Star Hotel** - When two wrongs make anything but a right

Last week’s post considered one of the leading cases in relation to a failure to follow the specific requirements of a trust instrument when appointing a beneficiary.

In that case, the failure to validly appoint a beneficiary caused significant difficulties due to subsequent purported distributions of income to the party.

In summary, it was held as follows:

1. The attempted distribution of income to an invalidly appointed ‘beneficiary' is a nullity.
2. On this basis, the distribution can be set aside as void ‘ab initio' – in other words, the distribution itself is taken to never have occurred (this aspect of the decision relied on an earlier case of Re Cavill Hotels Pty Ltd [1998] 1 QdR 396.
3. Where a purported distribution of income fails, the entitlement of valid potential beneficiaries will depend on the relevant original distribution minute initially.
4. If the relevant distribution minute does not address who receives a failed distribution, then the default provisions, if any, under the trust instrument will apply.
5. The ability for any default clause under a trust instrument to operate effectively will depend upon whether they do in fact trigger a distribution within the relevant income year. As profiled in an earlier post, some trust deeds do not operate effectively in this regard.
6. There is also a risk that if there is no valid default or gift over provision, then the assets of the trust pass on a resulting trust to the settlor. This outcome is at best problematic, particularly given that the settlor is often an unrelated third party such as an accountant or lawyer.

Practically, a trustee would need to reimburse the trust (or each underpaid beneficiary) to the extent of the invalid distribution from their own assets.

Trustee Exposure also potentially extends to other losses, for example overpaid income tax that may have become unrecoverable from the Tax Office (eg due to being out of time).

While in theory the trustee would be entitled to recover amounts it personally compensates the trust for from the overpaid beneficiary, practically if that beneficiary does not have assets, recovery attempts may fail.

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 Cold Chisel song 'Star Hotel’ – inspired by the Cavill Hotels case mentioned above.

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A seven nation army**? - How many resolutions does it take to create a valid appointment?

Previous posts have looked at various aspects of trust related strategies recommended by accountant Steve Hart, that over time caught the attention of the Tax Office.

Previous posts have also considered various aspects of the mantra ‘read the deed'.

Recently, I was reminded of a decision, which highlights the importance of both of these concepts, namely the decision in Idlecroft Pty Ltd V Commissioner of Taxation [2004] FCA 1087.

The factual matrix in this matter was relatively complex. Arguably, the key aspect related to a purported nomination of a beneficiary.

The relevant clause in the trust instrument gave the principal of the trust the power to nominate beneficiaries by notice in writing to the trustee.

Under the purported written nomination, the principal did sign the document, however it was noted in the instrument that the signature was in his capacity as a director of the trustee company.

The court held that the document failed to satisfy the requirements under the trust deed for the principal to provide the trustee with written notification of the appointment of beneficiary.

In turn, this meant that the subsequent distributions of income to the beneficiary, who was not in fact validly appointed, failed.

Next week’s post will summarise some of the consequences of this failure.

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 White Stripes song '7 Nation Army’.

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Trust deed without a power to vary: you'd better run, run, run** to court

Posts over recent weeks have considered the issues about varying a trust that has no, or an inadequate, power to vary.

An iteration on the theme is set out in the decision of Budumu Pty Ltd [2021] NSWSC 522.

In this case a power to vary was granted under the trust instrument, however it was only able to be relied on during the life time of 2 named (primary) beneficiaries; both of whom had died by the time the variation was required.

Court approval was therefore needed, and granted, in order to ensure the trust avoided the land tax surcharge in relation to foreign beneficiaries.

A further example is provided in the decision of Casibond Pty Ltd: In the matter of George Tsivis Family Trust [2021] NSWSC 320. In this case, a trust deed had no formal power of variation, however did have the following provision:

'(The Trustee may) generally, determine all matters as to which any doubt, difficulty or question arises in relation to the Trust Fund and every such determination shall bind all parties interested in the Trust, but nothing in this sub-clause shall prevent the Trustee or any person interested in the Trust Fund from applying to the Court.'

This provision was held to be insufficient to allow the trustee to avoid the application of the foreign beneficiary surcharge, however again the court approved steps allowing the desired outcome.

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 Hunters and Collectors song 'Run, Run, Run'.

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Little room** (to move) - Varying a power of variation

Posts over the last couple of weeks have considered the issues about varying a trust that has not power to vary.

Previous posts have also looked at various aspects concerning the ability to vary trust instruments.

One iteration that is important to remember relates to attempts to vary problematic power of variation.

In other words, if a trust instrument has a variation power that is considered too narrow to achieve wider objectives, is it possible to use the pre-existing variation power to vary that clause of the trust instrument and create a wider power or variation?

As explained by the mantra ‘read the deed', the answer to this question will often depend on the exact terms of the trust instrument.

Very broadly however, the position appears to be as follows:

1. If there is a restriction on how the variation power may be exercised, it is generally not possible to vary the power to remove that restriction.
2. In other words, a trustee cannot implement steps indirectly to achieve something that is prohibited via direct action.
3. The reason for this conclusion is largely based on the rule that a trustee has an overriding duty to comply with the terms of the trust instrument as articulated on the settlement of the trust.
4. The corollary is also true – i.e. if the power of variation expressly contemplates itself being varied, then the trustee should be able to do so.
5. As is almost always the case with the trust deeds, there are a number of related potential issues that should be considered depending on the factual matrix.
6. For example, if a particular trust instrument prohibits distributions to a certain person, but not to a trust of which that person is a potential beneficiary, would a ‘back to back’ distribution from the initial trust to the second trust and then to the relevant person constitute a breach of trustee duties?
7. There is certainly case law to support an argument that where a trustee takes steps to achieve an ulterior purpose, this can constitute a ‘fraud on the power', which means the arrangements may be held to be void by a court.

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 White Stripes song 'Little Room’.

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When tax savings inspire courts to decide: Let's Groove** with a proposed trust variation

Posts over recent weeks have considered various issues about courts varying a trust deed that has no sufficient power of variation.

One of the cases mentioned was the decision in Cecil Investments Pty limited [2021] NSWSC 211.

This decision (as well as TNB 878 Pty Limited – Brunskill Family Trust [2022] NSWSC 527) is also useful as it confirms that there have been a number of cases where it is has been held tax savings or advantages form a basis of expediency in the management and administration of trust property - one of the key tests that generally need to be satisfied.

In particular the decision lists the following examples:

1. Re A.S. Skyes and the Trustee Act (1974) 1 NSWLR 597: “… the powers conferred on the Court should not be withheld merely because their exercise is sought to enable the avoidance of a revenue impost…”
2. Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004: “As well, the minimisation of the capital gains tax and stamp duty on the trust property provides a separate basis upon which the conferring of the power is expedient.”
3. Application of NSFT Pty Ltd [2010] NSWSC 380: “modernisation of the trust deed ... with consequential tax benefits, is expedient in the management or administration of the property vested in the trustee…”
4. Barry v Borlas Pty Ltd [2012] NSWSC 831: the scope of the court's powers includes preserving trust property and making it financially productive “…which included planning to minimise the impact of tax and duty on the trust property…”
5. Soo v Soo [2016] NSWSC 1666: "… there are numerous decisions of this Court to the effect that the tax effective administration of a trust is a matter to which regard may properly be had in considering whether or not to exercise discretion".

The above summary largely reflects the conclusions in Kearns v Hill (1990) 21 NSWLR 107, another case featured in other View posts.

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 Earth, Wind and Fire song 'Let's Groove’.

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When you dream** of a better trust deed; however the court refuses to assist

Last week's post considered the issues about varying a trust that has no power to vary, under the regime in New South Wales.

While in other states, for example Queensland, it is generally accepted there is a relatively wide power available to the courts to assist with amending trust deeds that do not have robust provisions, the rules in New South Wales are far more restrictive.

One further example in this regard is the decision in Application of Country Road Services Pty Ltd (In the matter of the Browne Family Trust) [2019] NSWSC 779.

In this case a desired amendment to a trust deed to appoint a related trust (that had losses) to allow distributions to it was rejected as not being 'expedient' (as required by the legislation in New South Wales).

The court confirmed that:

1. The variation of the terms of a trust (including by way of conferral of some new power on the trustee) is not something within the ordinary and natural province of a trustee’s powers (unless the trust deed otherwise grants the relevant power).
2. It is neither something that is ‘expedient’ that a trustee should do nor, fundamentally, something that is done ‘in management or administration of’ trust property.
3. Rather, a trustee’s function is to take the trusts as it finds them and to administer them as they stand.
4. A trustee should not be concerned to question the terms of the trust or seek to improve them.
5. Thus, even where the trust instrument itself gives the trustee a power of variation, exercise of that power is not something that occurs “in the management or administration of” trust property. It occurs in order that the scheme of fiduciary administration of the property may somehow be reshaped.
6. Ultimately, the Court’s power to amend a trust deed in New South Wales cannot be used to subvert the beneficial disposition in the trust instrument.

Similarly therefore, a request to amend a trust deed to extend the perpetuity period was held to be another example of the kind of order not authorised by legislation in New South Wales (see Cisera v Cisera Holdings Pty Ltd [2018] NSWCA 286), even though the trust was due to vest in around 7 years and would likely trigger significant capital gains tax costs at that point.

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 Simple Minds song ‘New Gold Dream’.

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

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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