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): 

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): 

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): 

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:

"Income

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.

Capital

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."

Conclusion

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'.

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):