Tuesday, September 21, 2021

No debate** - Can shares be owned as tenants in common?

Recent posts have considered various aspects of the rules in relation to assets owned as joint tenants.

Another aspect of the rules in this area that continues to cause debate relates to the manner in which shares in a company may be owned.

Often a constitution of a company will mandate that shares registered as owned by 2 or more people may only be owned as joint tenants. Often the constitution will also state that the name first listed on the share register will have all voting rights in relation to the shares.

Where a constitution of a company does not set out that joint share owners must own as joint tenants the issues are more complex if a will does not distribute a discrete number of shares to separate people. That is, instead of (say) giving 100 shares to A and B, giving 50 shares to A and 50 shares to B.

Despite there being a number of conflicting cases, it appears as though the long standing decision in McKerrell [1912] 2 Ch 648 continues to apply. In that case it was held that despite a will stating that the recipients of the gift of shares were to take as tenants in common – ‘That is not possible. At least, it is not possible that a chose in action, such as shares, can be held as tenants in common at common law’.

In other words, the only assets that can be owned as tenants in common at law are real property and chattels. This means, as one example, bank accounts in joint names are deemed to be owned as joint tenants. This is because there is essentially a chose in action, being the contractual right of the account holders against the bank, for recovery of a ‘debt’ (being the balance from time to time in the bank account).

Another example in this regard is the well known case of Equititrust Ltd & Anor v Franks [2009] NSWCA 128, where it was held in relation to a debt (and related mortgage), that the common law presumption of a joint tenancy applied despite the deeming provisions under legalisation that would have otherwise seen the parties hold as tenants in common.

As usual, if you would like copies of any of the abovementioned cases please contact me.

** for the trainspotters, the title today is riffed from the Breeders song ‘Lord of the thighs’. View hear (sic):

Tuesday, September 14, 2021

Assuming makes an a%& of you and me ... presumptions** and jointly owned assets

Last week’s post considered various aspects of the rules in relation to assets owned as joint tenants.

At law there is a presumption that where property is gifted to two or more people, they receive that property as joint tenants (subject to any contrary intention).

A number of jurisdictions have also enacted legislation confirming this outcome, including Western Australia, South Australia and Victoria.

In New South Wales and Queensland however there is legislation that ‘flips’ the position at law.

This means that where real property is gifted to two or more people in those jurisdictions it will be deemed to pass to the parties as tenants in common, in equal shares.

** for the trainspotters, the title today is riffed from the Midnight Oil song ‘Blot’. View hear (sic):

Tuesday, September 7, 2021

The youngest, modern-est**, most beautiful-est ... and 'wealthiest'

Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common.

One aspect of the rules in relation to joint tenancy that can arise in tragic circumstances is where two (or more) people die in the same incident, or indeed in unrelated incidents, and it is not possible to determine the order of deaths.

In these circumstances, in all Australian states other than South Australia, there is legislation deeming the deaths to have occurred in order of oldest to youngest. This means the youngest person will be entitled to 100% of the assets formerly owned as joint tenants.

These rules apply where the court determines that the order of death is uncertain (for example, see Re Comfort; Re Tinkler; Equity Trustees Executors & Agency Co Ltd v Cameron [1947] VLR 237).

South Australia also has a unique approach (in Australia) in relation to perpetuity periods, having essentially abolished the rule against perpetuities (which is generally 80 years) and allowing trusts to potentially last indefinitely.

The decision of In the Estate of Graham William Dawson (Deceased) and Teresa Veronica Dawson (Deceased) [2016] SASC 89, arguably best summarises the position in South Australia where multiple joint tenant owners of an asset die.

While acknowledging that the law in this area has essentially been ‘frozen’ for over 100 years, the court held that the existing rules continued to apply because no legislation had been introduced in South Australia changing the position. This meant the assets owned as joint tenants passed undivided into the respective estates for the 2 owners.

Interestingly, again due to legislation in states other than South Australia, companies can also own assets with other parties as a joint tenant.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Silverchair song ‘Young modern station’. View hear (sic): 

Tuesday, August 31, 2021

Before too long ** - when not even living together is a de facto relationship

As previous posts have touched on, in order to be in a de facto relationship, two people need to ‘live together as a couple’.

The case of NSW Trustee and Guardian v McGrath & Ors [2013] NSW SC 1894 highlights that in order to live together as a couple, you do not necessarily have to share a particular residence.

As is often the case in disputes about whether a de facto relationship existed, following the death of one of the parties, the facts in this case were relatively complicated.

In summary:
  1. The couple, with their respective life spouses had been friends for around 20 years.
  2. When the respective life spouses passed away, the couple formed a close bond, which they shared for around 13 years.
  3. They never lived together as such, however the relationship was often described as ‘boyfriend/girlfriend’.
  4. They spoke every night on the phone.
  5. They would meet at least a couple of times a week.
  6. They would often holiday together.
  7. the couple also attended all family functions (for example, birthdays, Christmas day etc.) together for one side of the family - in relation to the other side of the family, there was significant estrangement and no family functions were attended.
Following a dispute about the distribution of the estate on the first of the couple to die, the entitlement of the other party to the relationship turned on whether he satisfied the definition of a de facto.

The court decided that although the case was borderline, there was sufficient evidence to support the existence of a de facto relationship, given how devoted the couple seemed to be to one another, even though they never chose to share a residence for a lengthy period of time.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Paul Kelly song ‘Before too long’. View hear (sic): 

Tuesday, August 24, 2021

Non-lawyers providing full (legal) services**

One issue that often arises is the liability of non-practicing lawyers and those advisers without any legal qualification who facilitate the provision of legal documentation.

Arguably, the leading case in this area is Legal Practice Board v Computer Accounting and Tax Pty Ltd [2007] WASC 184.

In this particular case, an accountant arranged for a trust deed to be bought for a client over the internet. The base trust instrument had been written by lawyers however, the accountant then populated the template.

In doing so, the court held that practically this meant that the accounting firm was breaching the relevant legislation. In all likelihood, the accountant would not be covered by their professional indemnity insurance in relation to any issues that arose out of the trust instrument.

Despite the proliferation of online providers, the decision in this case remains a very important one for any adviser facilitating legal solutions.

In many respects, it reinforces the approach adopted by firms such as ours who, while leveraging significantly off technology driven solutions, still ensure that all documentation is reviewed by a fully qualified, specialist lawyer, and where relevant, a certificate of compliance is provided confirming that all legal advice has been provided by the firm, and not the facilitating adviser.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Art of Noise song ‘Backbeat’. Listen hear (sic):

Tuesday, August 17, 2021

Guiding (star)** principles on trust interpretation

Following the post last week I was reminded of a related issue from the case of Harris v Rothery [2013] NSWSC 1275 that provides useful guidance in relation to the role of an appointor.

In many respects, the main focus in the decision was on the issue of whether the role of an appointor was a fiduciary one.

While the court held that for the purposes of the relevant deeds the role was not a fiduciary one (even though generally it will be), a number of other issues were addressed by the court that are important to the interpretation of trust deeds.

In summary, these included the following:
  1. a later inconsistent document to a purported variation, including where the later document is set out in the will of a party can validly amend a trust instrument, depending on the provisions of the original document;
  2. where a trust deed is prescriptive about the steps that must be taken (for example, providing written notification to a trustee) any purported change will only be valid on satisfying the relevant requirements;
  3. similarly, if there are timeframes set out in the deed for the provision of notices, unless they are complied with strictly, the notice will be held to be ineffective;
  4. unless a trust instrument requires original notices to be provided, then copies will suffice;
  5. similarly, notices that are undated will not of themselves be invalid unless the trust instrument requires dated documents;
  6. the provisions of a trust deed must be interpreted by reference to a reasonable objective construction, as opposed to how the parties subjectively interpreted them; and
  7. the nomination of a replacement appointor will only take effect when the incumbent appointor is no longer able to act, unless otherwise expressly provided in the instrument of nomination.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Teenage Fanclub song ‘Guiding Star’. View hear (sic):

Tuesday, August 10, 2021

2 (+2 =5)** step deeds of variation

A common theme of posts over time has been the critical need for trustees (and their advisers) to read the provisions of any trust deed.

One issue that arises regularly under trust deeds is a variation power that may only be used in relation to certain clauses in the trust deed.

Where a trustee wishes to amend clauses that are protected from variation, one strategy that is often considered involves preparing:
  1. an initial deed of variation, which amends the power to vary under the trust deed to remove the prohibitions; and
  2. a second deed of variation implementing the desired changes.
Obviously, this approach is only available where the variation power itself is not one of the clauses that the prohibition on variation applies to.

Even where the approach, is on the face of the trust deed available, there are cases that would suggest this 2-step process is void for being a fraud on the power to amend.

The leading case in this area is Jamaica Ltd vs. Charlton [1999] W.L.R. 1399.

In particular, the decision confirms that the trustee cannot look to achieve by two steps, what was unable to be achieved by one step.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Radiohead song ‘2+2=5’. View hear (sic):

Wednesday, August 4, 2021

New (Financial) Year**, Same Story: avoid lost SMSF trust deeds

One of the key trustee duties of any form of trust is to know the terms of the trust deed and keep the original wet (not electronically!) signed trust instrument safe and secure. This duty is very difficult to discharge however if the trust deed is lost.

The case of Jowill Nominees Pty Ltd v Cooper [2021] SASC 76 ("Jowill") provides a recent insight into the issues a court will consider where a trust deed has been lost. Court application being the only pathway to achieve a solution that is binding on beneficiaries and third parties such as revenue authorities, as well as protecting the trustee where an original trust deed has been lost.

While Jowill involved a discretionary trust, many of the principles are applicable for self-managed superannuation funds (SMSFs).

Factual matrix

Broadly, the factual matrix involved a trust that was established in 1976 and for many years had as its substantive asset shares in Coopers Brewery Limited. The original trust deed was unable to be located and there was also no copy of the document.

There was however an advice letter from a lawyer in 2007, based on a review of the original trust deed that explained a number of key provisions including the range of beneficiaries. Other aspects were also able to be reverse engineered, such as the probable perpetuity period and the fact that the deed likely permitted capital distributions.

The capital distribution power was assumed to exist by the court on the basis of the lawyer's evidence that if it did not, this would have been flagged in the advice letter, particularly because the lawyer confirmed no trust deed read in 45 years of practice failed to contain such a provision.


The court confirmed that under the relevant state based Trustee Act it could vary the trust deed (effectively adopting a new deed here), so long as the following tests were met (all of which were, primarily due to the evidence of the lawyer that provided the 2007 advice letter):
  • there is good reason to make the proposed exercise of powers;
  • the proposed exercise of powers is in the interests of beneficiaries;
  • the proposed exercise of powers will not result in 1 class of beneficiaries being unfairly advantaged to the prejudice of another class (here it was critical that all beneficiaries were represented before the court);
  • the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust;
  • the proposed exercise of powers will not disturb the trust beyond what is necessary to give effect to the reasons for the revocation or variation; and
  • the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.
The deed approved by the court was based on a precedent as at 1978 of the firm that had likely drafted the trust deed, adjusted to align with the advice from 2007.

While the court did consider a request to simply revoke the trust, it ultimately confirmed its preference to approve the, varied, adopted trust deed as it was the least disruptive approach. The court confirmed the trustee could choose to exercise its discretion to make a capital distribution of the assets of the trust (which was its intention) and subsequently vest the trust, relying on the terms of the court approved deed.

Vesting issues

If a trust deed cannot be found, commercially with discretionary trusts it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.

Any vesting of a trust and subsequent distribution of assets, with or without court approval, is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.

Most of these can generally be ignored however in relation to SMSFs as a result of the leading case in relation to trust resettlements, namely FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and subsequent Tax Office statements (for example, see Private Ruling Authorisation Number 14613, which confirmed that amendment of an SMSF deed, that was not lost, by deleting all the operative provisions and inserting the terms of an updated trust deed did not cause a CGT resettlement).

Adopting a new deed

In the context of SMSF trust deeds (and indeed other forms of fixed trusts with a narrow range of known beneficiaries, who can be proved via other evidence), a court application for adopting a new trust deed is generally seen as being unlikely to be necessary from a trust law perspective.

That is, the trustee and interested beneficiaries can simply adopt a new deed.

However the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ care must be taken.

In this case a husband and wife established separate SMSFs appointing themselves as sole members. They declared a property owned by them as property of their respective SMSFs.

In considering who the ‘beneficiaries’ of each SMSF were, it was held that upon construction of the SMSF deeds, the class of beneficiaries was broader than each single member. This was because the trust deed allowed the trustee to pay benefits to the member’s dependants and even relatives (if there were no dependants, as defined under the superannuation legislation) of the member.

As such, in this case, the potential class of beneficiaries included 21 different people.

Best practice therefore dictates that each person who can enforce the due administration of the trust should be a party to and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed (see also Re Bowmil Nominees Pty Ltd [2004] NSWSC 161, which confirmed that where all potential beneficiaries agree to a variation, there is no need for the court approval).

Other approaches

Alternatively, a conservative approach (that may be appropriate if a court application is not commercially viable) can be to adopt a replacement deed and then establish a new SMSF and immediately the roll assets of the fund that had the lost deed into the new structure. The heritage SMSF would then be wound up.

Regardless of which approach is adopted, other than court application, if an SMSF trustee is adopting a new deed without any evidence as to the original terms, specific specialist advice should be obtained as to whether this will amount to a CGT resettlement. Fortunately, from a stamp duty perspective, most states have a concessional regime that any variation of an SMSF trust deed (even if it causes a duty resettlement) will be liable for only nominal stamp duty.


While it is possible to reconstitute the terms of a lost SMSF trust deed, the process is generally time consuming, commercially difficult and unnecessarily costly.

As with many similar areas, despite the potential triteness of the statement, when considering the implications of lost trust deeds, prevention is the best cure.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the U2 song 'New Year’s Day’.

View here:

Tuesday, August 3, 2021

(When) advisers** act as fiduciaries

One issue that arises fairly regularly for advisers is whether they will act in fiduciary roles for their clients, for example, as trustees or executors of a will or as an attorney under some form of enduring power of attorney document.

At law, there is no reason that an adviser is automatically prohibited from accepting this type of role.

There are however a number of rules that need to be understood and complied with, not least of which the duty to avoid a conflict of interest.

Practically however, many financial and risk advisers are prohibited from taking on these roles, unless they are able to obtain the prior written consent of their licensee.

** for the trainspotters, the title today is riffed from the Bob Dylan song ‘Queen Jane Approximately’. Listen hear (sic):

Tuesday, July 27, 2021

(Quick) Succession** with super fund trusteeship on death

Recent posts have considered the various issues that can arise in relation to the payment of superannuation entitlements following death.

The case of Ioppolo & Hesford v Conti & Anor [2013] WASC 389 provides another example of how unintended consequences can arise where the control of a self managed superannuation fund (SMSF) is not carefully considered as part of a comprehensive estate plan.

The background of the case was as follows:

1) the husband and wife originally established an SMSF and were the individual trustees;

2) following the wife’s death, the husband appointed a corporate trustee (not the legal personal representative of his wife’s estate) of which he was the sole director and shareholder in order to comply with the relevant superannuation legislation;

3) the corporate trustee (with the husband as sole director), then resolved to pay the entirety of the wife’s superannuation entitlements to the husband, as opposed to her legal personal representative pursuant to her will;

4) the executors of the will sought to unwind the distribution, partly because of a direction in the will that related to the superannuation entitlements;

5) in particular, the executors argued that the husband failed to act in a bona fide manner because of the provision in the will.
In dismissing the executor’s claim and allowing the husband to retain all of the wife’s superannuation entitlements, the court confirmed that there is no obligation under the superannuation legislation for a surviving trustee to automatically appoint the executors of a former co-trustee as replacement trustees of an SMSF.

In many ways, the decision simply reinforces the principle from the Katz v Grossman case some years earlier.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Elliott Smith song ‘Bled White’. View hear (sic): 

Tuesday, July 20, 2021

What you need** with super death benefit planning

Last week’s post considered the case of Katz v Grossman.

Earlier posts have considered the various types of superannuation death benefit nominations that can be made.

Clearly if the father in Katz v Grossman had utilised a binding death benefit nomination, then there would likely have not been any successful challenge to the ultimate payment of the superannuation entitlements

Some of the other planning strategies that can be utilised to regulate how superannuation benefits are distributed on death include:

1) incorporating automatic adjustment clauses under the terms of a will, to take into account benefits that are received directly from a superannuation fund;

2) mandating the succession of trusteeship of the superannuation fund; and

3) entrenching approval mechanisms for death benefit payments, for example, by prohibiting a payment until trustee receives consent from a trusted third party.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the INXS song ‘What you need’. View hear (sic):

Tuesday, July 13, 2021

The Original (Sin)** and super death benefits - the Katz decision

Superannuation entitlements are regularly one of the most significant assets in any estate planning exercise.

Critically however, superannuation benefits need to be regulated in a way that complements a wider estate planning exercise. Arguably, one of the leading cases in relation to superannuation death benefit planning remains, after more than 15 years, the decision in Katz v Grossman [2005] NSWSC 934.

The case involved Katz bringing an action against his sister Grossman (and her husband), claiming an interest in their father’s self managed superannuation fund (SMSF).

A summary of the facts is as follows:
  1. originally, the father and mother were the individual trustees of the SMSF;
  2. the mother died some years before the father, and subsequently Grossman was appointed as a co-trustee with the father (this was to ensure that the SMSF continued to comply with the relevant superannuation legislation);
  3. when the father later died, Grossman appointed her husband as a co-trustee with her;
  4. during his lifetime the father had made a non-binding nomination indicating that he wanted his superannuation entitlements divided equally between Katz and Grossman; and
  5. Grossman and her husband ignored the nomination and paid the entirety of the superannuation entitlements for the benefit to herself.
The Court held that all the trustees of the SMSF had been validly appointed at the relevant times, and that as a result, the challenge by Katz was unsuccessful and Grossman was entitled to keep the superannuation entitlements.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the INXS song ‘Original Sin’. View hear (sic):

Tuesday, July 6, 2021

Trust renunciations and disclaimers – the changed (tax) position** for the beneficiary

Previous posts have looked at some of the key issues to be aware of in relation to renunciations and disclaimers by beneficiaries of a trust. 

The stamp duty aspects of any such renunciation or disclaimer must be considered carefully on a state-by-state basis. As with many aspects of stamp duty law, frustratingly, there is little consistency across the various jurisdictions.

Fortunately, in relation to the capital gains tax consequences, the position is somewhat clearer.

In particular, the Tax Office has set out their view is in Tax Determinations 2001/26 (in relation to renunciations) and TR 2006/14 (in relation to disclaimers).

Broadly, the Tax Office confirms its view that from a tax perspective outcome of disclaimers (which operate retrospectively from the commencement of the trust) and renunciations (that operate from the date the renunciation is made – ie prospectively) in relation to discretionary entitlements are the same.

The Tax Office has confirmed that a renunciation or disclaimer of a trust interest will not normally have any capital gains tax (CGT) consequences for the trustee of the trust.

In particular the Tax Office confirms that:
  1. an interest in a trust is a CGT asset; and
  2. a renunciation by a beneficiary of an interest in a trust will give rise to CGT event C2 (the abandonment, surrender or forfeiture of an interest).

However, whether the CGT event has any practical consequence depends on whether:
  1. the CGT asset has any value at the time of the CGT event; and
  2. if there is any exemption that may be available.
The Tax Office considers that if a beneficiary who renounces their interest is a purely discretionary beneficiary of the trust (that is, the beneficiary has no interest in either the assets or income of the trust before the exercise of any trustee discretion as to the allocation of such income or assets), then there is likely to be no CGT (as the market value of the beneficiary’s interest will be nil).

If however the beneficiary who renounces their interest is a default beneficiary (that is, the beneficiary will receive a distribution of either income or capital in default of the exercise of a discretion by the trustee), then this kind of trust interest may in fact have some value. This means that CGT is more likely to be triggered by that beneficiary as a result of their renunciation.

Similarly, where a beneficiary disclaims (as opposed to renounces) their trust interest, the disclaimer is effective retrospectively and has the effect that the beneficiary is deemed to have never held the interest or entitlement which has been disclaimed. Consequently, there is no asset to which a CGT event could apply.

Whether CGT is payable will be determined on a case by case basis, depending on issues such as:

1) the terms of the particular trust deed and its purpose; and

2) the past history of distributions made by the trustee in favour of the default beneficiary; and

3) all other circumstances of the particular case.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from one of the coolest song titles ever, namely the Kaiser Chief’s song ‘Na na na na naa’. View hear (sic): 

Friday, July 2, 2021

I like your old stuff better than your new stuff** - Tax Office shows its (previous) caring approach towards family trusts distributing to testamentary trusts

New (financial) year.

More lock downs.

And a reminder some things never change - for example, the Tax Office don’t like trusts.

Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.

In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.

In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.

Briefly, to the extent relevant, the factual matrix was as follows:
  1. a willmaker was the ultimate controller of a family trust;
  2. the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
  3. it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
  4. this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).
In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:
  1. Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
  2. Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
  3. Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
  4. While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
  5. Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Regurgitator song ‘I like your old stuff better than your new stuff’.

View here:

PS and the image the quintessential lock down WFH set up.

Tuesday, June 29, 2021

Sometimes** Trust to trust distributions are not all good

With only one more sleep until another 30 June is upon us, it seemed timely to remember that all Australian jurisdictions except for South Australia have a statutory perpetuity period of 80 years. In Victoria, Tasmania, Western Australia and the Northern Territory, the common law perpetuity period may also be adopted, that is ‘a life in being plus 21 years’. 

Despite South Australia essentially abolishing the rule against perpetuities, section 62 of the Law of Property Act 1936 (SA) allows the court to dispose of any remaining unvested interests after 80 years on the application of a beneficiary. 

Generally, when trust to trust distributions are made, the vesting date of both trusts should be considered. Where a recipient trust has a vesting date which is later than the distributing trust, the risk that the rule against perpetuities is breached is a particularly relevant issue. 

Historically, many advisers believed that if the vesting date of the recipient trust was later than the distributing trust, then this automatically caused a breach of the rule against perpetuities, making the purported distribution void. 

However, the case of Nemesis Australia Pty Ltd v Commissioner of Taxation [2005] FCA 1273 confirmed that the ‘wait and see rule’ in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date. 

The ‘wait and see’ rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by the Carpenters. View hear (sic): 

Tuesday, June 22, 2021

Sometimes**, some of the other key questions concerning family trusts (part two)

Following recent posts, some of the additional questions considered by the court in Beeson v Spence in deciding the assets of a trust were property of the marriage are set out below. 

1. Can beneficiaries be removed or added, and if so by whom?

The beneficiaries could be removed or added by the trustees, only with the consent of the appointor.

2. Is there any risk that the trustee may be seen as simply the ‘alter ego’ of some other person?

The Court found that the trust was created with the wife in control of the appointment of those with the duty of administering it and it was never created to benefit the children alone. The assets of what was essentially a 'standard' discretionary trust were controlled by a party to property proceedings who ultimately had the power to legitimately determine at any point to whom income and/or capital was to be distributed, including herself.

3. Does someone (e.g. an appointor, guardian, principal) have the power to unilaterally change the trustee?

Yes. The appointor was the wife initially. Whilst she subsequently relinquished control and appointed her sister as replacement appointor in 2003, the steps taken via the deed of variation were seen as having been taken at the wife’s direction. This conclusion pointed towards the trust being the alter ego of the wife, and thus the property of the marriage and not the property of the children.

4. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?

The deed provided for the appointor powers to pass to Mr Beeson, the wife’s father and trustee of the trust, upon her death. The deed also allowed for the wife as the original appointor to name a successor appointor (which she did, namely her sister).

5. For an existing trust, has there been a pattern of income or capital distributions?

Distributions were made from income in both 2002 and 2003 to the specified beneficiaries being the children. Distributions were also made to the wife in this period, which she applied, among other things, to payment of her legal costs. Whilst the wife argued the legal costs incurred showed the fund was used for the children’s benefit, it was held that the legal costs should be seen as being incurred on her own account. This supported the conclusion that the trust was not the sole benefit of the children.

Further, there was nothing improper about the trustees distributing funds in the wife’s favour, as she was a potential beneficiary up until the variation in 2003, and continued to be entitled to receive distributions as a ‘parent’ of the specified beneficiaries after the variation.

** for the trainspotters, ‘Sometimes’ is a song by the Brand New Heavies. View hear (sic): 

Tuesday, June 15, 2021

Sometimes (always)** you need to ask these key questions concerning family trusts (part one)

As flagged in last week’s post, some of the key questions the court in Beeson v Spence took into account when deciding the assets of the trust were property of the marriage are set out below. 

1. Who is the trustee of the trust?

The trustees of the trust were the wife’s father and her solicitor. They had the discretion to administer the trust.

2. Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?

The specified beneficiaries were the children of the husband and wife, and the husband and wife were initially potential beneficiaries as parents of the specified beneficiaries. By the deed of variation (instigated by the wife) in 2003 the husband and wife were removed as potential beneficiaries. After the deed of variation the wife and husband were entitled to receive distributions, not as potential beneficiaries, but as ‘parents’ of the specified beneficiaries.

3. Does the trustee need consent/approval of any other person for distribution?

No. However, the trust deed gave the wife ultimate control of the distribution of income and capital by giving her power of appointment and removal of trustee, who in turn had the discretion to distribute to the wife and the husband to the exclusion of the children. This level of control pointed towards the trust being an alter ego of the wife, and the conclusion that the assets were property of the marriage, not the children.

4. Does the trustee effectively/practically control the trust in an unfettered way?

No. Up until her resignation under the deed of variation in 2003, the wife as appointor had complete control over the appointment and removal of the trustee. The consent of the appointor was required for the trustee to vary the terms of the trust deed. Nothing, including a request by the trustee, obliged the wife as appointor to relinquish control of the Trust.

5. Does the trustee exercise its powers independently or are they controlled or subject to approval by any other person or entity?

While the trustee had the discretion to make distributions, the power to vary the deed was subject to approval by the appointor and the appointor could remove the trustee at any time.

** for the trainspotters, ‘Sometimes Always’ is a song by the Jesus and Mary Chain. View hear (sic): 

Tuesday, June 8, 2021

Sometimes** it’s about asking the right questions – Beeson v Spence

Following recent family law related posts, this week, an adviser reminded me of the case of Beeson v Spence [2007] FamCA 200 which highlighted the importance of the factual matrix on how exposed the assets of a trust are. The decision is still regarded as one of the most important in relation to trusts and family law. 

Briefly the case involved a wife and husband who met in 1996 and married in 1997. They had two children and subsequently divorced in 2004. In 2001 the wife had established a trust known as the S Trust. 

On establishment of the trust, the wife’s father and her solicitor were appointed as trustees and the wife was the appointor. The specified beneficiaries were the two children of the marriage and the wife and husband were within the class of potential beneficiaries. 

In 2003, at a time when the husband was going through financial difficulties, and when the wife and husband had separated, the deed was varied to exclude the wife and the husband as potential beneficiaries of the trust, as well as to resign the wife as appointor. A new appointor, being the wife’s sister, was nominated in her place. 

After the variation, the deed practically still entitled the wife and husband to receive distributions, not as potential beneficiaries, but as ‘parents’ of the children who remained specified beneficiaries. 

In the property settlement proceedings, the husband argued that the trust was established for the benefit of the family as a whole and not just the children. 

In contrast, the wife suggested that the trust was ultimately established for the purpose of benefitting the children of the relationship and therefore the assets should not be treated as property of the marriage. 

Having reviewed all of the available facts, the Court ignored the release of direct control by the wife (through her resignation as the appointor and the removal of beneficiaries) and held that the wife still retained sufficient control of the trust to support a conclusion that the assets should be treated as property of the marriage. 

Posts over the next two weeks will look at the key questions the court took into account in reaching this conclusion. 

These posts will show that the factual matrix is decisive in determining whether the property is matrimonial property. This is because the assets of the trust are more likely to be matrimonial property where, among other things, the trust is essentially the alter ego of one of the parties to the marriage. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by Ash. View hear (sic): 

Tuesday, June 1, 2021

What do you want from me?** family law and tax fraud

Today’s post looks at the Family Court decision where property proceedings were adjourned to allow for the wife’s allegations against the husband for fraudulent tax evasion to be investigated. 

In Pisani & Pisani [2012] FamCA 532, the main two main issues were: 
  1. whether it was appropriate to adjourn the property proceedings given the potential impact on the asset pool?; and
  2. whether the Court should bring to the attention of the Australian Tax Office (ATO) evidence of the husband's alleged fraudulent tax evasion, as disclosed by the wife?
The court held that given the potential liability, if the allegations of tax evasion were proven, would have been considerable, it was appropriate to adjourn the property proceedings until the allegations were resolved by the ATO. Until the issues had been resolved, it would be virtually impossible to determine the true asset pool of the parties. 

In relation to the duty of the Court to disclose the allegations to the ATO, the court held it was obligated to take action to bring the issue to the attention of the ATO. This said, the court also confirmed that the question of this type of disclosure was one that needed to be determined balancing all relevant issues on a case by case basis. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘What do you want from me?’ is riffed from the Billie Eilish song ‘Bury a friend’. View hear (sic): 

Tuesday, May 25, 2021

When family law courts recognise spouses have (gone) ‘Fishing** for documents’

Today’s post looks at a Family Court decision regarding beneficial interests in property proceedings following a matrimonial breakdown.

In the case of MacDowell & Williams and Ors [2012] FamCA 479, the court denied the request for disclosure of the wills and documents relating to the corporate and trust structures of the wife’s parents. 

The wife and the husband married in April 2004 and separated on a final basis on 12 July 2010. The husband had submitted that the documents requested were relevant to the marital property pool and in determining the financial resources available to the wife. 

The wife’s parents filed an objection to the husband’s request on the basis that: 
  1. the documents sought from them in their personal capacity were not relevant as they maintained testamentary capacity; and
  2. the documents sought from them in their capacity as directors were not relevant as neither the wife nor the husband had any proprietary interest.
In relation to the parents’ wills, the court said the request was a ‘fishing expedition’ by the husband. Although there may be compelling circumstances which warrant the disclosure of will documents (for example, when a parent has lost capacity), here, both parents were alive, in good health and possessed full testamentary capacity. 

In relation to the financial and corporate documents, it was held that there was no evidence to suggest that the wife had control over any of the entities, or that control was likely to arise in the future. 

This lack of control was contrasted with the case of Keach (which has featured in previous posts) where the husband did have significant involvement with a trust and it was held to be his financial resource. 

The court then considered the previous distributions of one trust where the wife was both the primary and default beneficiary. Given, however, that the wife had only received $28,000 over the ten years of the existence of the trust, and during that time, distributions had also been made to other beneficiaries of the trust, the court held that it was clearly ‘discretionary’ in nature. 

The husband also sought to rely on purported interpretation of Kennon v Spry [2008] HCA 56 (again see previous posts) and argue that the wife’s interest in the trust were property, that being her ‘right to consideration’ and ‘due administration’. 

The court held in favour of the wife’s parents that this was a misstatement of the law on this point and that while such rights could be taken into account, they would generally be very difficult to value. 

The court also bluntly distinguished Spry by noting that Dr Spry had total ultimate control of the trust in question, which was not the case here. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Gone fishing’ is riffed from the Stereophonics song ‘Bartender and the thief’. View hear (sic): 

Tuesday, May 18, 2021

Where’s it at?** Capital gains tax and non-resident beneficiaries

Following recent posts it is worth remembering that historically, non-resident individuals could access the 50% capital gains tax (CGT) discount on capital gains on the disposal of Australian real property or shares in land rich entities, provided that there was an ownership period of more than 12 months. 

However, for any capital gains made after 8 May 2012 by a non-resident disposing of a taxable Australian asset, regardless if the asset was owned by the individual or via a trust, there is no access to the 50% CGT discount. 

The 50% CGT discount is still available for any capital gains accrued, but not crystallised prior to 8 May 2012, although an independent valuation is likely to be required. 

Trustees of trusts with non-resident beneficiaries will need to be particularly mindful of issues such as the following: 
  1. having a mixture of capital gains on taxable and non–taxable property when distributing to a non-resident;
  2. if a beneficiary becomes a non–resident after 8 May 2012 and the relevant asset disposed of was acquired prior to that date; and
  3. ensuring the benefit of accessing the 50% CGT discount on accrued gains as at 8 May 2012 by obtaining a valuation.
** for the trainspotters, the title today is riffed from the Beck song ‘Where’s it at’. View hear (sic): 

Tuesday, May 11, 2021

Tax Office tracing** of trust distributions

Following on from last week’s post, arguably, the starkest example of the Tax Office’s attitude concerns its review around identification of beneficiaries of certain distributions, particularly where trust to trust distributions are involved. 

In particular, trustees are required to complete an Ultimate Beneficiary Statement where a distribution is made to another trust, failing which ultimate beneficiary non-disclosure tax is imposed on the trustee of the original trust equal to the highest marginal tax rate plus the Medicare levy. 

The Tax Office also previously established its ‘Trusts Taskforce’ which, in addition to the goal of identifying ‘egregious tax avoidance and evasion using trust structures’ is stated to be focused on: 
  1. unregistered trusts and their beneficiaries;
  2. trusts that are irregular in lodging tax returns;
  3. offshore trust dealings involving secrecy jurisdictions;
  4. sham transactions; and
  5. artificial re-characterisation of amounts.
The Tax Office has however stated that the intended targets of the Taskforce are high risk taxpayers and not ordinary arrangements and tax planning associated with genuine business or family dealings. 

** for the trainspotters, the title today is riffed from the Beck song ‘Nicotine & Gravy’. View hear (sic): 

Thursday, May 6, 2021

Trust assets on marriage breakdown (AKA Primitive love rites**)

Many previous posts have explored how trusts are considered in family law matters.

The decision in Balken & Vyner [2020] FamCA 955 provides another example of the approach the courts take in relation to family trusts.

Factual matrix

Broadly, the factual matrix was as follows:

  1. A couple, both previously married, had a period of perhaps a few years as de factos prior to their marriage (there was a debate as to when a de facto relationship may have started).
  2. The couple were married 6 years.
  3. The majority of the asset pool was owned via trusts.
  4. The majority of the trusts were created by, and the assets held via them contributed by, the husband's father (who died shortly before the couple married).

There was significant disagreement between the spouses on almost every substantive issue before the court, including the overall value of all assets, with the wife's estimate ($63M), more than double the husband's ($31M).

Control of trusts

Specifically, in relation to the level of control of the trusts the husband had (and therefore in turn the ability for the court to apportion assets held via the trusts to benefit the wife), the following key comments set out below were made.

The husband was not the sole appointor of key trusts, nor the sole director or shareholder of the trustee companies.

The husband's father had left a Letter of Wishes addressed to the directors and shareholders of the trustee company setting out his instructions.

There were independent directors of the trustee companies, and these persons were also appointors.  The directors held regular meetings and exercised their discretion in relation to the income and capital of the trusts in accordance with the Letter of Wishes and there was no evidence which suggested that they would not continue to do so.

The accepted evidence was that the directors of the trustee had always acted, and would likely continue to act, in accordance with the wishes (an extract the decision provides of the Letter of Wishes is set out later in this article).

This meant the husband had a present entitlement to 40% of the income and 40% of the capital, however only on the trusts vesting, as opposed to the 100% immediate entitlement to all income and capital of the trusts suggested by the wife.

The court confirmed the evidence clearly demonstrated that the husband did not control the trusts, nor could he use the assets of the trusts for his own purposes.

In particular, there were regular meetings of the directors of the trustee companies and the husband reported to those meetings and was required to account to the other trustees and justify his actions.

To the extent the husband was responsible for the day-to-day management, an independent director (a consultant to the group) reviewed the accounts and queried the husband about particular transactions.  The husband was required to justify his actions to the other directors (which included a partner at a law firm) and ultimately to the beneficiaries.

The evidence also demonstrated that if the husband received more than he was entitled to, according to the terms of the Letter of Wishes, any amount over and above was debited against his loan account and he was either required to repay those amounts or paid interest on any loan account balance.

Ultimately the asset pool was decided to be in the region of $35M, which effectively excluded a number of assets held in the trusts due to the practical limitation on the husband's potential entitlements imposed by the Letter of Wishes.

The husband suggested an 85%-15% split in his favour.  The wife suggested 65%-35% in the husband's favour.

In a detailed balancing of the contributions, the court made a primary allocation of 77.5%-22.5% in favour of the husband, with a further adjustment to benefit the wife, making the final allocation 75%-25% in favour of the husband.

Letter of Wishes

In relation to the Letter of Wishes, a warning - the significant emphasis placed on the Letter of Wishes and the fact that the court held that the trustee directors essentially considered themselves bound by it, needs to be considered in light of wider trust principles.

For example, the potential tax and stamp duty consequences of the Letter of Wishes perhaps causing the various trusts to be amended were not explored. 

Furthermore, the rules against trustee's fettering their discretion were ignored. 

As confirmed in the decision of Dagenmont Pty Ltd v Lugton [2007] QSC 272, there is a general prohibition on a trustee fettering its discretion, namely “trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power”.

Similarly, the questions of whether the trustee directors were otherwise discharging the 3 key obligations on a trustee exercising a discretion were not explored; namely:

  1. to do so in good faith;
  2. upon a real and genuine consideration (a requirement that is so obvious that it is often not mentioned); and
  3. in accordance with the purpose for which the discretion was conferred.

The Letter of Wishes provided as follows:


After the death of the father of the husband, the net income of the Trusts for each accounting period shall be:

Distributed and paid as to:

1. 40% to the husband (or as he may direct)

2. 20% to the father's daughter (or as she may direct); and

3. 30% to the children of the father's daughter as tenants-in-common in equal shares; and

4. 10% to the husband's children as tenants-in-common in equal shares.

Until each of father's grandchildren attain the age of 24 years, sufficient funds shall be made available from their respective entitlements above to pay for their education expenses.


After the death of the father and upon vesting of the Trusts, the balance of the capital, assets, income and other entitlements arising in respect of the Trusts, if any, after taking into account all liabilities of the Trusts will be held and applied as to:

(i) 40% to the husband (or as he may direct);

(ii) 20% to the father's daughter (or as she may direct);

(iii) 30% to the children of the father's daughter as tenants in common in equal shares; and

(iv) 10% to the husband's children as tenants in common in equal shares.

Notwithstanding any of the provisions in this Letter of Wishes, the Trustees may at any time make funds available to any of the beneficiaries named in this Letter of Wishes either by way of distribution of net income or advance of capital or loan to the relevant beneficiary if, in the majority opinion of the directors of the Trustees, the relevant beneficiary has reasonable cause to require assistance.

Any such payment shall be treated as a payment on account of (and not in addition to) the beneficiary’s entitlements under the above paragraphs (as the case may require).

In the event that any of the beneficiaries named in this Letter of Wishes predecease the father or survive the father but do not reach their full entitlements hereunder leaving a child or children then such of those children as shall attain the age of 21 years (and if more than one as tenants-in-common in equal shares) will take the entitlement which his or her or their parent would otherwise have taken.

This letter merely reflects the wishes of the father. It does not seek to impose any legal or binding obligations upon the Trustees except insofar as it is within the discretion of the Trustees to comply with such wishes and insofar as the Trustees as prepared to do so.

The Letter of Wishes is to be taken into account by all of the shareholders and directors from time to time of the Trustees and any successors in the offices of trustees or of Appointors and Guardians of the Trusts, in the administration of the Trusts and the exercise of the Trustees’ discretions in applying any income or capital of the Trusts after the death of the father.

If at any time any difference of opinion of exists in relation to the commission or omission or any act or any decisions, determination or consent to be made or given by the Executors under this Letter of Wishes, then unless otherwise indicated the majority opinion of the Executors shall prevail."


Ultimately the decision in Balken & Vyner [2020] FamCA 955 provides a further reminder that appropriately structured and administered trusts can achieve asset protection objectives from a family law perspective.

Critically however, in achieving asset protection objectives, potential tax, stamp duty and trust law issues may cause unintended and undesirable consequences.

This article originally appeared in Thomsen Reuters' Weekly Tax Bulletin.

** for the trainspotters, the title today riffed from Mondo Rock's tune 'Primitive Love Rites'.

Tuesday, May 4, 2021

Trust distributions to non-resident (leaders)** or beneficiaries (as the case may be)

Generally, withholding tax is payable on all dividends, interest or royalties included in the income paid by a resident trust to a non-resident beneficiary to the extent that the non-resident beneficiary is presently entitled to the relevant amount. 

For example, if a resident trust validly distributes income to beneficiaries in the United States (who are non-resident beneficiaries), then: 
  1. under the withholding tax system, a flat rate of tax is deducted from the source of the income before the income is sent overseas;
  2. each part of the income (depending on whether it is interest, dividends or royalty distribution) will be taxed on the relevant withholding tax rate generally, ranging between 10% and 15%; and
  3. often the beneficiary will not be subject to any other tax.
Importantly, however, any trust distributions to non-residents where the withholding tax rules do not apply, the trustee will be taxed at the top marginal rate. 

** for the trainspotters, the title today is riffed from the Green Day song ‘St Jimmy’. View hear (sic): 

Tuesday, April 27, 2021

Exclusion of settlor and the notional settlor (claws) or clauses** as the case may be

Today’s post looks at the rationale behind excluding settlors and notional settlors of trusts. 

Almost all trust deeds contain a clause excluding the settlor of a trust from being a beneficiary, in order to ensure the trust is not subject to adverse tax consequences as a ‘revocable’ or resulting trust under section 102 of the Tax Act. 

Some deeds, however, take the restriction further by prohibiting distributions to any ‘notional settlor’, in addition to the actual settlor. 

For example, a trust deed may include a provision along the following lines: 
1.1    ‘A person who has transferred property for other than full consideration in money or money’s worth to the Trustee to be held as an addition to the Trust Fund (herein called ‘the excluded persons’), or any corporation in which and the trustee of any settlement or trust in or under which any excluded person has an actual or contingent beneficial interest, so long as such interest continues, is excluded from the class of Beneficiaries.’ 

Where this type of a clause exists, a beneficiary will likely be excluded from receiving distributions, if they have: 
  1. made interest-free loans to the trust;
  2. sold an asset to the trust at less than market value; or
  3. gifted cash or other assets to the trust.
As the main beneficiaries of a trust will have often contributed amounts to a trust in one or more of the ways mentioned above, the risk of invalid distributions being made, where such a clause exists in a deed, are significant and anecdotally we understand this issue is one the Tax Office reviews regularly. 

Generally the inclusion of provisions excluding a ‘notional settlor’ are seen as unnecessary given section 102 only applies to the creation of a trust, not contributions to an already existing trust. 

** for the trainspotters, the title today is riffed from the Elvis Costello song ‘Temptation’.  Listen hear (sic): 

Tuesday, April 20, 2021

Trust disclaimers – taking the (tax) position** for the trust

Recent posts have looked at some of the key issues to be aware of in relation to disclaimers by beneficiaries of a trust. 

One other critical issue to be aware of relates to the tax consequences of a disclaimer, particularly in relation to any intended income or capital distribution that is disclaimed. 

Where a disclaimer is made before the end of an income tax year, how the amount disclaimed will be taxed will depend on the factual matrix, and will likely result in one of the following outcomes, namely: 
  1. If there is a valid default provision, then those default beneficiaries will be taxed (the key concepts in this regard are also explored in a previous post).
  2. If the distribution resolution validly sets out a ‘safety net’ distribution if the initial intended distribution fails, then that safety net provision will apply.
  3. If neither of the above scenarios apply, then the trustee is likely to be assessed on the disclaimed amount under section 99A of the Tax Act.
Critically, according to the decision in Nemesis Australia Pty Ltd v Commissioner of Taxation [2005] FCA 1273 (this case has also been explored in a previous post) the position in relation to disclaimers made after the end of an income tax year is more clear cut. 

In particular, in Nemesis it was held that as the interest of a default beneficiary only arises at the date of the disclaimer, then if the disclaimer arises after the end of the income year the trustee will be taxed under section 99A. This is despite the fact that the disclaimer itself has retrospective effect back to the date of the purported distribution (ie which will generally be before the end of the relevant income year). 

Where the trustee is taxed under section 99A, a flat rate of tax is imposed at the highest marginal rate. This means there is no splitting of income amongst beneficiaries, access to the stepped marginal tax rates nor the 50% general discount for capital gains on assets owned via trusts for more than 12 months. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, the title today is riffed from the Pet Shop Boys song ‘Sad robot world’. Listen hear (sic): 

Tuesday, April 13, 2021

Sometimes** unit holders do have liability – another lesson from the leading case

Last week’s post featured a detailed look at the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355 with reference to disclaimers. 

Previously the decision has also featured in posts in relation to the fact that a trustee of a unit trust will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders, unless this is excluded by the trust deed. 

Where a trust deed is not crafted to exclude unitholder liability the question becomes the basis on which unitholders are liable. That is jointly, or severally. 

Broomhead addresses the question bluntly by confirming (unlike a partnership) the liability is several, capped at each unitholder’s percentage interest in the trust. 

In particular, the court confirmed that there is no justification for treating any one beneficiary as liable to pay the full amount of the trustee's indemnity. The beneficiaries are not jointly entitled to the whole trust fund. Each one is separately entitled to a separate part. 

Thus, the proportionate liability of a separate beneficiary (is) the same as (their) proportionate right to benefit. 

Further, each beneficiary bears the proportion of the trustee’s indemnity for liabilities incurred, correspond(ing) to the proportion of (their) beneficial interest when the liabilities were incurred. (Each unitholder’s) share of liability is limited to that proportion, even though other beneficiaries are not liable to indemnify or are unable through insolvency to meet their liability. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by Yello. Listen hear (sic): 

Tuesday, April 6, 2021

How soon is now? ** – effective trust disclaimers

The decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355, is arguably most well known for the lesson that in relation to unit trusts, beneficiaries (or unit holders) can be personally liable for the debts of the trust. 

In particular the case confirms the general principle that unless specifically excluded by the trust deed, the trustee of a unit trust will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders. 

One of our earlier posts explores this aspect of the decision. 

The decision however is also important due to its comments in relation to arguably one of the most critical aspects of disclaimers (following on from recent posts), namely whether they are made ‘within time’. 

Relevantly the case confirms that the test to apply is ‘whether in the circumstances (a beneficiary) has accepted by words or other conduct or has remained silent for so long that the proper inference is that (they have) determined to accept the interest’. 

The other ways in which the court explained this concept included the following statements: 
  1. Acceptance may be presumed unless the donee disclaims the gift.
  2. Knowing of the gift, the donee, unless he disclaims it, is ordinarily treated as tacitly accepting it.
  3. During the period that the donee remains entitled to disclaim, the gift is treated as vested in the donee subject to repudiation.
  4. What is a reasonable time for (a disclaimer) depends on the nature of the property with respect to which it is given and all the circumstances.
  5. By remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted.
  6. While there is no limit to the acts which may constitute a disclaimer, an effective disclaimer must be intentional and show unequivocally that the beneficiary rejects the beneficial interest.
  7. A disclaimer is to be established by the party alleging it.
  8. The consequence of (a) disclaimer … is that in law (the donee) is treated as retrospectively disentitled to the interest declared for (their) benefit in the trust deed (and thus) … freed from all burdens which would have gone with acceptance of the interest.
  9. (The donee’s interest is) described as a right "defeasible by the beneficiary's own act of disclaimer”.
While ultimately the test is obviously subjective, it also is clearly based on other disclaimer cases that unless a properly crafted disclaimer is signed within weeks of a beneficiary being made aware of their entitlement it will likely be held to have been made out of time. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘How soon is now?’ is a song by The Smiths. View a more recent version by Morrissey hear (sic): 

Tuesday, March 30, 2021

Sometimes you get kicked** Trust disclaimers … some further lessons

As mentioned in last week’s post, a previous post has explored arguably the leading case in relation to trust disclaimers, being the decision in FCT vs. Ramsden [2005] FCAFC 39. 

The decision in Smeaton Grange Holdings Pty Ltd vs. Chief Commissioner of State Revenue [2016] NSWSC 1594 provides further clarity around the key issues in this regard. 

While the case is primarily focused on payroll tax grouping issues, it does provide an analysis of the key principles in relation to trust disclaimers that are also important for income tax purposes. 

In summary, the case confirms: 
  1. No person can be compelled to accept a gift against their wishes. This principle is derived from the leading English case Re Gulbenkian’s Settlements (No.2) [1970] CH408. Again, if you would like a copy of this case, please let me know.
  2. A beneficiary of a discretionary trust can therefore disclaim their interests unilaterally by way of deed poll, which means that no consideration needs to be paid.
  3. A disclaimer cannot be made however if a person has full knowledge of all aspects of their entitlements and then fails to take steps to make the disclaimer.
  4. A person can disclaim their interest in specific entitlements to income or capital of a trust without disclaiming their interest in the entire trust. In this situation, the disclaimer only applies in relation to the specific interest defined in the disclaimer.
  5. Alternatively, a beneficiary can disclaim their interest in the entire trust.
  6. Disclaimers, once made, operate retrospectively, thereby meaning that the entitlement disclaimed is effectively deemed to have never arisen. Contrast this with a renunciation, which is effective prospectively.
  7. A disclaimer or renunciation can be made from time to time in relation to distributions of income and capital in any income year, however if the person is a default beneficiary the disclaimer or renunciation must be in relation to their entire interest.
  8. To be effective a disclaimer must be made within a reasonable time period of the beneficiary becoming aware of the distribution. The importance of this aspect can not be understated and will be explored in more detail next week.
As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, the title today is riffed from the INXS song ‘Kick’. View hear (sic): 

Tuesday, March 23, 2021

When amended assessments and trust disclaimers don’t mix**

Last week’s post explored the Yazbek decision. 

One of the critical aspects of the core principle from that decision is the potentially significant adverse consequences that can arise in relation to the Tax Office issuing amended assessments to a taxpayer. 

In particular, any person that is merely a potential beneficiary of a discretionary trust can automatically be subject to a four-year amendment period. 

This is despite the case that they may not even have been aware that they were a potential beneficiary of, for example, a distant relative’s trust. 

This said, where a potential beneficiary is unaware of their beneficiary status, if an amended assessment is issued more than two years (which is the general time limit), but less than four years, the relevant beneficiary may be able to challenge the assessment if they immediately disclaim their interest in the relevant trust. 

A previous post has considered the manner in which an effective disclaimer can be made. 

Next week’s post will further explore some of the key issues in relation to trust disclaimers. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, the title today is riffed from the ACDC song ‘Dogs of war’. Listen hear (sic): 

Tuesday, March 16, 2021

Sometimes** you need to ask: Who are beneficiaries under a trust deed?

Today’s post considers the meaning of ‘beneficiary’, from a tax perspective as confirmed by the Federal Court in the case of Yazbek. 

The decision confirms that a ‘beneficiary’ is not simply a person who, as a matter of fact, has obtained some tangible benefit from the trust, rather a beneficiary is someone who is entitled to enforce the trustee’s obligation to administer the trust according to its terms. 

In other words, anyone named as a potential beneficiary, or a member of a class of beneficiaries (even if not specifically named) will be a beneficiary. 

A comprehensive review of a trust deed should always include an analysis of every variation or resolution of a trustee or other person that may impact on the interpretation of the range of potential beneficiaries. 

Some examples of documents that may impact and the class of potential beneficiaries include: 
  1. resolutions of the trustee to add or remove beneficiaries pursuant to a power in the trust deed;
  2. nominations or decisions of persons nominated in roles such as a principal, appointor or nominator; and
  3. consequential changes triggered by the way in which the trust deed is drafted (for example, beneficiaries who are only potential beneficiaries while other named persons are living).
As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by Depeche Mode. Listen hear (sic):