NSW implications for all changes** of trustee

There is a specific provision of the New South Wales and ACT Duties Acts which require that, in order to qualify for the stamp duty exemption where a change of trustee is occurring, the new trustee needs to be excluded as a beneficiary of the trust.

This means the trust deed needs to contain an express provision excluding any new trustee from being a beneficiary.

Advisers practicing in New South Wales or the ACT are usually acutely aware of that limitation being in most of their trust deeds and of the resulting need to look at who may have been a previous trustee to see whether any beneficiaries are excluded.

The issue comes up quite commonly because several of the popular online trust deed providers use trust deeds from Sydney law firms, meaning that even though the trust deed might be ordered online by an accountant in Western Australia or a lawyer in South Australia, if the deed provider is based in New South Wales, the deed they’re providing probably contains this exclusion without the adviser being aware of it.

There are two reasons we need to know whether the deed contains the exclusion.

Firstly, if we are changing the trustee and we appoint a new trustee who is a beneficiary of the trust, then that change of trustee may be invalid or it may trigger unintended tax or stamp duty consequences.

Secondly, we may have individuals who were previously a trustee of the trust and who at face value appear to be a beneficiaries, but who were actually excluded as a result of the clause.

For instance, if Mum and Dad were individual trustees but they subsequently retired and appointed a corporate trustee, even though they may be named as beneficiaries of the trust, the exclusion clause may have made them ineligible to receive income or capital distributions.

An exclusion like this can have an impact from a family law perspective and also from a tax perspective, if we have been purporting to make trust distributions to individuals thinking they were beneficiaries, not being aware of this exclusion hidden within the trust deed.

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 David Bowie song ‘Changes’.

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Sole trustees of a partnership of trusts: No Surprises**

Posts over recent weeks have considered the issues surrounding whether a partnership exists where two or more trusts have the same corporate trustee.

As mentioned last week, while the so called 'self-dealing rule' can potentially invalidate a structure of a single trustee of multiple trusts, that rule can be ignored where this is addressed in the relevant trust instruments.

Subject to this requirement, it appears that at least some professional bodies and third parties (for example the Law Society and Stamps Office) interpret the relevant legislation as allowing a sole corporate trustee of multiple trusts in partnership.

Two commercial examples in this regard would include trust cloning and trust splitting, both of which are founded on the basis that it is possible for the same trustee to contract with itself in relation to multiple trusts.

There does however need to be provisions along the lines set out in the trust deed for each partner.

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Example trust deed clauses

Conflicts of interest

1.1 The Trustee may:

1. contract with, or sell or grant options to buy any part of the Trust Fund to;
2. purchase Property from;
3. borrow money from; or
4. enter into any share farming or agistment agreement, lease, tenancy or partnership with, the Trustee in its own or any other capacity, either alone or in conjunction with any other persons or:
5. any company or partnership, even if the Trustee, or any shareholder or director of the Trustee, is a shareholder, director, member or partner of that company or partnership; or
6. a Child of the Trustee.

1.2 The Trustee may exercise (or concur in exercising) all of the powers and discretions contained in this document or otherwise conferred by law, even if:

1. the Trustee, or any director or shareholder of a Trustee that is a company:
1. has or may have any direct or personal interest in the mode or result of exercising that power or discretion; or
2. may benefit either directly or indirectly as a result of the exercise of that power or discretion;
3. is a party in its personal capacity to the transaction being contemplated; or
2. the Trustee is the sole trustee.

1.3 The Trustee may sell, transfer, dispose, divide in specie, hire or lease any part of the Trust Fund to carry on or carry out any profit making undertaking or scheme in partnership with:

1. the Trustee in any capacity (including its personal capacity, or in its capacity as trustee of another trust fund);
2. any company or partnership, even if the Trustee, or any shareholder or director of the Trustee, is a shareholder, director, member or partner of that company or partnership; or
3. a Child of the Trustee.

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 Radiohead song ‘No surprises’.

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Sole trustees of a partnership of trusts: not so hard to explain**

Posts over recent weeks have considered the issues surrounding whether a partnership exists where two or more trusts have the same corporate trustee.

A related issue in this regard relates to whether a company as trustee of two different trusts can contract with itself.

Generally there are potentially prohibitions against this style of structure under the various state based Property Law Acts. These prohibitions are analogous to the common law ‘self-dealing’ rule, which prevent a trustee conveying or selling property to itself because it places the trustee’s personal interest in conflict with the duty to the beneficiaries.

That is, at common law, there must be at least two parties to a contract. Therefore it is the case that a party cannot contract with a nominee for itself or with its own agent, if that agent is contracting with its principal in that capacity - and two agents of the same principal cannot contract with each other, see Infigo II v Linmas Holdings [2023] NSWSC 75. This case also succinctly confirms that:

1. A trustee, in its personal capacity and in its capacity as a trustee, remains the same legal person.
2. Except as permitted by statute, whilst a trustee can contract in two different capacities, it cannot contract with itself.
3. The assumption that a trustee in its personal capacity and in its trustee capacity are different persons is false (see MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911).
4. A legal person cannot act as agent for itself (see McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902).

Having said the above, the common law rule is largely removed by the Property Law Acts. Under these Acts, a distinction is made between a person conveying land to itself (void) and a person conveying land to itself in another capacity (voidable), that is, as a trustee. In the latter case, a single corporate trustee of a partnership is generally valid, although could in theory be unwound if (say) a beneficiary of one of the partner trusts seeks to object to the arrangement. Any risk is therefore a commercial rather than a legal one.

The decision in Leximed Pty Ltd v Morgan [2016] 2 Qd R 442 provides some context in this regard. This case involved a partnership agreement between 2 trusts with the same trustee. The court confirmed that the partnership agreement was likely to be unenforceable at common law on the basis that the partnership was a nullity under the ‘self dealing’ rule, although a concluded position was not reached on the issue. Part of the reason the issue of invalidity due to self dealing was not determined was because the relevant Property Law Act overruled the common law position and therefore would have created the requisite ability to enforce the arrangements.

Similar to the Property Law Acts, under the Tax Act, section 960-100(3) confirms 'A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity' (see Re David Christie as trustee for The Moreton Bay Trading Company [2004] AATA 1396).

In this regard, there are two exceptions to the self-dealing rule as it relates to the trustee of a trust:

1. it is authorised or contemplated by the trust instrument; or
2. it is authorised by each of the beneficiaries (who are of legal age) and the transaction occurs at arm’s length terms.

While the law is not settled on this point, assuming the documentation is drafted in a way to ensure the intention was clear that the trusts would be forming a partnership with one corporate trustee, and the practical arrangements reflected this intention, such a structure is at most voidable if a successful application is made by (say) one of the beneficiaries.

Practically, there is often also utility in having an appointor or principal power in each trust deed, to facilitate a change of trustee if required of any partner, without terminating the partnership.

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 Strokes song ‘Hard to explain'.

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