (such as a Trustee Act), and as may exist or will be modified by the terms of the trust deed.

Who should be the settlor?

From a taxation perspective, the issue to be addressed is the potential application of section 102 of the Tax Act. It is not so much a question of the actual identity of the person, but rather the general class or category of who should be ‘invited’ to volunteer to be the settlor. In my view this depends on the type of trust that is being established.

If it is a superannuation fund trust, the question of who should be the settlor is rather simple. A superannuation fund may be originally settled by either of the member or an employer of the member. Superannuation funds do not have the problem created by section 102 of the Tax Act. This is because, for taxation purposes, Part 3-30 of the 1997 Tax Act is deemed to be a code for the taxation of superannuation entities (see section 950-150).

But what of discretionary trusts, unit trusts, bare trusts, hybrid trusts, and such? The potential application of section 102 of the Tax Act makes it important to ensure that proper procedures are followed for the settlement and that the correct identity of a settlor is adopted.

As far as is relevant for the purposes of this section of the paper, section 102 reads:

102(1) Where a person has created a trust in respect of any income or property (including money) and:

(a) he has power, whenever exercisable, to revoke or alter the trusts so as to acquire a beneficiary interest in the income derived by the trustee during the year of income, or the property producing that income, or any part of that income or property;

(b) …

the Commissioner may assess the trustee to pay income tax, under this section, and the trustee shall be liable to pay the tax so assessed.

102(2) The amount of the tax payable in pursuance of this section shall be the amount by which the tax actually payable on his own taxable income by the person who created the trust is less than the tax which would have been payable by him if he had received, in addition to any other income derived by him, so much of the net income of the trust estate as –

(a) is attributable to the property in which he has power to acquire the beneficial interest;

(b) represents the income, or the part of the income, in which he has power to acquire the beneficial interest; or



(c) is payable to or accumulated for, or applicable for the benefit of, a child or children of that person who is or are under the age of 18 years.

102(3) Where this section is applied to the assessment of income of a trust estate or part thereof derived in the year of income, no beneficiary shall be assessed in his individual capacity in respect of his individual interest in the income or part to which this section has been so applied, and the trustee shall not be assessed in respect of that income or part otherwise than under this section.

The first issue that may be drawn from section 102 is:

Practice Point

The settlor must not be a person who has any control or may in the future be capable of having any control over the whole or any part of the trust.

In an ordinary family discretionary trust situation, section 102 makes it clear that the settlor should not be the mum, the dad, or any relative of them. And for a unit trust, it certainly should not be a person who is or may become a unitholder.

But isn’t it just a name that is required, someone who says that they will act as settlor?

Isn’t the name enough?

The question, for section 102 purposes, is not who is the person named as settlor, but who is the settlor at law.

Thus, even though the accountant or solicitor may be named as the settlor, if it can be shown that the true source of the settlement sum came from the principal or guiding mind behind the trust (through perhaps being able to show that the solicitor or accountant charged the settlement amount paid by them as a disbursement), then the truth will prevail and section 102 will have application as though the true settlor were in fact named in the trust deed.

Compare case 16 TBRD Case R40:

Pursuant to applications signed by Y per X, his father, shares were allotted in Y’s name, the subscription moneys being supplied out of X’s private bank account, X’s private ledger indicating a loan to Y in that amount. Subsequently, the company’s articles having been amended permitted X to compel the transfer to him or his nominees of any shares, Y’s shares were transferred to X for a sum (at valuation) in excess of cost, the amount being credited to Y in X’s ledger leaving a credit balance in Y’s favour. Later, a holding company was formed and shares were allotted to A and B who declared in writing that they held them in trust for Y, then 21/2 years old. The subscription moneys were again paid out of X’s bank account and debited to Y’s account in his ledger. Held, by majority, the funds used to purchase the holding company’s shares were provided by X out of his funds and therefore he was creator of the trust and was properly assessed pursuant to sec. 102(1)(b). (1965) 16 T.B.R.D. Case R40.

[Extracted from CCH Federal Tax Reporter 30,510.]

Thus, the question is not who is the person named as settlor but rather who in fact is the settlor.



This is a genuine role, requiring a true gifting of the initial trust property for the purposes expressed in the trust deed. For this reason, it is appropriate that the settlor well understand the intent of their actions and the substance of the question that they are asking of the trustee.

Where this approach is followed, the parties and beneficiaries to the trust may be confident that the Taxation Office will not succeed in any challenge based upon section 102 of the Tax Act.

Practice Point

The settlement sum or property over which the trust is created must genuinely be gifted, there must be no expectation of reimbursement.

How much should the settlement sum be? That is an issue of the generosity of your settlor, certainly it should not be a trifling amount.

A mere nominal amount, it could be argued, is not sufficient to sustain the commencement of a trust. This, in my view, may support an argument that there was never in fact any intention by the settlor to establish the trust. They merely gifted money at the request of a family friend for a purpose that they may not have understood.

Of course, what is a trifling amount is a question of degree, and will no doubt differ among many people. For what it is worth, my preference is for the settlement amount to be not less than $100.

Who is preferable as the settlor? — Discretionary Family Trusts

For discretionary trusts, my personal preference for a settlor is a close family friend. Someone who can genuinely say that it was their personal wish to establish the trust, even if at the request of the principal of the family, for the benefit of the family.

Some guidance may be found from the AAT and Federal Court findings in Faucilles 90 ATC 4003 (profiled in further detail later in this paper).

Apart from its finding that John Kakridas intended that the terms of the trust deed should cloak his real intentions, the Tribunal made a clear finding that it was he who caused the trust to be established and was responsible for the manner in which it was structured. Necessarily involved in that finding is that John Kakridas caused Faucilles to execute the deed as trustee and that he procured Julia Sztainbok (his accountant’s wife) to assume the role of settlor and, as such, execute the deed. The settlor clearly played no other role and was not intended to do so.

Julia Sztainbok was not called as a witness before the Tribunal and there was no direct evidence before it as to the circumstances in which she was recruited to assume the role of settlor. In those circumstances, the Tribunal was required to draw inferences from the circumstances surrounding the relevant events. It was, in our opinion, open to the Tribunal, on the material before it, to infer that the settlor had no other intention than to assist John Kakridas in effectuating whatever purpose he had in mind in establishing the trust.

For a transaction to be a sham there must be an intention common to the parties to it that the transaction is a cloak or disguise for some other and real transaction, or sometimes as in Clyne -v- Federal Commissioner of Taxation (1983) 83 ATC 4508 for no transaction at all. It is, as Lockhart J, pointed out in Sharrment Pty Ltd -v- Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454 something which is not genuine or true but false or deceptive.



Where it is alleged that the trusts of a settlement or some of them are a sham, of necessity it will need to be proved that it was the intention of the settlor that the settlement itself be a sham, or in a case such as the present that some of the trusts of that settlement are a cloak or disguise for the real trusts intended to bind the trustee. Commissioner of Stamp Duties -v- Jolliffe (1920) 28 CLR 178 at 181 is clear authority, if authority be needed, for the principle that intention is a necessary ingredient in the establishment of a valid express trust.

The Tribunal found, and it was open for it so to find, that the settlement was brought about by Mr Kakridas; that he “caused” it to be made. That fact, coupled with the fact that Mrs Sztainbok was the wife of the tax accountant to Mr Kakridas and could be expected to give effect to her husband’s client’s wishes, plus the inference which could properly be drawn from their failure to give evidence that the evidence of the accountant and his wife would assist the taxpayer, was sufficient in my opinion to permit the Tribunal to draw an inference as to the intention of Mrs Sztainbok and thereby justify the conclusion reached by the Tribunal that Mrs Sztainbok, like Mr Kakridas, did not intend that the default distribution provision would be effective.

In short, the AAT and the Federal Court placed a great deal on the identity or assumed intentions of the settlor when assessing how to apply tax principles to the trusts in Faucilles.

Who is preferable as the settlor? — Unit Trusts

Where the particular trust is a unit trust then the issue of “who?” turns upon the purpose to which the trust will be put.

Where the principal units in the unit trust are to be held by a superannuation fund, then, consistent with the purpose of the unit trust being a vehicle for investment by the superannuation fund, the superannuation fund trustee is quite acceptable as the settlor. Question, however, the potential application and requirement to comply with the Superannuation Industry (Supervision) Act, 1994.

At section 65 of the SIS Act, a trustee of a superannuation fund “must not give any other financial assistance using the resources of the fund to a member of the fund or a relative of the fund”.

In the context of this section, there is a potential argument that there may be a breach of this SIS rule where the trustee of a superannuation fund is the settlor of a trust, and subsequently the assets of the trust (which originate from the assets of the superannuation fund) are then used by the unit trust to provide mortgage security for a debt by unit holders who are members or relatives of members of the fund.

Whilst the process may nonetheless seem artificial, a conservative approach would suggest that, in such circumstances, the superannuation fund trustee should not be the settlor of the unit trust. If the superannuation fund becomes a unit holder through a subsequent application and allotment, the argument remains available that the superannuation fund did not actively engage in an indirect provision of financial assistance; it was merely a later investor rather than the originator of the trust structure and concept.

In the circumstances of a property investment based unit trust, where the sole unit holders are intended to be husband and wife, once again it is my view that a close family friend would be a suitable settlor.



In my view, there are very few circumstances where I would accept that it would be appropriate for a professional person such as a solicitor or an accountant to be the settlor of a trust. I appreciate that it is a fine line, however the need is to be in a position whereby a settlor, if questioned, can confidently say, “Yes, I was asked to be the settlor and to establish the trust, but I did so gladly, and with the intent that the moneys that I gave would establish the business/investment structure that would benefit my close friend’s family.”

The assumptions arrived upon by the AAT and accepted by the Federal Court in Faucilles should be avoided. Where there is no relationship between the settlor and the principal of the trust, other than one purely pertaining to professional advice, then it seems appropriate that the only reasonable assumption to be drawn is that the trust was established at the request/direction of the principal so as to achieve the known tax benefits.



3. STAMP DUTY LAWS

This part proposes to look at the stamp duty issues which, in my view, are of day to day practical application.

Establishment of a trust – stamp duty issues

Stamp duty applicable upon the creation of a trust is dependant upon the nature of the trust created and the property which may be said to be subject of the trust upon creation.

In New South Wales, the primary provisions relating to stamp duty upon execution of a trust may be found in Chapter 2 of the Duties Act 1997. The form and type of trust will determine whether ad valorum duty is payable or a fixed nominal rate only. Ad valorem duty will apply to the extent that there is a declaration of trust involving a change in beneficial ownership of dutiable property (refer section 8, 9, and 11). Other forms of stamp duty for trusts in Chapter 2 are found in section 54 to 59.

Form over substance – Ordinary Trusts

It is critical to understand that an instrument need not give effect to a valid trust at trust law before it can be subject to stamp duty. All that is required is that the instrument the subject of review satisfies the descriptive terms that are expressed under the heading “Declaration of Trust” in subsection 8(3).

‘Declaration of Trust’ means any declaration (other than by a Will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration.

The heading “Declaration of Trust” is stated as being applicable to any instrument that refers to property that “is or is to be held in trust” – that is, it has operation in respect of future trusts, it extends to where no property is vested in the trustee and to cases to which no trust is presently operative.

It is not necessary that as at the date of execution by the first party that a validly constituted trust exists. Accordingly, the absence of a validly created trust does not render an instrument a legal nothing and therefore invalid for stamp duty purposes.

It would appear, however, that if the purported trust never comes into existence, the taxpayer can apply for a refund of stamp duty on the basis of a complete failure of the trust.

One of the clearest examples of an instrument being subject to stamp duty in circumstances where it very likely did not create a trust, may be found in Tooheys Ltd -v- Commissioner of Stamp Duties (1961) 105 CLR 602.

In this case, the Directors of Tooheys Limited executed a trust deed for the purpose of creating a superannuation pension fund. The Directors and the General Manager were stated as the first trustees. By clause 4, the company was to contribute an amount of £50,000 at a future date.



Walsh J, in the Supreme Court of NSW noted (and the High Court basically agreed with him) that, as at the date of creation, it was not clear:

• if any property was vested in the trustee; and

• whether, in regard to any individual employee, it could be said that an interest in the fund was conferred on him.

It was probable that two essential elements of a valid and effective trust at trust law were absent: property and beneficiaries. At trust law, it is commonly recognised that there are four essential elements to any validly created trust:

1 Trustee;

2 Property;

3 Beneficiaries; and

4 Trustee Duty.

It is often said that the existence of the trustee duty (found at trust law and in the trust deed) binds each of the other three elements together in the creation of a trust. In Tooheys case, upon execution there appeared to be neither property nor beneficiaries. It accordingly followed that, at trust law, no trust existed as at the date of execution.

The judgment does not clearly express this point, however, it would at least appear arguable that the promise under a trust deed by Tooheys Limited to contribute £50,000 at a future date would give rise to property which could be the subject of the superannuation pension trust. Even if this argument was accepted however, the absence of members would still render the document incapable of creating a legal trust as at execution.

Notwithstanding that it was accepted that no trust was created, the document was liable to stamp duty following first execution pursuant to paragraph 2(a) of the heading “Declaration of Trust” (now found in subsection 8(3));

the question is not, therefore, whether this deed is, in the ordinary sense of the term, a declaration of trust, but whether it satisfies the statutory definition. It is only to be expected that this description would go beyond the ordinary sense of the term, since ‘ordinary’ declarations of trust are included in the definition of ‘conveyance’, and are thus chargeable without recourse to the provision now under consideration.

From a stamp duty liability point of view, declarations of trust may arise even where there is no real intention to create a trust and where the trust would, in any event, as a result of the general law, be nonetheless imposed upon the trustee. In other words, a liability to stamp duty on a declaration of trust basis may arise where it need not have occurred.

The mere description of a person in a contract as “trustee” for a named beneficiary was enough for the Chief Commissioner to effectively impose “double” stamp duty (once for the conveyance and once for the trust declaration) in Farrar -v- Commissioner of Stamp Duties (1975) 5 ATR 364.

Generally, the ad valorem on declarations of trust can be avoided by taking advantage of the well founded principle that a person who intends to acquire property as a trustee cannot later deny the existence of the trust: Rochefoucauld -v- Boustead [1897] 1 Ch 196.



Practice Point

Tell clients. “If you wish to buy something in a trust do not name the trustee as acting as a trustee, ie do not write on the land contract or share application ‘XYZ Pty Ltd as trustee for the Smith Family Trust’, just write ‘XYZ Pty Ltd’. Let the minutes on the bank records show that the purchase was by the trustee as trustee.”

Form over substance – Bare Trusts

Following the decision of the High Court in Commissioner of Stamp Duties (NSW) -v- Pendal Nominees Pty Limited and Anor 89 ATC 4207, similar form over substance conclusions can be reached when reviewing ‘apparent purchaser’ or ‘bare trusts’.

Bare trusts are often employed where it is necessary to conceal the true owner or purchaser of the property (e.g. shares, land, businesses etc) which is to become the subject of the bare trust. The bare trustee holds the legal ownership of the subject property for the express and absolute benefit of the true owner. The bare trustee has no power or discretion as to the property as regards the true owner.

In my experience, this bare trust approach often arises for example where a second shareholder has been required for Corporations Act purposes and in property developments. In property developments, this arises because a property developer wishes to purchase property without the vendor becoming aware that the purchaser is a person who seeks to develop their property.

The use of a bare trust is significant when it is appreciated that the stamp duty cost of being able to conceal the true identity of the purchaser is only $10.00 (section 55). The commercial application of a bare trust is further enhanced when it is recognised that, for capital gains tax purposes, Section 106-50 of the Income Tax Assessment Act 1997 deems the true owner to be the relevant owner for the purpose of assessing any capital gains tax upon any subsequent disposal by the bare trustee. Section 55 provides:

55 (1) Duty of $10.00 is chargeable in respect of:

(a) a declaration of trust made by an apparent purchaser in respect of identified dutiable property:

(i) vested in the apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property, or

(ii) to be vested in the apparent purchaser upon trust for the real purchaser, if the Chief Commissioner is satisfied that the money for the purchase of the dutiable property has been or will be provided by the real purchaser, or

(b) a transfer of dutiable property from an apparent purchaser to the real purchaser, in a case where dutiable property is vested in the apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property.

(1A) For the purposes of subsection (1), money provided by a person other than the real purchaser is taken to have been provided by the real purchaser if



the Chief Commissioner is satisfied that the money was provided as a loan and has been or will be repaid by the real purchaser.

(1B) This section applies whether or not there has been a change in the legal

description of the dutiable property between the purchase of the property by the apparent purchaser and the transfer to the real purchaser.

Note: For example, if the dutiable property is land, this section continues to apply if there is a change in the legal description of the dutiable property as a consequence of the subdivision of the land.

(2) In this section, purchase includes an allotment.

A review of the Pendal Nominees decisions in the Supreme Court, the Court of Appeal, and subsequently the High Court confirms that, from a stamp duty point of view, the following rules that must be adopted in any circumstance where it is desired to evidence and have stamped a bare trust relationship:

1. The trustee must appear to be the only purchaser and is acting for them self

The relationship of the bare trustee and true owner should not be expressed in the original purchase documents. Such a relationship must only be expressed after acquisition of the subject property by the bare trustee (apparent purchaser). It is clear that the bare trustee must upon the face of the document pursuant to which they acquire legal title be expressed as the purchaser. Section 55 requires that the bare trustee be expressed in the purchasing document as the purchaser. As happened in Pendal Nominees, if the bare trustee is expressed as being a bare trustee, the concessional stamp duty of $10.00 shall fail and most likely ad valorem stamp duty shall arise.

2. Declare the bare trust before or after the purchase?

Paragraph 55(1)(a)(i) is expressed in the past tense, that is, it only relates to property “vested”, it is necessary that the bare trust only be declared after acquisition by the bare trustee of the subject property. Accordingly, it follows that the document evidencing the bare trust can only be entered into following the acquisition of the subject property. In terms of a property transaction this may be before settlement, but certainly it must occur after exchange of contracts.

Unlike the old apparent purchaser provision contained in the Stamp Duties Act, paragraph 55(1)(a)(ii) recognises that an apparent purchaser declaration of trust may be made in advance of the acquisition. As can be seen from the above quoted extract, an apparent purchaser declaration of trust made in advance of the purchase will only satisfy the criteria “if the Chief Commissioner is satisfied that the money for the purchase of the dutiable property has been or will be provided by the real purchaser”. Having regard to the fact that ad valorem stamp duty will be payable if the Chief Commissioner is not satisfied, great care must be taken when seeking to declare an apparent purchaser declaration of trust prior to entering into any relevant transaction. Since the earlier quoted authority of Rochefoucauld -v- Boustead [1987] clearly supports the principal that a trustee cannot later deny the existence of a trust, it is respectfully suggested that the safer course of action is to prepare and execute the apparent purchaser declaration of trust after the acquisition has been made.



3. Must be able to prove that the true owner actually paid for the purchase

Section 55 requires that the true purchaser be the one who has in fact paid the purchase monies for the property. It is my opinion that this requires a clear audit trail so as to easily prove to the Chief Commissioner of Stamp Duties that the money was in fact provided by the purchaser to the apparent purchaser (bare trustee) and then such monies were passed by the apparent purchaser to the vendor of the subject property. In my conservative experience, it is not sufficient for the true purchaser to arrange a loan and have the loan monies directed to the vendor. Rather, it is safer that the loan funds be drawn by the true purchaser in favour of the apparent purchaser who in turn should draw against these funds and pay the vendor.

Provided the three criteria expressed above are followed, a stamp duty liability of $10.00 only should arise, regardless of the value of the underlying dutiable property over which the bare trust has been expressed.

It is my opinion that a trust document of this nature should not exceed one page. The purpose of the document is to express nothing more than a bare trust; even a lawyer should be able to express this in one page. If the document includes covenants and obligations, the risk arises that the document will be acknowledged as more than that required for the purpose of a bare trust and more than what is necessary for the purpose of section 55. A far greater liability to stamp duty would likely arise under section 8, 9, and 11.

A sample of a bare trust is attached.

“Vested or to be Vested”

The concept of “declaration of trust” in section 8 and the effect of section 9 results in stamp duty based on the ad valorem value of the underlying dutiable property. If sections 8 and 9 do not apply, then it is very likely that section 58 will impose a flat rate of stamp duty of $500.00.

If the section 9 rate of duty applies, the calculation of dutiable value will be based on the property vested or to be vested.

Pendal Nominees once again represents a culmination of many prior stamp duty cases which have looked at the concept of “vested or to be vested”. From this case, and the many that preceded it, the following three principals can be drawn:

1. The property (whether vested or to be vested) the subject of a trust upon which stamp duty is to be calculated has to be both ascertainable and identifiable as at execution. This requirement can now be found within the definition of “declaration of trust” where it states that the declaration must be in respect of “identified property”.

2. “Vested” relates to property which, upon execution of the trust, either vests in the trustee at the point of execution or is already vested in the trustee at that time. For the draftsperson, the phrase “vested” can cause the most problems. As has already been stated, equity will not allow a trustee to deny the existence of the trust. The facts surrounding the way in which the trustee acquired the property is often sufficient to evidence the existence of a trust. As a safeguard, however, a draftsperson may like to restate the fact that the trustee holds the property for the benefit of the beneficiaries. This is where the problem occurs because, in so doing, the trustee will be stating that the property “is vested” in them and is declaring a trust already in existence. Ad valorem stamp duty will be payable in circumstances where it need not have been.



3. The phrase “to be vested” captures any property that is ascertainable and identifiable as at the date of execution which shall be vested to the trustee at some future time.

It is perhaps the latter point for which Pendal Nominees shall be remembered, although it raises and answers a number of other issues as well. Pendal Nominees has extended the “to be vested” principle expressed in DKLR Holding Co. (No. 2) Pty Limited -v- Commissioner of Stamp Duties (NSW) 82 ATC 4125.

DKLR Holding Co. appeared to have left the principle that if there was an expectation existing as at the date of execution over ascertainable and identifiable property that that property would in the future vest in the trustee, the value of that property must be included in any assessment of stamp duty of the relevant trust.

Pendal Nominees accepts this ‘expectation approach’ and extends it to include any property over which there exists a mere futurity of it being vested after execution into the trust.

What does this mean?

Unfortunately, the view adopted by the High Court is not readily capable of application. From a given set of circumstances it is not difficult to identify when the ‘mere futurity’ may exist, however, it is otherwise difficult to describe.

Certainly, some direction may be taken from the intention of the High Court to establish an objective test. Whilst it is not abundantly clear, it would appear that the High Court in Pendal Nominees is seeking to move away from the ‘expectation approach’ which seems to require an objective look at what was the subjective intent of the settlor at the time of the creation of the trust. Perhaps one way of looking at the ‘futurity test’ is to say ‘let the facts speak for themselves, with the benefit of hindsight’.

In view of the above, it is my preference that the documentation which establishes the trust be of such a nature that it reflects, as at the date of execution, that there could not have existed an expectation or mere futurity in respect of property which subsequently was vested into the trust.

Practice Point

Try to manage the trust creation process so as to avoid any inference at the creation time that further property will be settled upon the trust.

Re-settlements

The recent speed and volatility of changes in the Australian tax system has required practitioners to continually update their ideas and business structures. For discretionary trusts, these changes have brought a necessity for the discretionary trust deed to allow the trustee the power to distribute a capital gain, and to differentiate between the different types of income received, and the power to allocate the differing forms of income received to selected beneficiaries. It is by this mechanism that the trustee may have power to allocate franked dividends or capital gains to a beneficiary whose personal income tax position is such as to take advantage.

It is often also required that the trust deed be amended so as to introduce a new beneficiary to which the trustee may make distributions.



In each of the circumstances described above, where the trustee has amended to accommodate these, there exists a very real danger that the trust will have been resettled.

The courts have accepted the view that a settlement includes a re-settlement or reconstitution of trust. Accordingly, it follows that, where a trust deed of variation is such as to constitute a re-settlement, the document evidencing the re-settlement may fall within the definition of a transfer for the purpose of section 8, and accordingly, shall be subject to ad valorem stamp duty.

Subject to how the principles in Buckles case are to applied, the ad valorem stamp duty shall fall upon the whole of the unencumbered value of the property of the trust. Debts and liabilities of the trust are ignored when assessing the ad valorem stamp duty payable.

Can this be avoided where the trustee has power to amend the trust deed by resolution? The answer, very likely is no. Section 10 provides:

It is immaterial whether or not a dutiable transaction is effected by a written instrument or by any other means, including electronic means.

It follows therefore that the issue is not whether or not there is a declaration of trust, the issue is whether or not there is a declaration of trust within the concept of section 8 which has resulted in a change in beneficial ownership of the underlying trust (dutiable) property. Section 10 simply required that there be a declaration of trust resulting in the change of beneficial owner of dutiable property. The form of declaration of trust would appear to be irrelevant.

So what is the re-settlement?

It is easy to recognise but difficult to describe. In the writer’s opinion the best approach is to examine the original and the amending document and ask the question, “Does this amending document amend the charter of future rights and obligations of the parties to the trust deed?” If yes, it very likely will constitute a re-settlement.

The issue most often arises in the context of altering the beneficiaries of a trust, either by addition or exclusion.

From a trust law point of view, the distinction is that a new discretionary beneficiary, by being named as such, possesses nothing more than a mere expectancy. That is, they have an expectancy that the trustee may or may not exercise discretion in favour of them. If the trustee exercises its discretion to benefit beneficiaries, the new beneficiary has an expectancy that they are included within the class of persons whom the trustee may select, but nothing more.

By contrast, a default beneficiary has a contingent interest in that if the trustee does not exercise discretion to benefit any of the named beneficiaries, the default beneficiary shall, by virtue of the trust deed, become entitled to the income or capital over which the trustee had a right to exercise its discretion.

From a NSW stamp duty perspective the fear of ad valorem stamp duty has largely been accommodated under the Duties Act and Revenue Ruling DUT 17. This has been achieved not by a change to the view as to what constitutes a re-settlement; rather it is that for ad valorem stamp duty to apply there needs to be a passing of interest from the current beneficiaries to or from the altered beneficiaries. Without this ‘transfer’ of interest occurring there is no transfer within the context of sections 8 and 9.



But the principle of re-settlement remains nevertheless of relevance in the nature of the interests of the beneficiaries and the context of capital gains tax applying to these.

With regard to the income and capital view, it is the writer’s experience that the easiest way to accommodate this, and yet avoid a re-settlement, is to define the concept of income in circumstances that will satisfy the desired approach. Of course, care must be taken so as to achieve the desired Income Tax Assessment Act requirements and avoid the possibility of re-settlement.

The most recent case in this area of law is Nichols Cabramatta Wholesale Stationary Supplies Pty Limited v. Commissioner of Stamp Duties (NSW) 93ATC 4647.

The purpose of the Deed of Variation of the trust was so as to achieve certain income tax liability advantages. The taxpayer trustees were of the view that the proposed Deed of Amendment would be subject to stamp duty as a deed not otherwise dutiable – $10.00 only. Unfortunately, when submitted to the Office of State Revenue, that office took the view that ad valorem stamp duty was payable on the basis of a resettlement. Following certain submissions by the taxpayer, which were accepted by the Chief Commissioner of Stamp Duties, the primary stamp duty was reduced to $34,325.00. Because the document was lodged late there was also a fine of 100% and therefore a further amount payable of $34,315.00. The $10.00 difference most likely relates to the original $10.00 submitted when first being assessed.

To put the matter more simply, the trustees were expecting $10.00 stamp duty. Their actual liability was $68,640.00.

It is worth quoting Justice Sulley’s comments at page 4652-3:

They [the Trustees] imagined that the Deed of Amendment effected a lawful minimisation of the exposure to Income Taxation of Nichols Property Trust: and so it did. They thought that instrument achieved that result by adding at least one corporate entity to an appropriate category of beneficiaries: and so it did.

The undoubted fact that the Deed of Amendment has been found to entail unintended consequences, the principal among them being an exposure to stamp duty, does not at all entail, in my opinion, that the instrument is “radically different” from what was “intended”.

The Trustees failed in an argument that their signature of the Trust Deed of Amendment was by way of a mistake of fact.

If you need more proof that stamp duty is a form over substance law, once again it is valuable to look at the comments of Justice Sulley at page 4651:

I have, at the outset of a consideration of that argument, a conceptual difficulty. The Commissioner, it seems to me, is clearly correct in his contention that ... stamp duty is a charge on instruments and not on transactions which they represent. In my opinion the Commissioner is correct, also, in his contention that the instrument; ... was chargeable to stamp duty upon first execution thereof.

Practice Point

Be very careful if amending the terms of a trust to extend the beneficiary class. Take great care to avoid a resettlement of the trust.



Appointment of trustee

Following appointment or retirement of a trustee, it is often necessary to advise various persons who are responsible for recording the former and new trustee as the owner of the property subject to the trust, e.g. Registrar General in respect of land, company secretary in respect of shares, etc. The change of registered owner requires a transfer form. In the absence of anything to the contrary, the Office of State Revenue will seek to impose ad valorem stamp duty on the transfer form in respect of the dutiable property. Section 54 of the Duties Act provides a confessional rate of $10.00 where the transfer document is consequential upon a change of trustee. If the change of trustee is in respect of a “special trustee” nothing further need be proven to access the $10.00 nominal stamp duty. For these purposes, section 51(1) states a “special trustee” to be:

• public trustee;

• an official trustee company; or

• a complying superannuation fund.

The principal concern for changing trustees of other trusts arises because of the proviso in section 54(3). This section provides:

Duty of $10.00 is chargeable in respect of a transfer of dutiable property to a person other than a special trustee as a consequence of the retirement of a trustee or the appointment of a new trustee, if the Chief Commissioner is satisfied that, as the case may be:

(a) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust; and

(b) none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust; and

(c) the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person.

If the Chief Commissioner is not so satisfied, ad valorem duty is chargeable in respect of the transfer.

Critical to entitlement to nominal duty is the requirement that the Chief Commissioner of Stamp Duties is satisfied that the newly appointed or additional trustee is not or cannot also become a beneficiary under the trust, or that following retirement of a trustee, the remaining trustees do not become beneficiaries under the trust. Where this is available, full ad valorem stamp duty upon the unencumbered value of the trust applies.

It is for this reason that it is common to find in trust deeds that any person who has been appointed to the office of trustee is immediately upon appointment disentitled as a beneficiary of the trust. Once again, care should be taken at any time that a trustee is appointed or removed.

Practice Point



If changing trustees of a trust, check whether there is a need to notify others and to also change the legal registered owner’s name of trust property. If this is needed, take care to ensure the concessional stamp duty benefit of section 54 is obtained.

Winding up trusts – the stamp duty consequences

Before looking at the taxation consequences of the winding up of a trust, it is appropriate to briefly examine how a trust may be wound up.

The most practical and simple starting point for understanding how a trust may be wound up is to commence with what is required to create a trust. n very simple terms, there are four essential elements to every trust: a trustee, beneficiaries (sometimes known as objects), property (in whatever form such as cash, real estate, shares, etc), and a trust duty (which starts with the essential purpose of the trust, relies on centuries of equitable trust rules that are modified by reference to Trustee Acts and the expressed terms of a trust deed, if any).

It is sometimes said that the most important of these four essential elements of a trust is the existence of the trust duty. In fact, the trust duty binds the other three elements together and identifies the existence of a trust.

In very simple terms, the absence of any one of these four elements renders the trust no longer effective. Please accept this as a very simple rule in respect of which there are a great many exceptions or special circumstances where the general rule will no longer apply. Perhaps the most common exception to this general rule is the absence of a trustee. The Supreme Court will not allow a trust to fail simply because the trustee no longer exists. This is why such rules were developed, which state that the executor of a person who held property on trust for another will assume the deceased trustee role and continue to hold the property that was in the deceased’s name for that other person.

To answer the question, ‘What is the most simple way to wind up a trust?’, the answer immediately becomes:

Pay out the trust property to the beneficiaries. At this time there will no longer be beneficiaries or there will be no property over which the trust can be expressed. The former trust will be at an end.

So, the easiest way to wind up a superannuation fund trust is to pay the benefit to the members or to the benefit of the members (say in the purchase of a superannuation pension or annuity in their name from a life office). A unit trust is wound up through a trustee repurchase of the units or unit redemption or whatever method is prescribed by the terms of the trust. Where the power or discretion of distribution of capital of a discretionary trust is available, a valid exercise of that discretion will usually be sufficient to wind up the discretionary trust.

Similarly, the occurrence of the vesting date will generally give rise to a similar circumstance. On the proclaimed vesting date the trustee is usually obliged to apply the assets of the trust to the “vesting beneficiaries”.

Taxing issues?

There are no formal taxation administration issues that must be attended to in the winding up of a trust. There will however be tax consequences. Broadly these may be identified as:



• Stamp duty on transfer out of dutiable property.

• Capital gains tax disposal.

Whilst this section of the paper refers to the New South Wales Duties Act, there are similar provisions that exist in most other stamp duty laws of the states and territories of Australia.

Where the relevant stamp duty law incorporates a transaction based regime, as exists with respect to dutiable property in New South Wales, the vesting of a trust may involve a transfer of beneficial ownership with consequential stamp duty liabilities. Real estate, shares, units, interests in a business, and other such assets will attract the applicable stamp duty rate on the transfer of the interests to the beneficiary.

In non-transaction based stamp duty jurisdictions, where there is still a need to identify a stampable document, a stamp duty obligation on the beneficiary who receives the property will not arise as a result of the vesting of the trust, but as a result of the subsequent transmission document which vests legal ownership in their name. Of course, this is subject to the existence of any “claytons contract provisions or land holding entity provisions which usually call for the creation of a written statement which is deemed to be the dutiable document”.

From a stamp duty perspective, it will be important to clearly understand both the law of the trust (usually referred to in the trust instrument) and the situs of the relevant property which is the subject of the dutiable vesting.

A possible opportunity to minimise the stamp duty costs on vesting of a trust will exist for those stamp duty jurisdictions that rely on a transaction approach.

The courts will readily recognise the existence of a constructive trust over property held by the former discretionary trust/unit trust/superannuation fund trustee. That is, following the winding up of the trust, where the asset remains in the name of the trustee, the courts will not allow the trustee to deny the fact that the property now belongs absolutely to the beneficiary. A court will recognise a resulting trust in favour of the “vested beneficiary”. That is, whilst the asset will remain in the name of the trustee, the trustee will own the asset absolutely for the resulting beneficiary.

Care should be taken to ensure that any minute of meeting or any other form of resolution necessary to vest the trust does not become a dutiable document. In this regard, guidance can be drawn from the “stamp duty minute of meeting cases” of Chadwick v Clarke (1845) 135 ER 717 and Lucas v Beach (1840) 133 ER 396. The capital gains tax consequences of the resulting trust are discussed below.

Where the resulting trust follows from the winding up of a trust, it is very likely that it will be in the nature of a bare trust relationship. From a capital gains tax perspective, section 106-50 of the 1997 Act (which replaced section 160V of the 1936 Act) which effectively provides that for CGT purposes the asset will be regarded as though it is held directly by the beneficiary. This section provides:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the trust as if you had done it.

Where proof of ownership of the asset formerly held by the trustee is not necessary, the resulting bare trust relationship will often be sufficient. All income dividends, etc also flow through to the beneficiary.



The existence of the bare trust relationship will not require the continuing lodgement of income tax or other administrative returns. Even the business entity tax regime is likely to recognise that for the purposes of all taxation matters a bare trust will recognise taxation consequences in the bare trust trustee. It is suggested that this conclusion can be drawn from:

the government envisages that certain trusts would be excluded from the entity tax arrangements and attract tax in line with the current treatment of discretionary trusts. There would be consultation on the basis that the general principle for exclusion would be where a trust has been created and settled only as a legal requirement or subject to a legal test or sanction. On this basis, trusts excluded would include constructive trusts (eg, imposed by a court in relation to embezzled money) and trusts arising in a range of circumstances where the sole beneficiary is subject to a legal disability or is legally incapacitated.

Practice Point

In non-transaction based stamp duty jurisdictions, where it is practicable for formal legal title to remain in the name of the trustee, consider the stamp duty savings of ‘not completing’ the winding up of the trust by transferring the asset into the name of the vesting beneficiary.

With some planning at the time of establishing the trust there will often be the opportunity of minimising future consequential stamp duty arising from transferring the asset from the trust to the nominated beneficiary.

Once again, reference is made to the New South Wales Duties Act, however corresponding provisions exist in most other Australian jurisdictions.

Section 55(1) of the Duties Act (NSW) provides:

Duty of $10 is chargeable in respect of:

(a) ..., or;

(b) a transfer of dutiable property from an apparent purchaser to the real purchaser, in a case where dutiable property is vested in an apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property.

No matter what value attaches to the underlying dutiable property, stamp duty of $10.00 only is payable on what the law would recognise would be the winding up of a constructive trust. A word of caution: the concessional transfer stamp duty of $10 is only available where the provisions of section 51(1)(a) have been satisfied when the apparent purchaser constructive trust relationship was first created.

Another area of concessional stamp duty conveyance to a beneficiary may be found in section 56 of the Duties Act (NSW). This section provides:

(1) if:

(a) dutiable property (other than marketable securities) that was transferred to a person to be held by that person as trustee for the transferor is transferred back to the transferor by the trustee, and



(b) no person other than the transferor has had a beneficial interest in the dutiable property (other than the trustee’s right of indemnity) between its transfer to the trustee and its transfer back to the transferor,

the duty chargeable on the transfer of the dutiable property back to the transferor is $10.00.

(2) If duty of $10 has been paid on a transfer under subsection (1), the initial transfer to the trustee is also chargeable with duty of $10.00. The Chief Commissioner must reassess the initial transfer and refund any duty paid in excess of $10.00 if an application for a refund is made within:

(a) 5 years after the initial assessment, or

(b) 12 months after the transfer back to the trustee, whichever is the later.

(3) In this section, trustee includes a trustee appointed in substitution for a trustee or a trustee appointed in addition to a trustee or trustees.

As can be seen from the above, whilst full ad valorem stamp duty will be payable on the transfer to the nominee, there is the potential for a refund of all but $10 from the winding up of the bare trust relationship that exists between the nominee holder of the relevant property.

In today’s environment, where asset protection strategies are becoming more important, the above stamp duty concessions, when constructed carefully, can greatly help to minimise the winding up costs associated with any nominee or secret trust relationship.

A little known practical stamp duty saving approach to the transfer of assets from a trust to a beneficiary is found in section 57 of the Duties Act (NSW) and its corresponding sections throughout Australia. This section provides:

(1) Duty of $10 is chargeable in respect of a transfer for no consideration of dutiable property to a beneficiary made under and in conformity with the trusts contained in a declaration of trust, subject to subsections (2) and (3).

(2) Subsection (1) applies only to the extent that the property being transferred is property that the Chief Commissioner is satisfied is:

(a) wholly or substantially the same as the dutiable property the subject of the declaration of trust and that:

(i) duty charged by this Act has been paid in respect of the declaration of trust over that property, or

(ii) the declaration of trust is exempt from duty, or

(b) dutiable property representing the proceeds of re-investment of property referred to in paragraph (1), or

(c) property to which both paragraphs (a) and (b) apply.

(3) Subsection (1) applies only if the transferee was a beneficiary at the time at which duty became chargeable in respect of the declaration of trust.



The practical value of a section 57 transfer of an asset to a beneficiary lies in the original creation of the trust. Where it can be very simply shown that on creation of the trust full ad valorem stamp duty was payable over the principle asset for which the trust applies, only nominal stamp duty will be subsequently payable on transferring the property to a beneficiary.

In New South Wales, the minimum stamp duty payable on the declaration of a trust is $500.00. The original declaration of trust could be declared in respect of dutiable property up to $34,800 and the applicable stamp duty would still only be $500.00.

All too often a trust is established and the interest in the business venture subsequently acquired at its then market nominal value. Over time, after years of success are enjoyed, the business interest may become very valuable. The stamp duty cost of a subsequent transfer of that business interest usually comes at quite a surprise.

With some careful planning, a better approach would be to adopt the procedure expressed in section 57 and have the trust declared over the relevant dutiable property. In the future, section 57 will then allow for the conveyance of that item to a beneficiary with only nominal $10.00 stamp duty.

Subject to the way in which the discretionary trust is established, and the relevant property transferred to it, “double duty” may be payable. If at the time of creation of the trust the relevant duty probably was in the range of $34,000, so called “double duty” of approximately $1,000 will be very palatable if it has the result of allowing future stamp duty of $10 on a subsequent transfer of the particular property. This can be a substantial saving if, for example, the relevant property represented shares with an underlying (non-land) value of $1 million where the stamp duty transfer cost would be $12,000.

Practice Point

Enquire as to the purpose of the trust that is to be established. Given that one day all trusts must come to an end, carefully consider how to establish the trust so as to at least open the possibility of concessional rates of stamp duty applying on a future transfer from the trust to one or more of the beneficiaries.



4. THE APPOINTOR AND THE ISSUE OF CONTROL

There are two bases upon which trusts may be controlled –

• through exercise of the power of appointment; and

• owning relevant debt.

As the name implies, the appointor is the person who is vested with power to appoint (and remove) the trustee. The importance of the position and of the need to understand the power of the appointor cannot be understated.

It is more usual than not that the power of appointment will at first be vested in the person who has caused the trust to be established (not meaning the settlor but rather the principal parent in a family discretionary trust for example).

Particularly where the trust has been established with the primary purpose of achieving asset protection from potential creditors, the power of appointment will be critical. The principal question to ask, in the event of the death or disability of the first person with power of appointment, is: ‘Is the substitute person appropriate?’

Leading on from this question may then arise succession planning issues and estate planning strategies, foremost in each of these being the question of control.

In this area, nothing displaces the discipline of reading the terms of the trust deed. And there is no easy or universal solution.

For some trust deeds, the power of appointment is flexible, the current appointor may nominate a successor appointor.

Other trust deeds vest the appointment power in the trustee for the time being. In this situation, in the case of a corporate trustee, whomsoever holds the shares and therefore controls the board of directors will in turn effectively control the trust.

And yet other trust deeds may prescribe who will become the successor appointor. Often this will be the spouse of the original appointor.

If, after consideration of the issues, the appointor nomination is not appropriate, then a deed of amendment to the trust will be required.

Practice Point

When creating the trust take care as to who will control the power to hire and fire the trustee. Take even greater care to ensure that the successor appointor provisions are consistent with the principal’s wishes.

In the event that a change is necessary, should the trust be changed to the position whereby the appointor nominates their own successor with power to hire and fire the trustee? Or should the trustee simply retain power to appoint their own successor?

The former approach has greater flexibility which may be useful in a continually changing business, creditor liability, and tax environment. Arguably, such a role itself is of a fiduciary nature,



and thus the appointor, when nominating a new appointor, should carefully and properly exercise any decision of appointment:

[T]he power to remove a trustee and to appoint a new trustee is neither a general power of appointment nor a power which may be executed in the interests of the appointor. The interests of persons other than the appointor must be taken into account. The power is a trust or fiduciary power, being a power conferred by a deed of trust, and must be exercised accordingly, in the interests of the beneficiaries.

Davies J in Re Burton: Wily -v- Burton (1994) 126 ALR 557 at 559.

The latter approach, that is, the trustee appoints the next trustee approach, is attractive in its simplicity. But it lacks the flexibility that comes with separating the trustee and appointor powers.

One example of the flexibility that a successor nomination approach provides, is avoiding the possible situation where a creditor or other claimant takes control of the shares in the trustee company owned by the principal of the trust. With the control of the shares comes the control of the board and consequently the control of the trusts and any subsequent trustee.

The question of bankruptcy and interests in trusts of the principals to the trust has plagued many professionals. Is there a risk of exposure to creditor claims where a bankrupt holds a position of power of exercise of decisions that may impact upon a trust?

A power of appointment of trustee to a family trust that is vested in a bankrupt person has been held not to be property within the meaning of section 116 of the Bankruptcy Act 1966, and thus was not capable of division among the bankrupt’s creditors or capable of exercise by the bankrupt’s trustee. (In Re Burton: Wily -v- Burton (1994) 126 ALR 557.)

In any event, there is the often stated principle arising from the House of Lord in Duke of Portland -v- Lady Topham (1864) 11 ER 1242, which provides that a person who possesses power in respect of a trust must exercise that power in good faith and sincerity and with an entire and single view to the real purpose and object of the power, and not for any personal benefit unless otherwise allowed and consistent with the trust purpose.

Again, in Ex parte Gilchrist: Re Armstrong (1886) 17 QBD 521, property subject to a general power of appointment held by a woman was held not to be her separate property for the purposes of her bankruptcy. She could not be compelled to execute a deed in favour of her trustee in bankruptcy.

These cases would appear to support the ability for a trust to be protected even in circumstances where the shares of a single director company are vested in the trustee in bankruptcy. Caution, however, would suggest that the terms of a trust should seek to avoid the potential situation by automatic disqualification of the trustee. In this way the professional can ensure that some other person’s client gets the opportunity to spend money on legal costs so as to finally determine the principle at law.

Debt as a measure to control a trust

The principles of power of appointment are relevant but may become less so depending upon the financial circumstances of the trust.

It is very common that debt loan accounts will be built up over the years of operation of a trust. At first instance, the principles of the power of appointment become particularly relevant for a trust



with assets of say $1 million. However, if upon examination of the financial statements of the trust you were to reveal a debt due to a beneficiary of the trust in the amount of $1 million, then it can be seen that the strategy of ensuring that the power of appointment is consistent with a particular succession strategy becomes almost entirely frustrated if the existence of the debt is not taken into account.

From a personal estate planning and succession perspective, the existence of the debt must be recognised as an asset of the person to whom the money is owed. If, as is usual, the terms of the debt are not known, it may be assumed that the debt is “at call”.

Thus, the person to whom the money is owed may at any time call upon the debt and through this method exercise effective control over the assets of the trust.



5. BENEFICIARY DISTRIBUTIONS

There are three principles that this section of the paper will briefly explore:

• cash payment or credit entry?

• too broad a range of beneficiaries, can this be classed a sham?

• meetings and powers to distribute, are they adequate?

For this section of the paper, substantial reliance is placed upon the Federal Court judgement in the Faucilles case. No doubt there are other cases that will each prove their own points, however, it is my belief that Faucilles is effective for showing how a number of failures can interact in the management and administration of a trust and result in disaster.

Before we look at each of the points, it is worthwhile visiting the facts in the case of Faucilles:

On 1 July 1977 a deed of settlement was executed between Despina Toumbouras, described in the deed as “the Settlor”, and Faucilles Pty Ltd, described as “the Trustees”, establishing a trust which has been referred to as the John Kakridas Family Trust No. 1. The settled sum was $25.00. John Kakridas gave evidence before the Tribunal that the trust was established at the suggestion of his accountant, Harold Sztainbok.

On the same day, 1 July 1977, a deed was executed establishing a trust which has been referred to as the Jim Kakridas Family Trust No. 1, the trustee being Evian Pty Ltd (“Evian”). That deed was in substantially the same terms, with necessary modifications, as that establishing the John Kakridas Family Trust No. 1.

Also on 1 July 1977, two unit trusts were established, known respectively as the Kakridas Unit Trust No. 1 and the Kakridas Unit Trust No. 2. At all material times there were only two unit holders in each of those unit trusts, Faucilles as trustee for the John Kakridas Family Trust No. 1 and Evian as trustee for the Jim Kakridas Family Trust No. 1.

On 4 June 1981 a deed of settlement was executed by Julia Sztainbok, described as “the Settlor”, and Faucilles, described as “the Trustee”, whereby what has been referred to as the John Kakridas Family Trust No. 2 was established. The settlor was the wife of Harold Sztainbok, the accountant. The settled sum was $20.00.

The statement of distribution of net income attached to the income tax return of the John Kakridas Family Trust No. 2 in respect of the year of income ended 30 June 1982, shows the distribution of an amount of $4,000 to each of eight named persons, being the first eight persons named in the resolution, and an amount of $3,152 to Peter Dimaras, thereby accounting for the whole of the net income of $35,152. Of those nine persons, only one, Con Arvaniti, was a person identified in the Schedule to the trust deed as being a Primary Beneficiary. The other eight were persons falling within the definition of “The Secondary Beneficiary” in that deed.

Evian as trustee of the Jim Kakridas Family Trust No. 1 recorded the following distributions—

To resident beneficiaries of the Jim Kakridas Family Trust No. 2 $4,160

To Maria Kakridas $2,607



To the Jim Kakridas Family Trust No. 2 $31,742

$38,509

No amounts were, however, in fact paid to the purported beneficiaries by either Faucilles or Evian. What occurred was that Faucilles or Evian, as trustee of the John Kakridas Family Trust No. 1, loaned to Abbotsford Shopfitters Pty Ltd, as trustee of the Kakridas Unit Trust No 1, an amount equivalent to the amount it had received from that company, viz. $34,938.

The result in Faucilles case favoured by the Commissioner, supported by the AAT, and accepted by the Federal Court was that for taxation purposes a whole section of the beneficial class of the John Kakridas Family Trust No. 2 was held to be a sham, and therefore totally ineffectual. It consequently followed that the distributions in respect of these people failed. Therefore the intended tax consequences otherwise expected also failed.

There are probably very more principles that may be drawn from Faucilles than are expressed in this paper. The facts and final outcome of this case would suggest however the need to:

Practice Point

Ensure that the principals of the trust understand that:

* the trust assets do not belong to them

* they are trustees (or they are directors of a trustee company) who hold all assets pursuant and subject to the terms and conditions of the trust which may be found at trust common law generally, under a Trustee Act and within the terms of the trust deed

* when exercising powers and administering the trust a continuing thread to consider will be the terms of the trust and the principal purpose for which it was established.

To pay cash or to journalise, that is the question?

Let me make the point clear at the outset, there is nothing wrong with journalising the trust distributions. That is provided that the journalised entry in fact subsequently represents a debt due. And that is where the benefit of cash payments comes in. An actual cash payment is the ultimate confirmation that the journal entry was in fact a debt due.

In my view, the question does not simply end at whether or not distributions may be wholly journalised or should be supported by cash. The regularity of any cash payments from a trust will also be of importance.

Once again, whether or not cash payments should be made, and their regularity, will be dependant upon the purpose to which the trust is put.

By way of example, the unit trust established in many professional firms relies upon the principles of Phillip’s case for its existence. There are a myriad of reasons for establishing a Phillips trust structure, tax and creditor protection reasons among them. Vital to an effective Phillip’s trust relationship is the commerciality of the arrangement. The original basis for accepting a Phillip’s trust arrangement turned upon a recognition by the courts that all that was being done privately was that which was available publicly with third parties. That is, the Phillips trust approach works



because the principals of the professional partnership practice could have achieved the same effect by contracting with a third party for office, secretarial, and administration services.

Therefore, in my view, the closer that the Phillip’s trust relationship with the professional practice can be to that of a serviced office relationship, the greater the strength of its acceptance for all purposes, including tax and creditor protection.

And so, to the question, ‘pay cash or journalise?’, just ask yourself: If you ran a professional serviced office business would you happily receive acknowledgments of the debts from your clients recognised by journal entries or would you want the cash on a regular basis?

Consider also the following extract from the case of Faucilles:

John Kakridas also gave evidence before the Tribunal that the reason why no money was paid to any of the beneficiaries to whom income of the family trust was purportedly distributed was that they lent the money back to Faucilles straight away for the purpose of reinvestment by Jim Kakridas and himself. As the Tribunal recorded, John Kakridas was unable to say whether any of those loans were made at interest and, if so, at what rate. Apart from the production of documents apparently signed by five of the beneficiaries to whom income of the John Kakridas Family Trust No. 2 was purportedly distributed in 1982, he did not suggest that the beneficiaries had signed any other written acknowledgments of distributions or any written agreements to lend back moneys distributed. When pressed, he acknowledged that he had effectively made the decisions to retain the money as loans on his own initiative. In the Tribunal’s view, John Kakridas gave no satisfactory explanation why, if his reason for establishing the trusts was his concern about his parents’ poverty, no money was ever distributed to his mother before 1983 or to his father at all. The Tribunal found totally incredible his evidence of how beneficiaries were selected and why particular amounts were decided upon for distribution to the individual beneficiaries selected.

The lack of cash distributions were significant in the conclusions reached in both the AAT and Federal Court that sham arrangements existed.

Yes, this approach is conservative. But once again, there is no loss in following this conservative approach:

Practice Point

Where possible ensure that the cash distributions promptly follow any journal entries and that these properly reflect the purpose for which the trust was established.

Choosing a class of beneficiaries

The fundamental rule of trust law when choosing a class of beneficiaries is, “ensure that the class is sufficiently certain”. The legal argument is expressed in the negative; if the beneficial class of a trust is so broad so as to be uncertain as to who the potential beneficiaries may be, then the trust fails, or rather it never succeeded in the first place.

One approach to the issue of certainty is the class closing approach. Certainty of a beneficiary class is tested by whether or not at any point in time a list of persons’ names may be made identifying all the potential beneficiaries. Provided that at any one point in time a list of names can be made, and the list itself is not excessive, then it does not matter at trust law that further



beneficiaries may emerge, eg through a birth. And this broad approach may continue, provided that the class of persons who may benefit closes on final vesting of the trust.

Importantly, for modern trusts, these rules are not unduly restrictive, they allow a great level of flexibility. But how much flexibility is too much?

The class of beneficiaries may be broad but it must also be reflective of the potential persons who may in fact benefit from the trust.

This was one of the problems in Faucilles case.

No doubt to overcome an apparently restrictive range and class of beneficiaries in the first trust, a second trust was established with a broader class of potential beneficiary. This approach would have also overcome the potential stamp duty problems with seeking to amend the first trust by expanding the class of beneficiaries.

The conclusion finally reached in Faucilles is quite instructive. The view of the AAT was that in truth, at the time of creating the second trust, there was no genuine intention to in fact benefit the whole range of persons named in the trust:

I have no doubt that neither John Kakridas nor Sztainbok’s wife as settlor of the John Kakridas Family Trust No. 2 intended that the persons constituting the Primary Beneficiary of the trust should be entitled to have any part of the income of the trust distributed to them in default of the exercise by the trustee of his discretion. I am satisfied that they did not intend there to be any real distribution of the income of the trust to anyone other than John Kakridas and possibly his children. I find that John Kakridas meant to utilise the discretionary distribution provisions of the deed of settlement to cloak the real transactions which he intended to undertake and that he meant the default distribution provisions, if it ever purportedly took effect, similarly to disguise the real situation.

I have come to the conclusion, therefore, that the provisions of the deed of settlement of John Kakridas’ Family Trust No. 2 for default distribution to the Primary Beneficiary was a sham, that is to say that it was never intended to create legal or equitable rights or obligations. It was never intended that, if there were no distribution to any other beneficiary in accordance with the terms of the deed of settlement, there should be a real distribution to persons constituting the Primary Beneficiary.

I have no doubt that John Kakridas’ object in causing his Family Trust No. 2 to be established was to obtain tax advantages and that he established it after receiving advice from Sztainbok.

There was thus, as the Tribunal found, a “round robin” of book entry payments. There was other evidence before the Tribunal which it regarded as further emphasising the artificiality of the transactions.

Of course, this conclusion was reached with the benefit of hindsight. The non-resident beneficiaries had not received their benefit, were not likely to have known of it, were very unlikely to have agreed to lend their distribution entitlement back to the trust, and in the absence of the tax investigation would very likely never have been aware of their being entitled to any benefit whatsoever.

Practice Point



When establishing a trust, consider whether the beneficial class is wide enough to accommodate future intentions. Importantly, these future intentions must be to genuinely benefit in the context of the family trust and thus the beneficial class should not be too wide. Ask the question: Could these people in fact be given a benefit? If the answer is yes, they will be suitable for inclusion in the beneficiary class.

Trustee discretion – matters to consider

The nature and the purpose of a trust is the driving force behind the approach to adopt in interpreting its terms and conditions. The Federal Court went to the trouble of reviewing the family background of the principal behind the trusts in Faucilles case, to the point of the village in Greece that he grew up in, the relative economic standard of living, the nature of the family relationships both in Greece and in Australia, and so on.

John Kakridas was born in Greece and lived there with his parents, George and Paraskevi Kakridas, until he was nearly 18 years of age. In November 1970 he came to Australia, his parents and certain uncles and aunts with whom he and his parents had close ties remaining in Greece. His parents resided in the village of Vrestena in the province of Sparta. Their standard of living was very low by Australian standards. His elder brother and elder sister had emigrated to Australia before him. A twin brother, Jim Kakridas, came to Australia soon after he did and some two or three years later John and Jim Kakridas went into business together. In the year ended 30 June 1982 that business was carried on through two companies, Australian Aluminium Shopfitters and Glazing Contractors Pty Ltd and Abbotsford Shopfitters Pty Ltd. John Kakridas did not marry until 28 December 1985.

The terms of the trust and the purpose for which it was established should be the guiding principle behind every exercise of trustee discretion. Where it can be shown that any exercise of trustee discretion is outside of these, then room exists to begin to argue that the discretion exercised may be invalid and therefore not effective. If this exercise of discretion relates to the year ended distribution of trust income, then it will follow that there is a risk of a failure of income distribution, with the consequential tax result that either the named default beneficiaries will be fully assessable or the trustee will suffer the top marginal rate of tax under section 99A on the income to which no person was presently entitled.

The issue is not whether the exercise of trustee power appeared correct but whether in fact it was correct.

Practice Point

Ensure that the form of trustee resolution is correct at law. This means: Ensure that it is consistent with the terms contained in the trust deed (if any) and, if a corporate trustee, is consistent with the Corporations Act.

This may seem like a simple point, however it was lost on the people involved in Faucilles case.

In that case, it was found as fact that, at the time of a purported meeting of directors of the trustee company, only one of the directors was in fact present. The other person present was the accountant. The minute recording the meeting was wrong, the meeting as such did not occur. Under the laws that then existed, this resulted in the meeting being ineffective. It consequently followed that the resolution was not effective. The distribution did not occur at law.



Once the form of the recording of the exercise of trustee discretion is understood and complied with, the next step is to ensure that the actual exercise of the discretion also fits the requirements of law.

I commend the reader to the article by Dr Mark Robertson in Taxation in Australia Red Edition, August 1996, and ask you to consider the following extract from that article:

A discretionary object today has locus standi to compel performance of all the trustees’ obligations, not just the obligation to consider — see Davenport -v- Bishop. Thus, a discretionary object has tracing remedies, even though not thought of as having any beneficial interest in the property.

Because the power of selection is a fiduciary power when given to trustees as such, the trustees must give proper consideration as to their discretion and neither exercise nor refrain from exercising the power, without giving due consideration and weight to all relevant circumstances.

Importantly, trustees are required to think about whether to exercise their discretion at all. If they do not consider the exercise of their duty the court will intervene to compel them to consider its exercise. The court itself may consider the exercise of the power and appoint to particular objects if a scheme of distribution is presented to it by the beneficiaries.

One case where the trustees did not think is Turner -v- Turner. In that case, the trustees were relatives of the settlor and had no understanding of trust matters. They purported to exercise their power of appointment in favour of the settlor’s children on a number of occasions and also conveyed property to one of those children. At no time did they appreciate their powers and duties in relation to the discretionary trust, which had been wholly disregarded for the purpose of decision making. Effectively, they just did what the settlor and his solicitor told them.

The court held that the appointments made were nullities:

The trustees exercising a power come under a duty to consider. It is plain on the evidence that here the trustees did not in any way ‘consider’ in the course of signing the three deeds in question É The trustees therefore made the appointments in breach of their duty in that it was their duty to ‘consider’ before appointing and this they did not do.

The court also set aside the conveyance:

The conveyance fails as well as the earlier appointments. At the time of the execution of the conveyance there was a total failure on the part of the trustees to consider whether or not in their discretion [the property] ought to go to the beneficiary. They did not appreciate that they had a discretion to exercise.

Such cases make it clear that where trustees fail even to consider the exercise of their discretion to appoint income to discretionary objects, they have breached their duty. Accordingly, any discretionary object can apply to the court to compel the trustees at lest to consider exercising their discretion in the beneficiaries’ favour.

What direct relevance can be drawn from these principles in a tax sense?



Most will admit that one of the principal purposes of using the trust structure is to obtain access to certain tax benefits that come from flexible distribution. And yet, the vast majority of trusts do not direct a trustee to take into account taxation matters when considering exercise of trustee power.

How many trusts have you seen that distribute precisely $416 (or perhaps $643) to under age 18 beneficiaries? A coincidence? Certainly Not.

Practice Point

Given that tax is a relevant and appropriate consideration for a trustee when exercising any form of discretion, it would be prudent to expressly state this recognition in the terms of the trust. Such a provision need not be directive, it may merely be expressive of an issue to consider. Remember, if you adopt this approach, use broad language to ensure that the objective may be met. That is, the trustee may take into account the taxation situation expected to arise from any proposed distribution not only for the beneficiary concerned but in the context of the beneficiary’s family, other income entitlements, etc.

When looking at these matters that the trust deed directs the trustees to take into account, one should also review the terms of the trust to determine whether or not it fits a modern tax environment.

Practice Point

Many pre-1985 discretionary family trusts do not allow for the power to distribute capital. The result of course is that the trustee has no power to distribute an assessable capital gain which consequently means that section 99A rates of tax must apply to a trustee.

The place to look for this power will vary with each trust deed. Some places to look are: definition of income, income distribution power, general power of the trustee, and the capital vesting clause.

This interpretation is well accepted by the Tax Office. Consider these comments from TR 92/13:

“4. Income distributed by a trustee of a discretionary trust estate retains the character it had when it was derived by the trustee unless a statute or the trust deed provides otherwise. If a franked dividend is derived by a trustee during a particular year of income, the trust income for that income year distributed to beneficiaries will, to some extent, consist of franked dividend income. Generally, this will be so even after deducting trust expenses in the calculation of distributable income.”

“8. The allocation of dividend income to one beneficiary but not to another is not effective for income tax purposes if:

(a) the terms of the trust deed direct the trustee to mix different classes of trust income (eg dividends and interest) and then distribute the blended income in the trustee’s discretion to beneficiaries; or

(b) the trustee, in accumulating trust income, does not specifically place different classes of income into separate income accounts so that it is not possible to trace the source of each trust distribution to a particular beneficiary or to a particular class of beneficiary. Unless the trustee clearly reflects what he or she has actually done in accumulating the trust income



and in distributing it to particular beneficiaries, it will be most difficult to establish, after the event, what class of income was distributed to particular beneficiaries.”

“9. In either of the situations in paragraph 8, the net dividend income of the trust estate is to be rateably allocated among the beneficiaries to whom trust income is distributed. The distribution to each beneficiary is to be treated as comprising income of each different class of trust income on the basis that the beneficiary shares in each class of trust income in the same ratio as the beneficiary’s share of the net income of the trust estate bears to the total net income of the trust estate.”

“10. A rateable allocation of different types of trust income among beneficiaries is not necessary if it can be shown that an amount of trust income of a particular type (eg interest) distributed to a beneficiary was actually paid to the beneficiary before a different class of trust income (eg dividends) was derived by the trustee. The type of income actually distributed to the beneficiary (ie interest) retains the same character that it had when it was derived by the trustee.”

“16. In providing for the flow-on of imputation credits when dividend income derived by a trustee is distributed to a beneficiary, the imputation provisions are consistent with the so-called ‘conduit’ theory of trust income. Under that theory, an amount of trust income distributed by a trustee to a beneficiary retains the character it had when it was derived by the trustee, unless a provision of the trust deed or of any relevant statute provides otherwise. There is judicial authority to support this theory; see Syme -v- C of T (Vic) (1914) 18 CLR 519 and FC of T -v- Tadcaster Pty Ltd (1982) 13 ATR 245 at 249; 82 ATC 4316 at 4319.”

“17. If the trust estate does not have any distributable income it follow that no beneficiary can be presently entitled to trust income even though the grossing-up of imputation credits may produce a net income result for income tax purposes. If a distribution to a beneficiary is made from corpus, no imputation credits can attach to that distribution.”

“18. If franked dividend income is derived under a trust but, after deduction of expenses, there is no distributable income, there may still be net income of the trust estate corresponding to the gross-up amount included in the assessable income of the trust estate. In this case, the trustee will be liable to be assessed, under subsection 99(3), on the net income of the trust. The gross tax on this amount will be offset by the rebate to which the trustee is entitled under section 160AQY.”

“27. Assuming a trustee is validly empowered to allocate different components of trust income to particular beneficiaries, the exercise of a discretion to allocate franked dividend income included in the net income of the trust estate is dependent on the accumulation and allocation of different types of trust income being reflected in the accounting records of the trust.”

“28. If separate bank accounts are maintained for different types of trust income, amounts are debited to those accounts and are applied to meet distributions to beneficiaries (as well as trust outgoings), this will enable the amounts distributed to beneficiaries to retain the same character as they had when they were received by the trustee. This approach may, however, involve undue administrative inefficiency and inconvenience.”



“29. It does not matter that different types of trust income are mixed in a common bank account. The nature of an amount distributed to a particular beneficiary will be determined by debiting the amount distributed to the appropriation account corresponding to the particular income component. This procedure assumes, however, that records are maintained which separately account for different components of income, and that expenses attributable to the gaining or producing of each component are appropriately charged against the respective components.”

The important point to draw form the above is not simply limited to dividends and imputation credits, it extends to all classes of receipts and distributions including assessable capital gains.

Practice Point

To meet modern tax trust requirements, ensure that a streaming power for identification and allocation of receipts and expenses exists within the terms of the trust. In each particular year in which streaming occurs, ensure that the administration, management, and accounting of the trust is consistent with this goal.

Are single director trustee companies a problem?

Some commentators have questioned the nature of exercise of a trustee’s powers where the trustee is a single director company and the director of that company is also a beneficiary of the trust.

The argument is that the exercise of trustee discretion is an act of a fiduciary power which, when exercised by a company, becomes a fiduciary exercise of power of the director personally. Since the nature of a trust is solely that of a relationship, the act of the single director trustee, when in favour of themself, may bring about a merger of the legal and equitable interests that otherwise exist and distinguish the existence of the trust.

The remedy adopted to counter this arguable difficulty is to incorporate in the terms of a trust a prohibition upon a single director trustee company exercising a discretion that provides a benefit to the single director.

The substance of this argument may be found in Australian Forms and Precedents.

Personally, I do not subscribe to this view since to do so gives no recognition to the Corporations Act principles that give rise to single director corporations. It would also have to be stated that this argument should not be new. Two person ‘mum and dad’ companies have been trustees for a long time in circumstances where the trustee has exercised discretion in favour of both the mum and the dad company directors of the trustee.

This is not to say that single director companies acting as trustees of trusts should not be looked at with some caution.

Certainly, in the interpretation of the Family Law Act, arguments similar to the above have been raised successfully so as to empower a court with the ability to divide the assets of a trust in favour of the parties to the marriage.

Equally, the arguments have similar force when the question of whether or not any part of the trust should be considered for tax purposes to be a sham. This issue is not, however, a factor of having a single director trustee; it turns upon the intentions of the parties or rather the lack of intention of



the parties to validly create a trust for the benefit of the persons named in it. The existence of a single director company merely adds weight to this argument where the appropriate lack of intention already exists.



6. AMENDING TRUSTS - the tax considerations

For a wide variety of reasons there will often come a time when it is desirable to amend the terms of a trust. Any change to the terms of a trust raises the real potential for taxation consequences to follow.

Division 6 of the Income Tax Assessment Act 1936 sets out provisions concerning the tax liabilities with regard to a trust and treats the trustee as a taxpayer in relation to assessable income of the trust. Further, the provisions of Division 6 impose or allocate tax liabilities to the trustee or the beneficiaries of the trust. The Income Tax Assessment Act 1997 applies to recognise capital gains tax consequences arising with respect to the dealing with assets of a trust as well as any dealings with the rights and interests of persons with respect to a trust. The later are commonly described as ‘E Events’.

Changes to trusts essentially fall into two categories; administrative in nature or fundamental with respect to rights. The Courts have mostly considered the nature of a change in the context of a beneficiary challenge of a trustee action or when assessing the stamp duty due on a document giving effect to a change to a trust. The most common manner of assessing the distinction between the two approaches is to ask the question;

Has the alteration given rise to a change in the fundamental future rights, obligations and entitlements of persons? If yes the change is fundamental, if no the change is administrative.

A fundamental change to a trust is considered to be a re-creation of the trust, commonly known as a resettlement.

If a new trust is created by way of changes to the trust deed, the resettlement gives effect to the transfer of the assets of the trust to a new trust, though under the direction and control of the same trustee. This may trigger Capital Gains Tax (“CGT”). Generally a capital gain or loss occurs when a CGT event happens to a CGT asset (i.e. an asset acquired on or after 20 September 1985).

In accordance with Section 104-55(i) of the Income Tax Assessment Act 1997 a CGT Event E1 would happen

“………..if you create a trust over a CGT asset by declaration or settlement.”

The tax issue to be considered in any change of a trust is whether the change will have an impact on the underlying assets of the trust. This would be the case if the proposed amendments of the terms of the Trust are of such nature that a new trust is created over the trust property and the trust property comprises CGT assets. The Australian Taxation Office (“ATO”) is of the view that if amendments to a trust deed cause the creation of a new trust relationship, there must also be a new trust estate for the tax provisions under Division 6. Thus the tax-income allocation rules of the trust, within the context of the provisions of Division 6 will, in any resettlement, cause pre-CGT assets to become post-CGT from the date of change and post-CGT assets will be deemed to have given rise to a taxable gain or loss, subject to the value of these on the date of change.

The central question under which circumstances of amendments of a trust create a new trust was generally addressed by the ATO in ‘The Creation of new trust Statement of Principles August 2001’ (the “Statement of Principles”). The general view expressed by the ATO is that it is in some parts consistent with the decided cases on what is a resettlement and in other parts it extends beyond what is supported by the cases. In other words the ATO takes a wider view of when a resettlement can be said to occur.



Statement of Principles - General Overview

In the decision of Commissioner of Taxation v Commercial Nominees Australia Limited, the High Court stated (in relation to taxation of a superannuation fund) that there are three main requirements of continuity of a trust, namely;

the constitution under which the funds operates,

the property and

the membership (beneficiaries) of the fund.

Based on the High Court decision as well as other stamp duty and estate duty cases, the ATO expressed the view that a new trust arises when there is a fundamental change in the trust relationship. If there is a change in the essential nature and character of the original trust relationship, a new trust is created. Pursuant to the Statement of Principles the following changes to a trust deed, amongst others, may create a new trust:

• Any changes in beneficial interest in the trust property;

• Alteration of a class of beneficiaries;

• The addition or removal of a beneficiary;

• A possible redefinition of the beneficiary class;

• Changes in the terms of the trust or the rights and obligations of the trustee;

• Changes in the essential nature and purpose of the trust;

• A change in the termination date of the trust; and/or

• A change to the trust that is not contemplated by the terms of the original trust.

In order to determine whether the nature and extent of changes (either alone or combined) causes either a mere administrative variation of the trust or a fundamental change in the essential nature and character of the trust relationship the ATO considers the terms of the original trust, the powers of the trustee and the original intentions of the settlor.

Removal of Beneficiaries

A commonly proposed amendment to a trust is the removal of ‘any spouse of any child’ as possible eligible beneficiaries of the Trust. The nature of a spouse interest can commonly be found in two places within a trust deed;

as a member of the class of persons known as Eligible Beneficiaries, they may take a benefit from the trust if the trustee allocates any amount within the trust to them. This is commonly known as a mere expectancy and under the decided case law any change would be regarded as of an administrative nature since their rights are not diminished. However



if a trustee does not make a determination of income in favour of beneficiaries in a particular year or on the end date of the trust, the terms of a trust may provide that all Eligible Beneficiaries are to take a share. This may include the spouse. This is commonly known as a contingent interest in default and is a quantifiable right at any particular time.

It is important to determine the nature of the interest that a spouse may have in a trust since an amendment may cause a change in interests in the trust fund if it is an alteration of the class of beneficiaries or a redefinition of the interests among a class of beneficiaries. In view of the fact that the intent and objective of a creator or settlor of a trust is primarily to be taken from the terms of the trust deed settled by them and in this case the family persons include spouses of children, the removal of spouses in the second above described situation is likely to be a change in the essential nature and purpose of the Trust as well as a change to the original intention of the Trust.

By contrast it is worthwhile noting Point 5.1 of the Statement of Principles the ATO which states that

“The identity of those for whose benefit the trust exists is an essential element of the trust obligations and hence the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the

membership of a continuing class are consistent with a continuing trust”.

In other words, if the beneficiaries of the trust remain the same, then no re-settlement would occur.

Private Tax Rulings

Whether a proposed removal of beneficiaries or a class of beneficiaries causes the creation of a new trust has been the subject of a number of private tax rulings. The following gives a general overview in which circumstances the ATO has ruled that a removal of a beneficiary or class of beneficiaries causes a re-settlement of the trust and when it does not.

Private Ruling Examples of Re-Settlement Of Trust

Private Tax Ruling Identification Number 58776 - redefinition of a class of beneficiaries The Ruling concerned a discretionary trust under which beneficiaries comprised, amongst others, a specified list of relatives of the principal including the principal’s current, former and future spouses and specified relatives of such spouses. It was proposed to delete those persons as possible beneficiaries of the trust. Under the further terms of the deed, the trustee had powers to exclude persons from the definition of beneficiaries with the consent of the appointor.

The ATO ruled that the exclusion of all relatives of a former spouse may be considered to represent the complete removal of a class of beneficiaries and a re-definition of the class of beneficiaries.

Private Tax Ruling Identification Number 1011583111607- changes in the beneficial interest

Under the deed of a discretionary trust, the beneficiaries of the trust were the nominated beneficiaries (named in the schedule) and general beneficiaries who include the nominated



beneficiaries and their relatives. The general beneficiaries also included entities in which the general beneficiaries had an interest.

The beneficiaries were, subject to the discretion of the trustee, entitled to the income and capital of the trust. It was proposed to amend the trust deed to ensure that the capital beneficiaries of the trust were natural persons who are relatives of each other.

The ATO ruled that the proposed amendment would redefine the equitable interests in the trust fund. Under the current terms of the trust all of the beneficiaries would be entitled to income and capital. The amendment would cause that beneficiaries which are companies, trusts and superannuation funds are entitled to income only and no longer to capital. Those changes are no longer only of a procedural or administrative nature but a change of the essential nature of the trust relationship.

Private Tax Ruling Identification Number 59752- change in the essential nature and purpose of the trust (intention of the settlor)

The trust deed provided that the primary beneficiaries are the individual and his first spouse. The secondary beneficiaries included the relatives of the primary beneficiaries (widely defined). Under the proposed deed of amendment, the first spouse was to be removed as a primary beneficiary and replace with the current spouse.

The ATO ruled that the amendment would cause the creation of a new trust. It argued that it was the intention of the settlor that income of the trust be distributed to the primary beneficiary, his first spouse and generally the members of their families. The settlor had a similar intention regarding the distribution of the trust fund on the vesting date. The proposed removal of the first spouse as one of the primary beneficiaries would mean that the trust would no longer exist for her and her family. This contradicted the original intention of the settlor.

Private Tax Ruling Identification Number 67855

The Ruling concerns the proposed removal of a number of secondary beneficiaries. The discretionary trust had two, specifically named, primary beneficiaries. The secondary beneficiaries comprised any person who is a grandparent, parent, brother, sister, child, stepchild, grandchild, step grandchild, uncle, aunt, relative, associate or dependant of a primary beneficiary and the spouses, children, grandchildren, relatives, dependants and associates of those grandparents, parents, brothers, sisters, children, stepchildren, grandchildren, step grandchildren, uncles, aunts, relatives, associates and dependants. There were also tertiary beneficiaries (companies, trusts etc).

The trustee had discretion regarding the distribution of income and capital of the trust. Upon termination of the trust, where no beneficiary was chosen, the trust funds were to be distributed between the primary beneficiaries then living.

The trustee wished to exercise its right under the trust deed to exclude certain persons from the definition of beneficiaries.



In its ruling, the ATO firstly addressed whether the proposed removal of beneficiaries would cause any change in the beneficial interest in the trust property. The ATO ruled that due to the wide discretion of the trustee under the deed as to the distribution of income and capital, no beneficiary had a fixed entitlement. Rather, the beneficiaries’ interest is that of a potential recipient of benefits by the trustee and a right to have this interest protected by a court of equity. The removal of a beneficiary results in the loss of that interest.

However, in Chief Commissioner of Stamp Duty (NSW) v Buckle & Ors 98 ACT 4097, the High Court considered the term “discretionary trust” and emphasized the strong position of the trustee and the instability and prospective interests of the beneficiaries. In other words, the interest held by a beneficiary of a discretionary trust in the trust property is unstable. In view of the decision in Buckle’s case and the interest of a beneficiary being wholly contingent, the ATO ruled that the proposed amendment to the trust deed did not cause a change in a beneficial interest.

Secondly, the ATO addressed whether the amendment would change the essential nature and purpose of the trust. Under the deed it is stated that the settlor wished to establish a trust for the beneficiaries named under the deed. The ATO ruled that due to the wide discretion of the trustee to distribute income and capital of the trust, the exclusion of certain secondary beneficiaries would go beyond giving an indication to the trustee as to who could/should benefit under the trust. Rather, it directs the trustee as to who cannot be included in the list of beneficiaries. This contradicts the original intention of the settlor.

Finally, the ATO considered the removal of a significant number of secondary beneficiaries represents a major shift in the potential beneficiaries which indicates a redefinition of a class of beneficiaries rather then a change of membership in a continuing class.


The Ruling again addresses the removal of a number of secondary beneficiaries from a trust, namely the “L family trust”. The primary beneficiaries were husband and wife, the secondary beneficiaries were their son and daughter, their respective spouses, grandparents, parents, siblings, children, grandchildren and remoter issue. The trustee proposed to exclude the daughter of the primary beneficiaries, her spouse, children, grandchildren and remoter issue as secondary beneficiaries.

Under the deed, the trustee had wide discretion as to the distribution of income and property with no beneficiary having a fixed entitlement.

In its Ruling, the ATO addressed whether the proposed removal caused a change in beneficial interest, change in the nature and purpose of the trust, a redefinition of the class of beneficiaries as well as a change to the trust which was not contemplated by the terms of the original trust.

• Change of beneficial interest - in view of Buckle’s case ( we refer to our above comments) the ATO ruled that the proposed removal of the daughter, her spouse, children, grandchildren and remoter issue did not cause a change in the beneficial interest in the trust property.

• Changes to the nature and purpose of the trust - it was apparent from the terms of the deed that the settlor wished the trustee to hold the income and capital of the trust for



the benefit of the beneficiaries of the trust. This would include the daughter, her spouse, children, grandchildren and remoter issue. The ATO confirmed its view that the removal of these beneficiaries directed the trustee who cannot be a beneficiary and contradicted the settlor’s original intention.

• Redefinition of a class of beneficiaries - The Statement of Principles states that the identity of those for whose benefit the trust exist is essential. Changes of the membership of a continuing class of beneficiaries do not amount in the creation of a new trust. One of the examples given in the Statement of Principles for such a change is 5.1.1 which relates to “for the children and grandchildren of X”. Under the example where one child has died and a new grandchild has been born, the class of beneficiaries (children and grandchildren of X) continues. In the Ruling, the ATO stated that unlike under the example, the present trust deed identified the secondary beneficiaries by name and not just as “members of the L-family”. One of named secondary beneficiaries is removed. Therefore the proposed removal would cause a redefinition of the class of beneficiaries. The ATO also argues that the proposed amendment would remove half, and therefore a significant number, of the possible secondary beneficiaries.

• Changes that are not contemplated by the terms of the original trust - the trust deed did not comprise powers of the trustee to remove or add beneficiaries but only provided for a general power to amend the terms of the trust deed. The ATO considered the “substratum” of the trust and held that it was to benefit all members, including descendants, of a particular family. The amendment would contradict this substratum.


Under this Ruling, the ATO considered the removal of a large number of classes of beneficiaries. The beneficiaries of the trust were:

(a) A;

(b) The spouse of A;

(c) Any child, grandchild or remoter issue or step-child or foster child of A;

(d) Any spouse of any child or grandchild of remoter issue or stepchild or foster child of A;

(e) Any person (not being the settlor) nominated in writing by the Trustee to be a beneficiary for the purpose of this deed being a parent, brother, sister, nephew, niece of A or future wife of A or a person who is ordinarily a member of the house-hold of or who is maintained or supported by A or the spouse of any person referred to in this paragraph (e);

(f) The trustee or trustees of any other trust…..;

(g) Any company …….; and

(h) Any charitable purpose or educational institution or religious organisation declared by the trustee in writing at any time to be a beneficiary for the purpose of this deed.

Some of the proposed changes were to replace clause (b) with “B” and to delete clauses 1(d), (e) and (g).



The ATO addressed whether the proposed amendment cause a redefinition of the class of beneficiaries and/or a change to the original intention of the trust.

The proposed amendments would result in the removal of a whole class of beneficiaries. This would be a change in the definition of class of beneficiaries and therefore a significant change to the nature of the trust. Further, the ATO ruled that the amendment contradicted the original intention of trust which was to benefit the extended family of A. Further, the removal of such a large number of classes of beneficiaries would impact on the beneficial interest of a substantial number of beneficiaries.


The Ruling also concerns the removal of a large number of beneficiaries from a class and the ATO argued in a similar manner to the above rulings. In relation to the “change of membership in a continuing class” the ATO added that the Commissioner would generally only accept that there is a change of such nature when an already existing power to nominate beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which could reasonably be inferred that they were intended to be benefited and that it can be shown from the deed and the surrounding circumstances that it was a purpose of the trust to benefit that wider group as part of the defined group.

Private Ruling Examples of No Re-Settlement Of Trust

Private Tax Ruling Identification Number 22830 - appointment of a distributor The proposed deed of amendment provided for the power of the appointor to appoint a “distributor”. The distributor was authorised to direct the trustee to divide any income and capital of the trust into two or more shares. Under the original deed the trustee had wide discretion as to the distribution of income and capital of the trust. In relation to the issue of “beneficiaries”, the ATO ruled that the beneficiaries defined under the deed of amendment remained the same. Under the trust deed the beneficiaries’ interest is contingent on the exercise of the trustee’s discretion. The expectant nature of the beneficiaries’ interest would not change under the proposed amendments.

Private Tax Ruling Identification Number 69747 - categorize beneficiaries The deed of amendment comprised extensive changes to the original terms of the trust. It allowed for the creation of a category of “contributory beneficiaries” being any of the existing beneficiaries who contributes to the trust. The trustee had the power to repay any of the contributory beneficiaries at its discretion. In relation to the new class of beneficiaries, the ATO was of the view that the proposed amendment would not make any changes as to who may benefit from the trust. By making a contribution, an eligible beneficiary would become a contributory beneficiary. As such they do not have any entitlements to a certain share of income of the trust. Any contribution made by any of the beneficiaries would be administered by the trustee. Once the contribution has been repaid, the contributory beneficiary would cease to be a contributory beneficiary but continue to be an eligible beneficiary of the trust.

Private Tax Ruling Identification Number 70186 - removal of a small number of secondary beneficiaries within in a large number of beneficiaries A was the appointor and sole director of the trustee company. Under the deed of amendments, the trustee proposed to remove certain relatives of A from the trust. In the



past, a number of relatives had brought proceedings against A and the trustee of a previous trust. The trust was an “off the shelf” trust. The applicant stated that if the settlor and trustee would have been aware of the wide definition of secondary beneficiaries they would not have signed the deed until those relatives of A would have been deleted. In addition it had never been A’s and the settlor’s intention that those relatives of A would benefit from the trust fund. None of the relatives had any contact with the family or received distributions of the trust in the past.

The ATO held that the removal of some of the secondary beneficiaries did not cause the creation of a new trust. The number of secondary beneficiaries went into the multiple hundreds and therefore the removal of the relatives would not have a large proportional beneficial interest in relation to the other beneficiaries. Further, the relatives were not aware of the existence of the trust as there had been no contact with the family since the litigation.

Due to facts that the relative did not have any contact with any of the family members, were not aware of the existence of the trust, had not received distributions in the past and given there was not intention to distribute to them as well they are a small number of persons in a very large group, the ATO ruled that there was no resettlement of the trust.

Private Tax Ruling Identification Number 75141 - removal of “siblings” from the list of 3rd category beneficiaries The trust provided for three categories of beneficiaries. The third category comprised siblings of individuals X and Y, nieces and nephews of individuals X and Y, charities appointed by the appointer; and primary, secondary or tertiary educational establishments appointed by the appointer. In the event of the trustee failing to exercise its discretion at the end of each year or on the vesting date, distributions are to be made to the first category beneficiaries in equal proportions. If there were no first category beneficiaries the distributions were to be made to the second category in equal proportions and if none, the third category in equal proportions. The applicant wished to enter into a deed of amendment to remove siblings, nieces and nephews from the third category of beneficiaries in order to avoid the risk of legal proceedings sometime in the future.

The ATO stated that the trust was primarily established to benefit the children of individuals X and Y. The amendments did not affect the interest of these persons but propose to protect them from future legal proceedings. The third category of beneficiaries was included only as a standard clause used by the solicitor’s preparing the trust deed, so that in the event of death of all persons the trust was primarily established to benefit, a distribution may be made to them. The amendments did not cause the creation of a new trust.

Private Tax Ruling Identification Number 79149 - removal of ex-spouse and inclusion of spouse, children, grandchildren and lineal descendants

Under the trust deed, the trustee had broad discretion to distribute the income and capital of the trust to any or all of the beneficiaries. The beneficiaries comprised the primary beneficiary, the ex-spouse of the primary beneficiary and the children out of their marriage. The primary beneficiary and his ex-spouse were subsequently to the creation of the trust divorced and property orders were made. The primary beneficiary advised that it was overlooked to amend the class of beneficiaries as part of the property orders. It was



not the intention that the ex-spouse had any further involvement as a beneficiary or otherwise. The settlor stated that it was his intention to establish a trust for the benefit of the primary beneficiary and his family members whoever they may be.

Because of the settlor’s intention, the ATO ruled that the amendment to the deed did not cause the creation of a trust even though there was no definition of the term “spouse” under the deed but rather the ex-spouse was individually named as beneficiary of the trust.

Private Tax Ruling Identification Number 91346 - narrowing and removing of some classes of beneficiaries Beneficiaries of the Trust comprised (a) the ‘primary beneficiaries’

(b) a lineal descendant of the primary beneficiaries

(c) a lineal ancestor of either of the primary beneficiaries

(d) a brother, sister, nephew, niece, aunt or uncle of either of the primary beneficiaries

(e) the spouse or de facto spouse of one of the primary beneficiaries or of a person referred to in sub-clauses (b), (c), (d) or (e) above.

The trustee has discretion regarding the distribution of income and capital. It was proposed to delete all beneficiaries except the primary beneficiaries.

The ATO ruled that as the trustee had absolute discretion to distribute income and capital amongst the beneficiaries, the proposed amendments did not change any beneficial interest. There was no redefinition of a class of beneficiaries because the trust comprised primary and secondary beneficiaries. After the amendment, the primary beneficiaries would be retained. The amendment was in accordance with the trustee’s power to exclude a person or persons as beneficiaries of the trust.

Private Tax Ruling Identification Number 95053 - removal of a small number of beneficiaries from a class of beneficiaries

The beneficiaries of the trust comprised a number of classes. Class II of the beneficiaries was defined as the children and grandchildren of individuals named in Class I (born prior to the date the trust was established, or prior to the ending of the Trust). The Trustee proposed to distribute its interest in a property to a member of Class II (Member II) and after the distribution, a further deed of amendment (proposed amendment) would be signed.

Member II already holds an interest in, and has the use of, the property. After the distribution of the Trust’s interest in the property to Member II, the proposed deed of amendment would alter the trust deed to ensure that Member II and their family would no longer be potential beneficiaries of the trust.



The ATO ruled that the proposed amendments to the trust did not cause a resettlement because the potential beneficiaries being removed are only two members of a much larger group consisting of the children and grandchildren of the Class 1 beneficiaries. After the proposed deed of amendment, the trustee would continue to administer the trust for the benefit of the other members of the same extended family and the proposed amendments to the trust deed did not give any beneficiary a greater interest than other beneficiaries in the trust.



7. FAMILY LAW AND TRUSTS

The Family Court has wide discretionary powers to make orders in relation to alteration of property interests between parties after marriage breakdown and separation (see section 79 of the Family Law Act and also see sections 80(i)K, 85(A), 87(9)(b), 114(3)). The Court can make Orders affecting not only assets such as the matrimonial home, furniture, cars, and shares in companies, but also in respect of financial resources.

The use of tax minimisation devices such as family trusts and family companies has been considered by the Family Court in a number of decisions relating to property settlement.

In this section, we will look at the question of family law, tax, and the powers of the Family Court with respect to family trusts.

The High Court decision in Ascot Investments Pty Limited and Harper [1981] 148 CLR 337 set a precedent to determine the extent to which the Family Court may make Orders affecting the rights or interests of a third party, such as a family company, as opposed to the parties of a marriage.

The Full court of the High Court, with Murphy J dissenting, held that the Family Court had no power to order the company, Ascot Investments, and its directors, to register a transfer of shares pursuant to section 79 of the Family Law Act. Gibbs J, in the leading judgment, held that the Family Court could not make an order directed to a third party such as a family company in circumstances where its effect will be to deprive a third party of an existing right or to impose upon a third party a duty which the party would not otherwise be liable to perform. (Ibid at 354)

The Court did, however, specify circumstances in which the Family Court could make orders affecting third parties:

Except in the case of shams, and companies that are mere puppets of a party to a marriage, the Family court must take the property of a party to a marriage as it finds it. The Family Court cannot ignore the interests of third parties in property, nor the existence of conditions or covenants that limit the rights of the party who owns it. (ibid at 355)

The majority made a finding that there was not any cogent evidence to suggest that the husband exercised effective control over the company (at 355-356). It was also relevant to the decision that, in this case, the directors had not been overtly influenced by the husband, they had not actually refused to register a transfer for the sole reason that the husband had asked them not to.

What is the position therefore in relation to family discretionary trusts?

In a number of cases subsequent to Ascot Investments, the Family Court has held that a party’s interest in a family trust which was under the effective control of that party to the marriage, was to be regarded as property of the party for the Court to take into account when making Orders altering the property interests of the parties. See, for example, the Full Court decision in the marriage of T M and P L Ashton [1986] FLC 91-779, Goodwin [1991] 14 Family Law Reports 801, and Davidson [1991] FLC 92-197.

In these cases, the Court had to consider whether trust property was “property” of the marriage which the Court could take into consideration when making orders for property settlement.

In Ashton, Goodwin, and Davidson, the Full Court of the Family Court upheld the trial judge’s decision that the husband’s interest in a family trust amounted to property of the husband. The



husband’s interest in the trust was regarded as an extra asset and the Court adjusted the lump sum payable by the husband to the wife accordingly.

In all of the decisions, the Court undertook an examination of the trust deed and the factual circumstances.

In the case of Ashton, the Court found that the husband had de facto legal and beneficial ownership of the trust. Strauss J referred to the decision of Ascot Investments and Harper, and in particular to the passage of Gibbs J relating to sham transactions and companies that are mere puppets of a party to the marriage. In the case of Ashton, the Court found that no person other than the husband had any real interest in the property or income of the trust except at the will of the husband (at 462).

In a family discretionary trust, there are five “Dramatis personae”: the settlor, appointor, trustee, beneficiary, and ultimate controller.

We shall examine the component parties of a trust in relation to the question, ‘When does an interest under a trust amount to “property” for the purposes of the Family Law Act?’

1. Settlor — the settlor’s sole function is to create a trust with a nominal sum and without more, does not have any rights or property and does not have a financial resource.

2. Appointor — the appointor has power to appoint and remove trustees and therefore has an immediate interest in the affairs of the trust. If the appointor is also a beneficiary, the interest of the appointor may amount to property as in Whitehead [1979] FLC 90,673.

3. Trustee — a party who is a trustee without more merely has a legal interest in trust assets. If there is no beneficial interest this does not amount to property. However, if the trustee party has power to distribute in his or her own favour under the trust deed, this may amount to a substantial financial resource as in Whitehead. Often the trustee is a company in which the husband and wife have shares and in which one or both parties have control of the company. In Ashton the husband and his cousin were appointed first co-trustees of the Ashton Family Trust.

4. Beneficiary — a beneficiary’s interest in a trust may amount to property depending on whether it is contingent or a mere expectation interest. A mere expectation interest does not constitute property. However, a beneficiary with a contingent present or future interest may be the holder of property (being an equitable share in action). See Stacey [1977] FLC 90,324 and Shaw [1989] FLC 92,030.

In the decision of Harris [1991] FLC 92,254, the husband’s interests as a beneficiary amounted to property in circumstances where the husband had the “fullest power of disposition over the property and income of the trust including power to cause to have all of its income and corpus distributed to him.”

5. Ultimate Controller — a trust has an ultimate controller when it has been created for the immediate benefit of a person to relieve them of tax liability. Usually, the ultimate controller is also an appointor which allows them to exercise ultimate control over the trust. In the case of Ashton, the husband had controlling power in the corporate trustee. The ultimate controller who treats trust property as his or her own may be held for family law purposes to have trust property.



It is also possible for a beneficiary to be an ultimate controller. In Goodwin and Stein, the husband was the beneficiary at the discretion of the trustee. Compare the case of Shaw, in which the husband was named principal beneficiary as well as the appointor. But in Ashton and Davidson, the husband was not a named beneficiary. In the unreported judgment of Reynolds (27 April 1990), the husband was a beneficiary as well as the only named residuary beneficiary. In that case, trust property was held to be property of the husband.

The courts look to whether a party to the marriage effectively has control — whether the party treats the trust property as his or her own, in making a finding that the trust property is property of that party.

It is not necessary to show that the trust or company structure is a sham or puppet of one of the parties. See In the marriage of Harris [1991] FLC 92,254. It is necessary to consider the trust deed in light of the relevant factual circumstances.



8. THE ALTER EGO TRUST FAILURE?

The family discretionary trust is under attack. Realisation of this should not lead to abandonment of it, however it should lead to a re-examination of the practices and procedures that in the past have apparently given confidence to the adoption and use of the family discretionary trust as a powerful business and wealth management tool.

Practice Point

In other words, where the alter ego argument is found to exist, the protective veil of a family discretionary trust can easily be pierced.

The attitude of some sections of the Australian legal (and political) systems to the use of the discretionary trust is reflected in the, 4 April 1997 Supreme Court of New South Wales Judgement of Justice Young in Gregory v Hudson.in which he said;

"When one sees that discretionary trusts are used for the anti-social purpose of minimising taxation or defeating the rights of wives, there does not seem to be any reason in conscious why a court of equity should take any notice of them at all. Counsel were surprised that any Judge should take this view, and accordingly I announced during the argument that I would not seek to develop it in this case, but I believe that the message should be put abroad that the time may well have come where equity will have to reconsider its attitude to enforcing this sought of trust".

In recent times, the Courts have pierced the veil of the family discretionary trust. Two Court decisions are of note for the simplicity of approach and the willingness of the judges to accept that assets of the family discretionary trust represent property of a person over which orders could be given.

In Richstar Enterprises [2006] FCA 433 Justice French determined that he was able to grant the orders sought by the Australian Securities & Investments Commission in respect of the property of a person and apply this order to assets within a family discretionary trust. This is despite the fact that he was one of two directors of the corporate trustee and one of two joint appointors to the trust. Many would have thought that this was sufficient to achieve the protection that may have been sought. At the time that it was needed, it was not available.

Whilst Richstar Enterprises is a single judge decision, the appellant decision of the full court of the Family Court in Daniels v Bell [2007] FamCA 152 (2 March 2007) is equally as instructive. This decision also involved the issue of whether assets within a family discretionary trust may be the subject of a property order imposed upon an individual. Importantly, it is an appeal decision. The findings and decisions of the lower court judge were the subject of review by three judges whose role was to determine whether there was an error at law. The appeal judgment concludes that there was no error found in the alter ego principle that was applied.

The Richstar Enterprises judgment relates to property orders under the Australian Securities & Investments Commission Act. Under that Act, the Australian Securities & Investments Commission can seek court orders to freeze property of an individual who is a subject of an investigation. The orders were available with respect to property of the individual but ASIC pressed for the orders to be applied to assets held by a family discretionary trust associated to the individual.



Practice Point

The assets of the trust was found to be property of the parent owing the child maintenance debt

The Daniels v Bell judgment involves an unpaid child maintenance debt. The Family Court has power to order the disposal of property of a parent who has an unpaid child maintenance debt. In this case, there were no other assets out of which the child support debt could be paid other than those within a family discretionary trust. To give effect to these orders it was necessary to determine that the assets of the trust was found to be property of the parent owing the child maintenance debt.

From the perspective of Section 116(1) of the Bankruptcy Act, both of these cases are potentially quite instructive. The approach taken in Section 116(1) is to divide the property of the bankrupt among the bankrupt’s creditors. It is the reference to property that is of significance. There is no reason why the principles expressed in these two decisions would not also apply to an application by a trustee in bankruptcy. In other words, where the alter ego argument is found to exist, the protective veil of a family discretionary trust can easily be pierced.

There is little specific guidance that can be drawn from Richstar Enterprises as to when and how to apply the alter ego principle. The conclusion was drawn by Justice French without citing the facts upon which the conclusions were based. Perhaps this was because the orders were not given in respect of a particular asset within a discretionary trust until further evidence of an alter ego relationship was presented to the Court. Nevertheless, the principle relied upon by Justice French was; if the discretionary trust is in fact the alter ego of an individual, the assets of the trust may be attributed as property of that person for all purposes.

It is important to recognise that this alter ego trust argument is not an argument of sham. The argument of sham arises where it is found that the arrangements apparently in place are not real. As it relates to a family trust, the concept of sham requires there to be a finding at law that a part or the whole of the trust is in fact a façade. This was the conclusion of the Federal Court in the tax case Faucilles 90 ATC 4003. The principal sham argument in Faucilies was that there was never an intention to in fact benefit certain class of beneficiaries under the terms of the second trust deed. This class of beneficiary was struck out of the trust deed for tax purposes as being a sham.

The Administrative Appeals Tribunal in two unrelated cases (AAT Case 11115 and AAT Case 11125) applied the sham argument again in connection with trust distributions but with a different approach. The AAT agreed with the Tax Commissioner that purported trust distributions to non-resident beneficiaries were shams because the transactions were never intended to benefit the non-residents. In particular, the Tribunal found that the trustees did not intend to give the non-residents a present entitlement to the income of the trust. Refer cases 96 ATC 443 and 96 ATC 453.

For an arrangement to be a sham there must be a finding that there was a common intention of the parties to the arrangement that the transaction was a cloak or disguise for some other real transaction, or no transaction at all (Clyne -v- F C of T (1983) 83 ATC 4508). It is something which is not genuine or true but false or deceptive (Sharrment Pty Ltd -v- Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454. - where it is alleged that the trusts of a settlement or some of them are a sham, of necessity it will need to be proved that it was the intention of the settlor that the settlement itself be a sham).

Proof that it was the intention of the settler and the trustee that the settlement (or part of it) itself be a sham can be very difficult to achieve. Importantly for a sham argument to apply, the conclusion



must be that the legal relationships apparently evidenced in the trust documents do not in fact, and were never intended, to exist.

Practice Point

There is no remedy to an alter ego argument, either it applies or it does not. It is not about having the right documentation in place.... it remains a factual question

The sham argument contrasts with the alter ego argument. The latter does not appear to depend upon a finding at law but rather a finding of fact. It does not appear to be a challenge as to the legal status of relationships that the trust documents appear to have created, it is simply a question of the factual manner of administration and management. Thus, not understanding the potential application of the alter ego argument can lead a person into a false sense of security. Apparent distributions to beneficiaries are not challenged. Obligations of the trustee of debts and distributions appear to continue to apply.

It may be that a higher or future court will bring clarity and will recognise that an alter ego argument is a subset of the sham principles. But until then, it would appear that the alter ego argument stands independent of a sham conclusion.

Practice Point

The alter ego argument stands independent of a sham conclusion

In approving the comments of the lower court, the Full Federal Family Court in Daniels v Bell provided some guidance in understanding the alter ego argument. In that judgment, the reference to the use of the family trust as the “ATM” of the husband who was liable for the child maintenance debt is indicative of the facts needed to support the alter ego argument. The Full Federal Family Court noted and was no doubt persuaded by the findings of the lower court that.

No distributions from the income generated by the Trust have been distributed to the children. The father has utilised the income as he desires – including access by ATM for payment of his private expenses. Whether this “shield” was created to protect him from the claims currently made and/or as a device to avoid the limitations arising from his bankruptcy at the time is uncertain. What I am clear about is that the creation of the [Ithaca] Trust; the purchase of the [MU] Property and its subsequent control and management by the father was a well considered scheme devised by the father for his financial benefit

Another way of approaching this is to look to the operation of a family trust and ask: “Is this managed and administered in the manner and form that would be expected of a trustee?” If the answer is yes, there is no room for the alter ego argument. If the answer is no, the alter ego argument can be applied to attribute the assets of the trust to an individual such that orders may be extended over those assets as property of the individual.

There is no remedy to an alter ego argument, either it applies or it does not. It is not about having the right documentation in place. Yes, minutes of meeting and resolutions will be necessary to rebut an alter ego claim, however, it remains a factual question. The enquiry is whether the individual has dealt with the trust on a come-n-go basis. Withdrawing and replacing funds at will is certainly indicative of an alter ego application. It is suggested that residing in a property of the trust without paying rent and holding the property out as the person’s residence will also support an alter ego argument.



In the later judgment of Stephens & Stephens and Ors [2007] FamCA 680 (13 July 2007) the Court said:

Were it otherwise, it is obvious that a party could, by simply acquiring or placing assets in a discretionary family trust, effectively avoid an order being made which would enable the other party to share in the property owned by the trust.

The jurisprudence on this issue is not limited to Family Court authority. In Re Richstar Enterprises Pty Ltd & Ors; Australian Securities & Investments Commission v Carey and Ors (No.6) (2007) 233 ALR 475; (2006) 153 FCR 509, French J had to consider whether the Court had power under s 1323 of the Corporations Act 001 (Cth) to appoint a receiver to property held by a third party on a trust, whether discretionary or otherwise, of which the relevant person was a beneficiary.

French J noted (at page ALR 480) that in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547, Gummow J at page 552 described the power of the trustee in a discretionary trust as a “special or hybrid power” and said:

[A] power exercisable in favour of any person including the donee of the power would be a general power and thus would be tantamount to ownership of the property concerned....

French J said at page 481:

At least by analogy it may be observed that a beneficiary who effectively controls the trustee of a discretionary trust may have what approaches a general power and thus a proprietary interest in the income and corpus of the trust.

I agree with the comments of the Full Court in Webster (supra), particularly that each case must be determined on its own facts.

What is the solution? Treat the trust as it should be treated, and as it always should have been treated; as an important set of legal relationships between persons creating rights, duties and obligations that have been developed over centuries. This requires a separation of the interests of the trustees and any of the beneficiaries. Very basic trust law identifies some simple rules of trust that, if followed, are likely to allow no room for an alter ego argument to foster:

1. to act honestly in all matters concerning the entity;

2. to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;

3. to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries;

4. to keep the money and other assets of the entity separate from any money and assets, respectively that are held by the trustee personally; and

5. to not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers.

These are just a sample of the basic trust law duties of a trustee. Follow these, demonstrate that these are followed and there will be little room for the alter ego argument. Anything less and the alter ego argument will remain until the time when its application will be mostly feared.



9. EXTENDING THE LIFE OF A TRUST?

Originally, trusts had no end, they operated in perpetuity (if these did not earlier fail), commonly linked to the family and descendants of the creator of the trust. To overcome the permanent alienation of property from individuals the concept of the rule against perpetuity was introduced. The rule was first formulated by Lord Nottingham in 1682 in the Duke of Norfolk’s Case, (1682) 3 Ch Cas 1 at 31 and further developed by the House of Lords in 1833 in Cadell v Palmer. 6 ER 956.

It is a common law rule that invalidates a trust from the beginning it the trust delays the passing of its assets and property for what the law deems to be an excessively remote period. The rule arose during the sixteenth and seventeenth centuries because the courts considered that it was contrary to public policy to allow a person, through the trust mechanism, to tie up land indefinitely. The rule only prevents the creation of trust interests that will not vest until an unknowable time in the future; it has no application once an interest has actually vested. For this reason, the rule against perpetuities is better described as the ‘rule against remoteness of vesting’, it is technically more concerned with this than with the duration of trust interests once created.

The original rule evolved into the common approach of determining the life of the trust to be for the period of 21 years following the date of death of a person. It was not uncommon that the person was a member of the British Monarchy, mostly because genealogical speaking, they are a highly mapped and monitored family. Thus the phrase 21 years after the date of the death of the last descendant of Queen Elizabeth now living will identify the last of her four children and eight grandchildren and then 21 years after the last of them to die.

All Australian jurisdictions except for South Australia have a rule against perpetuities. In some a choice can be made between the fixed period of time or the common law rule, commonly a life in being plus 21 years. In the ACT and NSW on the statutory period of 80 years is available.

Statutory maximum period Common law period?

ACT 80 years No

NSW 80 years No

NT 80 years Yes

QLD 80 years Yes

TAS 80 years Yes

VIC 80 years Yes

WA 80 years Yes

South Australia has abolished the rule, that is, there is no perpetuity period applying to trusts in that State. Theoretically therefore a South Australian trust may continue ad infinitum. However, section 62 of the Law of Property Act 1936 (SA) provides that after 80 years parties may apply to the court for orders to bring the trust to an end or if before, seek orders that it is to vest within 80 years.



Most trust deeds specify the date, period of time or the event that will bring the trust to an end. Provided the description is consistent with the law that applies to the trust, it will be a valid trust (at least for perpetuity purposes). Whilst it may seem strange to some there are many trusts that when established, identified a vesting date that is less than the maximum that would have been available on creation. Indeed, the writer is aware of several trusts that hold hundreds of millions of dollars in assets that, according to the vesting date of the trust, will end before 2020. This may seem a long time away, as it did in the 1970’s when the 50 year original trust vesting date was defined!

Stein v Sybmore Holdings [2006] NSWSC 1004 is one judgement that addressed the issue of an ‘early’ trust by extending its vesting date. The trustee and the original creator of the trust approach the Supreme Court of NSW seeking it to exercise its powers under section 81 of the Trustee Act to bring about a change in the ending date of the trust. This section provides;

81 Advantageous dealings (1) Where in the management or administration of any property vested in trustees, any

sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court:

(a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and

(b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

(2) The provisions of subsection (1) shall be deemed to empower the Court, where it is satisfied that an alteration whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument, if any, creating the trust, or by law is expedient, to authorise the trustees to do or abstain from doing any act or thing which if done or omitted by them without the authorisation of the Court or the consent of the beneficiaries would be a breach of trust, and in particular the Court may authorise the trustees:

(a) to sell trust property, notwithstanding that the terms or consideration for the sale may not be within any statutory powers of the trustees, or within the terms of the instrument, if any, creating the trust, or may be forbidden by that instrument,

(b) to postpone the sale of trust property, (c) to carry on any business forming part of the trust property during any period

for which a sale may be postponed, (d) to employ capital money subject to the trust in any business which the

trustees are authorised by the instrument, if any, creating the trust or by law to carry on.

In Stein v Sybmore Holdings the court formed the view that it was expedient to alter the vesting date until a later point in time than that which was originally listed. In deciding to do so the court felt that the original purpose of the settlor or the creator of the trust was largely (if not completely) irrelevant, as was the opinion of the beneficiaries. The expediency had to be measured in the context of the trust and its stated purposes among the beneficiaries then in existence and who may come into existence as well as the current relative rights that each may have, however remote, in



the interests of the trust. As well, the minimisation of the capital gains tax and stamp duty on the trust property provides a separate basis upon which the conferring of the power is expedient.

Does the amendment cause a resettlement of the trust?

There can be no simple answer to this question, each trust and the circumstances of the beneficiary entitlements must be assessed in the context of the impact of an amendment extending the vesting date.

The question may be considered redundant for a trust with a long current vesting date that is merely being extended, if the view of the High Court in Buckle’s Case is applied. The suggestion in this case is that to the extent that any extension of time is relatively remote, the vicissitudes of the life of the trust make any alteration so remote in its possible effect that the value affected is at best nominal. Thus if the amendment of the vesting date did give rise to a resettlement the capital gains tax (for post assets) and stamp duty implications are likely to be manageable.

The foregoing view is consistent with the NSW Stamp Duty ruling DUT 17 and is somewhat consistent with the view expressed by the Federal Commissioner of Taxation in the 2001 Statement of Principles. In the later, the Australian Taxation Office accepts that an extension of the trust's duration is consistent with a continuing trust estate (that is, it does not amount to a resettlement).

In point 5.2 of the Statement of Principles, the ATO states that

“Given the absence of judicial guidance, the ATO will accept that in most circumstances the mere extension of the term of the trust is consistent with the continuing trust estate. The ATO

will reach this conclusion when:

The trust deed confers expressed powers to alter the termination date;

The deed and the surrounding circumstances do not indicate that a particular trust period was fundamental to a particular trust relationship; and

Other accompanying circumstances do not indicate a fundamental change to the trust.”

The following gives you a general overview in which circumstances the ATO has ruled that an extension of the vesting day of a trust causes a re-settlement of the trust and when it does not.

Private Ruling Examples of Re-Settlement Of Trust


The trustee proposed to amend the vesting day as well as change the appointor and confer a power to accumulate income of the trust on the trustee. The trust deed provided that upon the vesting day, the trust fund was to be distributed to nominated beneficiaries in shares as determined by the trustee or, if there were no nominated beneficiaries in existence, to eligible beneficiaries in such share as determined by the trustee.

With regard to the amendment of the vesting day, the ATO ruled that the trust deed indicated that the vesting day was an important feature of the trust and that it was the wishes of the settlor that the trust be established for a defined period (unfortunately there are no further details in the Ruling in this regard). Further, the ATO stated that, despite the trust deed conferring a general discretionary power on the trustee to amend the trust in any manner, it does not expressly provide for an extension of the vesting day but only to appoint an earlier date.



Vesting Day as defined in the deed is primarily used to determine the “life of the trust” but it also assisted in determining the identity of the potential beneficiaries who become entitled to income and capital at that time. The proposed extension of the “life of the trust” could potentially expand the identity of eligible beneficiaries as some may have come into existence and some may no longer be in existence. The ATO was therefore of the view that the proposed amendment resulted in a change to the beneficial rights of existing beneficiaries.

Private Ruling Examples of No Re-Settlement Of Trust


The trustee proposed to extend the distribution date from 30 June 2020 to 30 June 2050. The deed provided that on the distribution date the trustee should pay and transfer the trust fund in its absolute discretion “to the presumptive beneficiaries or to such one or more of them” to the exclusion of others and if there was no presumptive beneficiaries in existence, then to the next of kin of E as tenants in common in equal shares.

The ATO noted that there was no express power for the trustee to extend the termination date but only a general wide power to alter provisions of the deed. It was held that such a general power provided sufficient power for the trustee to extent the termination date.

Further, the ATO ruled that the beneficiaries would have the same beneficial interest in the trust fund before and after the amendment. The intention of the settlor was to provide the benefit to the listed beneficiaries and the trust was also not set up specifically as a vehicle for a particular project or to hold an asset for a limited duration. Therefore the intention of the settlor would not be changed through the proposed amendment.

Private Tax Ruling Identification Number 60910 In this application, the existing definition of “vesting day” meant ‘the twentieth anniversary of the last survivor of the lineal descendants now living of His Late Majesty King George V or such earlier day as the Trustee may in its absolute discretion appoint’. The new definition proposed to define the vesting day as ‘the day on which the trustee determines by deed to be the vesting day’ Even though the ATO noted that the new definition would enable the trustee to allow the trust to continue beyond the perpetuity date, the proposed amendment would not cause the creation of a new trust. The particular trust period appeared not to be a fundamental feature of the trust because the trustee already had the power to terminate the trust under the original deed. Private Tax Ruling Identification Number 84547 The trustee proposed to extend the term of the trust from 50 to 80 years. The ATO noted that the trust deed did confer an express power to alter the termination date but only to reduce but not to increase it. However, the ATO confirmed that a general power of the trustee to alter provisions of the deed would provide the trustee with sufficient power to extend the termination date. As the trustee had express power to shorten the 50 year term, the trust deed did not indicate that the original 50 year term was a fundamental feature of the trust.

Private Tax Ruling Identification Number 89770 Under the deed it was provided that the trust would vest after a certain time. The trustee had express power to appoint an earlier date to be the vesting day but not to extend the vesting date. The deed also provided wide powers to the trustee to alter provisions of the trust. The ATO noted that the proposed amendment to extend the vesting day would not



infringe the law against perpetuity but would bring the trust period in line with the rule against perpetuity in that State. The trust was established to benefit defined beneficiaries, being the trustee’s descendants and entities associated with those persons. The trust was therefore for the general benefit of a family group and not used as a vehicle for a particular project or to hold an asset of intrinsically limited duration. The ATO also noted that in relation to the beneficial interest of beneficiaries that

‘The relevant beneficial interest in a trust fund obviously constitutes a critical element in the trust relationship. In circumstances where default beneficiaries have vested but defeasible interests in the trust capital, an extension to the vesting date means there may be changes

in these beneficial interests. That is, the change to the vesting date may be considered likely to alter who ultimately has these beneficial interests.’

The ATO then ruled that there were always beneficiaries whose interest might be defeated, and with the change of the vesting date, the likelihood of their interests being defeated would increase. The class of beneficiaries may also include those who were not in existence at the original vesting date but who may come to hold relevant beneficial interests at the later vesting date. However, the ATO was of the view that those beneficiaries were always part of the class of beneficiaries as originally defined. Therefore the extension of the vesting day would not result in a redefinition of the class of beneficiaries. The class of persons who would be beneficiaries would remain the same.



APPENDIX

THIS DEED is made on the day of

BY NAME of ADDRESS in the State of New South Wales

WHEREAS:

A. I am a partner in the Chartered Accounting firm ACCOUNTING FIRM of ADDRESS (the “Firm”).

B. On DATE on the instructions of my client CLIENT (the “Client”) I acquired, through the firm, a shelf company NAME OF SHELF COMPANY (the “Company”) from NAME OF COMPANY of COMPANY ADDRESS.

C. All costs of the acquisition and establishment of the Company and the contribution of the initial AMOUNT dollars ($DOLLARS) “subscribers” share capital was paid by PAYOR by way of a personal cheque to the firm drawn on BANK DETAILS. A photocopy of the cheque in the amount of AMOUNT ($AMOUNT) is contained in Schedule 1 of this Deed.

D. I am the registered owner of NUMBER AND CLASS OF SHARE (“the Share”) in the Company being SHARE NUMBERS of the (INITIAL SHARE NUMBERS) initial subscribers shares. The share was registered in my name at the time of acquisition of the Company.

NOW THIS DEED WITNESSES

1. The share was purchased by PAYOR and is held by me, in my name as the apparent purchaser of same, for PAYOR who is the true owner of the Share.

Signed Sealed and Delivered ) by the said ) ) AT: ) in the presence of: ) ........................................ ............................................ (WITNESS) ............................................ (NAME OF WITNESS—PRINT) ............................................ ............................................ (ADDRESS OF WITNESS—PRINT)



STATUTORY DECLARATION

I, MR ACCOUNTANT of MY ADDRESS in the State of New South Wales, do solemnly and sincerely declare that:-

1. I am a partner in the Accountant firm of ACCOUNTANTS PTY LTD of ADDRESS (“the Firm”).

2. On DATE on the instructions of my client MR CLIENT I acquired, through the firm, a shelf company XYZ PTY LTD (“the Company”).

3. All costs of the acquisition and establishment of the Company and the contribution of the initial $2.00 “subscribers” share capital was paid by way of a personal cheque to the firm drawn on DATE. A photocopy of the cheque in the amount of $750.00 is contained in Schedule 1 of this Declaration.

4. I am the registered owner of One share (“the Share”) in the Company being numbered 2 and being initial subscriber shares. The share was registered in my name at the time of acquisition of the Company.

5. The share was purchased by MR CLIENT and is held by me, in my name as the apparent purchaser of same, for MR CLIENT who is the true owner of the Share.

AND I MAKE THIS SOLEMN DECLARATION conscientiously believing the same to be true and by virtue of the provisions of the Oaths Act 1900

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