Tuesday, March 12, 2024

Salvation!** - Varying a trust deed when there is no power of variation

View Legal blog - Salvation!** - Varying a trust deed when there is no power of variation by Matthew Burgess

Pursuant to the Trusts Acts (and similar legislation) in most Australian states, there is an inherent power for a court to make variations to trust instruments.

This power can be extremely important where there is no, or a very narrow, power of variation in a trust instrument.

One of the leading cases in this area is Re Dion Investments Pty Ltd [2013] NSWSC 1941.

In broad terms, the case involved a trust deed setup in 1973, which the trustee was wanting to amend so as to be able to better manage the trust property. The relevant legislative provision in New South Wales gave the court the power to amend a trust instrument so long as it was ‘expedient' for the management or administration of trust property.

In rejecting a request to amend the deed by inserting a comprehensive variation power (which in turn would have allowed the trustee to make such changes to the trust deed as it deemed appropriate from time to time), the court confirmed:
  1. The legislative provisions did not allow the court to simply insert into the deed a comprehensive power of variation.
  2. Only specific powers (in contrast to wide discretionary powers) with respect to a particular dealing will be granted under the legislation.
  3. It was however permissible for the court to confer particular and limited powers in relation to certain issues such as how to account for income and capital gains and related tax driven provisions.
  4. Despite not originally crafting its variation request along the lines that the court said was permissible, the trustee was permitted to make further submissions in accordance with the court’s recommendations for immediate approval.
Interestingly, in the subsequent decision of Re Dion Investments Pty Limited [2020] NSWSC 1661, the court authorised a further variation to ensure the ‘foreign person’ land tax surcharge could be avoided. This was in light of the fact that the trust deed did not give the trustee the ability to exclude foreign persons as beneficiaries. In particular, the relevant power of variation was limited to 'trusts' (granted to persons who had all died and therefore had lapsed), not the ‘powers’ – a distinction explored in many previous View posts.

The court confirmed that the requirements in the legislation were all met, namely:
  1. There needs to be a 'proposed dealing', being a 'sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction'.
  2. The dealing must be in the Court’s opinion 'expedient'.
  3. The dealing must be incapable of being effected because of an absence of power.
Relevantly the court confirmed that the existence of a tax advantage can form the basis of the ‘expediency’ in the management and administration of trust property requirement; here the land tax saving was over $100,000. This conclusion was reached notwithstanding that the order would adjust or even destroy the rights of some (potential) beneficiaries to the extent that they met the definition of a 'foreign person'.

The same outcome was granted in the case of Cecil Investments Pty limited [2021] NSWSC 211, where the trust deed permitted only a variation to the 'powers' not 'trusts.

This case also confirmed that previous attempted variations to the trust deed were invalid as they breached the limitation set out in the power of variation against anything that purported to change beneficiaries who were takers-in-default of appointment.

As has been explained in numerous previous posts, a comprehensive power of variation is arguably one of the most important aspects of any trust deed.

It is important to keep in mind that the legislation is worded differently in each State, for example the Queensland Courts have a wider power than in NSW. Reference should therefore always be had to the specific wording of the legislation in the relevant jurisdiction.

As usual, please make contact 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 Black Rebel Motor Cycle club song 'Salvation’.

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