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:
The couple, with their respective life spouses had been friends for around 20 years.
When the respective life spouses passed away, the couple formed a close bond, which they shared for around 13 years.
They never lived together as such, however the relationship was often described as ‘boyfriend/girlfriend’.
They spoke every night on the phone.
They would meet at least a couple of times a week.
They would often holiday together.
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.
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** for the trainspotters, the title today is riffed from the Paul Kelly song ‘Before too long’. View hear (sic):
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.
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** for the trainspotters, the title today is riffed from the Art of Noise song ‘Backbeat’. Listen hear (sic):
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:
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;
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;
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;
unless a trust instrument requires original notices to be provided, then copies will suffice;
similarly, notices that are undated will not of themselves be invalid unless the trust instrument requires dated documents;
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
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.
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** for the trainspotters, the title today is riffed from the Teenage Fanclub song ‘Guiding Star’. View hear (sic):
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:
an initial deed of variation, which amends the power to vary under the trust deed to remove the prohibitions; and
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):
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.
Decision
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.
Conclusion
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.
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** For the trainspotters, the title of today's post is riffed from the U2 song 'New Year’s Day’.
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):
