Tuesday, April 23, 2019

Oops! … I did it again**: amending existing agreements

An issue that often arises is the desire to amend an existing agreement, with effect from a particular date – regularly that date will be on and from the day the original agreement was entered into.

It is generally accepted that, as between the parties, an agreement can be effective and binding on whatever basis is desired. This does not mean however that an agreement can be changed such that it is binding retrospectively on third parties, such as revenue authorities.

Arguably the leading case in this area is Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation 2000 ATC 4201. As usual, if you would like a copy of the case please contact me.

In this case the parties purported to have an agreement entered into that caused adverse tax consequences amended some time later, with effect from the date of the original document.

In rejecting the effectiveness of the amended agreement in binding the Tax Office it was confirmed that a rectification by a court or by deed between the parties is the only approach that binds third parties. Such an approach however is only available where the parties are under a mutual mistake that the document they signed recorded the terms of their bargain, when in fact it did not.

Rectification does not operate to ‘alter the past’, rather it simply recognises what had in fact always been the case, namely that the true agreement between the parties was not correctly recorded in the document that was mistakenly signed.

Critically, rectification requires that there must have been a mutual mistake. In other words, ‘a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had’.

A mistake or misunderstanding, for example, as to the revenue consequences of an agreement is not a mutual mistake allowing rectification.

** For the trainspotters, the title today is riffed from Britney Spears song of the same name from 2000 see hear (sic):

Tuesday, April 16, 2019

How does it feel** - when a deed of rectification causes a resettlement?

Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.

The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.

Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties. 

The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.

The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the following posts Statement of principles to be finally amended, ATO releases draft determination on trust resettlements, and More comments on ATO resettlements determination).

The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.

In particular, it was confirmed that:

‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).

Importantly, a rectification also has retrospective effect.

That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.

As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.

** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):

Tuesday, April 9, 2019

Have you got time to rectify?**

Previous posts have looked at various aspects of deeds of variation, and in particular, the critical need to 'read the deed' before implementing any variation (see more here).

Where a purported deed of variation later proves to be ineffective due to a failure to follow the provisions of the trust deed, one approach that can provide a solution is a deed of rectification and clarification.

Generally, this approach will be a valid way to address previous inconsistencies, without the need for court approval.

Critically however, any attempt to rectify or clarify historical issues with a trust deed cannot do something that is beyond what was originally contemplated by the parties involved.

One example in this regard that we reviewed recently, involved a situation where a trustee was incorrectly inserted under a deed of variation as a beneficiary, in direct conflict with another provision of the trust instrument.

On discovery of the conflict some years after the deed of variation, it was clear that the only way to rectify the error would be to change the trustee with retrospective effect to a new entity. The deed of rectification approach was unavailable as the deed could not ignore the clear intention of the parties, which at the time was that the trustee should remain in its role and a rectification workaround would have ignored that fact.

** For the trainspotters, ‘time to rectify’ is a line from the Beatles song from 1965’s Rubber Soul ‘Think for Yourself’ listen hear (sic):

Tuesday, April 2, 2019

I can see clearly now ** – how to use a deed of clarification

Last week’s post, explored the difficulties that can arise when steps are taken (for example to change a trustee of a family trust) without having reviewed the trust deed.

Over the last few weeks, we have been working with an adviser where this type of situation had arisen and a third party financier was refusing to complete a transaction until steps were taken to resolve the issue.

In this particular instance, the only pathway we had been able to develop (and which the bank has accepted) has been to prepare a detailed 'deed of clarification'.

In many respects, this document is a self serving one, however in very general terms, it:

1) provides a summary of the purported changes;

2) confirms that the purported changes did not in fact comply with the deed;

3) restates the changes in a way that does in fact comply with the deed; and

4) has the trustee, appointor and some of the main beneficiaries of the trust all consenting to the changes, effectively with retrospective application.

** For the trainspotters, ‘I can see clearly now’ is a song by The Hothouse Flowers from 1990.

Tuesday, March 26, 2019

Take it easy** but get it right with changes of trusteeship

This blog regularly highlights the critical importance of reading the ‘Read the Deed’ mantra before taking any step of substance in relation to a trust.

Last week, I had another example of this in relation to a purported change of trusteeship.

The documentation in relation to changing the trustee of the family trust appeared on its face to be relatively standard.

The difficulty was that the particular trust deed had some quite bespoke provisions concerning how the trustee could be changed, and unfortunately, those provisions had not been followed.

The further difficulty with this particular case was that no one had discovered this error until some years later (when the bank was refusing to complete on a property transaction).

We are now working with the bank to try and resolve the issue that simply would not have arisen if the time had been taken to have read the trust deed in the first place.

** For the trainspotters, ‘Take it Easy’ is a song by The Eagles from 1972. See a live rendition from 1977.


Tuesday, March 19, 2019

Let Love Rule - Specific Requirements of Binding Nominations **

Previous posts have considered various aspects of superannuation nominations, including binding death benefit nominations (BDBN). Some of the previous posts are available below:

1) Superannuation death benefits

2) Superannuation and binding death benefit nominations (BDBN)

3) Double entrenching binding nominations

As with many other aspects of estate planning, whenever considering a BDBN, the starting point should always be the requirements set out under the trust deed. Indeed, a BDBN can only be used where the deed allows one to be made.

Below is an example of some of the requirements that are generally set out in trust deeds before a nomination will be held to be binding, the first three of which are generally required by legislation:

1) must be in writing;

2) must be signed, and dated, by the Member in the presence of 2 witnesses, each of whom has turned 18 and neither of whom is a person mentioned in the notice;

3) must contain a declaration signed and dated by the witnesses stating that the notice was signed by the Member in their presence;

4) will not lapse by the passing of time;

5) may be revoked by the Member by written notice to the Trustee at any time;

6) must contain sufficient details to identify the Member; and

7) must contain sufficient details to identify one or more Beneficiaries for each category of benefits selected.

While almost all trust deeds that allow BDBNs will have provisions along the lines outlined above, at times there will be additional provisions that are not necessarily expected. Some examples in this regard include:

1) a requirement that the trust deed for the superannuation fund cannot be amended in a way that impacts on any BDBN without the consent of each member who has made one;

2) a provision that empowers the trustee to accept amended BDBNs from the financial attorney of a member;

3) the trustee may be required to consider and accept a BDBN before it is valid; and

4) there may be a particular table or form that is required to be embedded into the BDBN, which sets out the percentage entitlement of each beneficiary.

** For the trainspotters, ‘Let Love Rule’ is a song by Lenny Kravitz from 1989.


Tuesday, March 12, 2019

BFA’s - What does the High Court decision mean (to me)**?

As mentioned in last week’s post, the key issues undermining the validity of the BFA in this matter related to the conduct of the husband and the existence of unconscionable conduct and (by majority) undue influence.

Unconscionable conduct was summarised as follows:

‘a special disadvantage may also be discerned from the relationship between parties to a transaction; for instance, where there is ‘a strong emotional dependence or attachment’ … Whichever matters are relevant to a given case, it is not sufficient that they give rise to inequality of bargaining power: a special disadvantage is one that 'seriously affects' the weaker party’s ability to safeguard their interests.’

Undue influence is said to occur when a party is deprived of ‘free agency’ in entering into an arrangement. In other words, when there is something so strong that the influenced party is under the belief that while the document is not what they want, they feel compelled to sign it anyway.

The High Court listed the following six factors (noting that they are however not exclusive) relevant in assessing whether there has been undue influence in the context of BFAs:

1) Whether the agreement was offered on a basis that it was not subject to negotiation.

2) The emotional circumstances in which the agreement was entered, including any explicit or implicit threat to end a marriage or to end an engagement.

3) Whether there was any time for careful reflection.

4) The nature of the parties’ relationship.

5) The relative financial positions of the parties.

6) The independent advice that was received and whether there was time to reflect on that advice.

Admittedly, with the benefit of hindsight, arguably, the case does not significantly change the position in relation to the effectiveness of BFAs.

Indeed, the agreement may well have been held to be valid if some of the basic recommendations featured regularly in these posts were embraced.

In particular, if the arrangements had been put in place earlier in the relationship or at least not so approximate to the wedding, that would have increased the robustness of the agreement.

Similarly, if steps were taken to ensure that the independent lawyer was able to endorse the appropriateness of the agreement by way of a collaborative negotiation, then it would have almost certainly been the case that the arrangements would have been upheld.

This said, BFAs remain a stark reminder of a key asset protection mantra, that being the need to 'measure twice and cut once' if there is a desire for the arrangement to be enforceable.

  ** for the trainspotters the title of the post today is riffed from 1986 and Crowded House’s Mean to Me