Unit trusts and excluding trustee Liability**

When establishing a unit trust structure, it is important to ensure the deed is properly crafted to expressly limit liability of the unitholders for debts of the trust.

As is well known, in a corporate structure, shareholders are not liable for the debts of the company.

Similarly, there is generally no right of indemnity for a trustee of a discretionary trust from the beneficiaries of the trust as they are not absolutely entitled to the trust assets.

In relation to unit trusts however there is a general principle that unless specifically excluded by the trust deed, the trustee will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders.

Failing to exclude this right of indemnity against the unitholders can therefore significantly undermine the asset protection advantages offered by structuring the investment through a unit trust.

The position in relation to unit trusts was confirmed in the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355. As usual, if you would like a copy of the case please contact me.

In this case a liquidator of a trustee company of a unit trust was able to force the unitholders to make good the deficiency of trust liabilities over its assets. The unitholders would have not been liable however if the trust deed had contained the relevant exclusion.

Including this type of exclusion expressly in a unit trust deed has been a relatively standard practice by most deed providers since this decision, for firms that do specialise in the area.

Where the exclusion does not exist in a current deed it is normally possible to implement the provisions by a deed of variation, so long as there are no potential issues on foot.

** For the trainspotters, the title today is riffed from Lorde’s song of the same name from 2017 listen hear (sic):

I can see clearly now ** – how to use a deed of clarification

Previous View posts have explored the difficulties that can arise when steps are taken (for example to change a trustee of a family trust) without having reviewed the trust deed.

With another 30 June here – and Happy New Year to all those who celebrate the end of the tax year – it seemed timely to consider one ‘fix’ for trust related errors.

The particular factual matrix here was a third party financier refusing to complete a transaction until steps were taken to resolve an issue their internal legal team had identified.

In this particular instance, the only pathway we had been able to develop (and which the bank has accepted) has been to prepare a detailed 'deed of clarification'.

In many respects, this document is a self serving one, however in very general terms, it:

1. provides a summary of the purported changes;
2. confirms that the purported changes did not in fact comply with the deed;
3. restates the changes in a way that does in fact comply with the deed; and
4. has the trustee, appointor and some of the main beneficiaries of the trust all consenting to the changes, effectively with retrospective application.

The tax link – despite satisfying the financier, the document is unlikely to be binding on other 3rd parties (eg revenue authorities) unless later approved by court. ** For the trainspotters, ‘I can see clearly now’ is a song by The Hothouse Flowers from 1990.

Super death benefits and conflicts of interest: Guilt is a useless emotion**

Previous View posts have explored arguably the highest profile decision in relation to the obligation of a legal personal representative (LPR) to avoid creating a conflict of interest is the decision in MacIntosh.

The decision in Brine v Carter [2015] SASC 205 provides another example of the key issues that need to be considered by LPRs, who are also potential beneficiaries of a superannuation death benefit.

In summary, the factual scenario was as follows:

1. The deceased appointed his de facto partner and three children from an earlier relationship as his LPR.
2. The de facto made an application for the superannuation death benefits to be paid to her directly, as opposed to the estate.
3. If the superannuation proceeds had been paid to the estate, the three children would have been entitled.
4. For a period of time prior to the death benefit being paid, the de facto partner withheld details of the superannuation death benefit from the three children.
5. Importantly however, by the time the super fund trustee exercised its discretion, the three children were aware of all relevant information concerning the death benefits and had themselves made an application for the death benefits to be paid to the estate.
6. It was held that this was a critical point, that is, the other LPRs had effectively consented to the de facto making her individual claim by themselves making a claim on behalf of the estate in full knowledge of all relevant circumstances.

While the decision of the superannuation fund to pay the entitlements to the de facto ultimately was upheld, a number of key principles were explained by the court, including:

1. Where an LPR seeks payment of a death benefit to themselves personally (i.e. not to the estate), they will be in a position of conflict, unless the will expressly permits the conduct.
2. Where there is no express provision waiving conflict, an LPR should renounce their position before taking any active steps to seek personal payment of the death benefit.
3. Alternatively, the LPR can seek the consent of all other LPRs (if any).
4. In seeking the consent of the other LPRs, there is no obligation to also receive consent from each beneficiary under the will.
5. Complications will likely arise where there is a sole LPR. In that instance, if they choose not to renounce their role, there would be an obligation to receive the informed consent of each potential beneficiary.

Ultimately, the decision is yet another reminder of the importance of a holistic approach to every estate plan.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title today is riffed from New Order’s song of the same name, from 2005, listen here:

Oops! … I did it again**: amending existing agreements

An issue that often arises is the desire to amend an existing agreement, with effect from a particular date – regularly that date will be on and from the day the original agreement was entered into.

It is generally accepted that, as between the parties, an agreement can be effective and binding on whatever basis is desired. This does not mean however that an agreement can be changed such that it is binding retrospectively on third parties, such as revenue authorities.

Arguably the leading case in this area is Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation 2000 ATC 4201. As usual, if you would like a copy of the case please contact me.

In this case the parties purported to have an agreement entered into that caused adverse tax consequences amended some time later, with effect from the date of the original document.

In rejecting the effectiveness of the amended agreement in binding the Tax Office it was confirmed that a rectification by a court or by deed between the parties is the only approach that binds third parties. Such an approach however is only available where the parties are under a mutual mistake that the document they signed recorded the terms of their bargain, when in fact it did not.

Rectification does not operate to ‘alter the past’, rather it simply recognises what had in fact always been the case, namely that the true agreement between the parties was not correctly recorded in the document that was mistakenly signed.

Critically, rectification requires that there must have been a mutual mistake. In other words, ‘a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had’.

A mistake or misunderstanding, for example, as to the revenue consequences of an agreement is not a mutual mistake allowing rectification.

** For the trainspotters, the title today is riffed from Britney Spears song of the same name from 2000 see hear (sic):

How does it feel** - when a deed of rectification causes a resettlement?

Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.

The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.

Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties.

The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.

The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the other View posts on this issue).

The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.

In particular, it was confirmed that:

‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).

Importantly, a rectification also has retrospective effect.

That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.

As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.

** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):

Have you got time to rectify?**

Previous View posts have looked at various aspects of deeds of variation, and in particular, the critical need to 'read the deed' before implementing any variation.

Where a purported deed of variation later proves to be ineffective due to a failure to follow the provisions of the trust deed, one approach that can provide a solution is a deed of rectification and clarification.

Generally, this approach will be a valid way to address previous inconsistencies, without the need for court approval.

Critically however, any attempt to rectify or clarify historical issues with a trust deed cannot do something that is beyond what was originally contemplated by the parties involved.

One example in this regard that we reviewed recently, involved a situation where a trustee was incorrectly inserted under a deed of variation as a beneficiary, in direct conflict with another provision of the trust instrument.

On discovery of the conflict some years after the deed of variation, it was clear that the only way to rectify the error would be to change the trustee with retrospective effect to a new entity. The deed of rectification approach was unavailable as the deed could not ignore the clear intention of the parties, which at the time was that the trustee should remain in its role and a rectification workaround would have ignored that fact.

** For the trainspotters, ‘time to rectify’ is a line from the Beatles song from 1965’s Rubber Soul ‘Think for Yourself’ listen hear (sic):

Only one thing ? – constitutions + division 7A provisions **

A previous post has considered the various trust deed providers that have from time to time contained a clause which seems to automatically convert an unpaid present entitlement into a loan (see our post from 9 December 2010). This week I was reminded of a similar difficulty with some constitutions offered by similar providers.

In particular, while the Tax Office has for some years accepted the ability for a company's constitution to set out the terms by which any loan by the company is made for Division 7A purposes, care must always be taken to ensure that the provisions of this loan (or facility) agreement do in fact reflect the intent of the parties.

A number of these types of facility agreements require compliance with the Division 7A provisions, regardless of the financial status of the relevant company. For example, even where a distributable surplus does not exist (and therefore the tax rules would not otherwise apply), many of these constitutions can in fact require compliance with the Division 7A rules.

While perhaps not so memorable as the ‘read the deed’ mantra for trusts, similarly we have a mantra of ‘read the constitution (& Tax Act)’ when considering company related issues.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘The One Thing’ is a song by INXS from 1982.

View here:

To cut a long story short** In conclusion - 1 related issue

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act which is available for distribution to creditors includes "the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…".

However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

By analogy, the power to remove an appointor is also considered to be a fiduciary power (see Ash v Ash [2016] VSC 577).

This means that equitable relief may be imposed upon a third party who knowingly receives some benefit from the fiduciary's wrongful conduct or is knowingly involved in that wrongful conduct (see Barnes v Addy (1874) LR 9 Ch App 244).

An attorney may be able to exercise the powers of an appointor, if this is anticipated by the trust deed or attorney document (and indeed, ideally, both documents in a complementary and considered manner).

An attorney may also be able to exercise an appointor's powers where there is informed consent. Such consent must however involve more than inference from an alleged plan of the principal, particularly where that plan is vaguely defined and based on inference itself. That is, there must be clear evidence of the salient details of the transactions affecting the principal's interests being provided to them before their incapacity (again see Ash v Ash [2016] VSC 577).

Like last week, the above post is again based on an article that we originally contributed to the Weekly Tax Bulletin.

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 Spandau Ballet song ‘Cut a long story short’.

View here: 

Changing an appointor - just like (starting over**) - or changing a trustee; simple! (in theory ...)

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust.

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –

• The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor;
• The intended change complies with the trust deed (the "read the deed" mantra again highlighted);
• The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and
• The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust.

Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

As usual, please make contact if you would like access to any of the content mentioned in this post.

The above post is based on an article that we originally contributed to the Weekly Tax Bulletin

** For the trainspotters, the title of today's post is riffed from the John Lennon song ‘Just like starting over’.

View here: 

Another (one bites the dust**) & permutation on reading the deed - regulating family trust assets via wills

The View post last week considered aspects of the probation on a trustee fettering its discretion.

One related issue that we see arise from time to time is an attempt to regulate the distribution of the assets of a trust via a will direction. Generally this approach is adopted on the basis that some argue that a will can have legal force over a trust.

The idea that a willmaker can mandate that a company take certain steps in relation to its assets is clearly untenable (even if the will maker is the sole director and shareholder of the company). The analogous argument that a will maker can somehow force a trust to take certain steps seems (at least conservatively) similarly without basis.

In any event, if the outcome of mandating certain trust distributions is required, a simple deed of variation, with an effective date of the willmaker’s death arguably achieves the same outcome, without any of the esoteric debate about whether a willmaker can regulate trust distributions.

While we do from time to time adopt the ‘delayed commencement’ deed of variation approach we generally recommend against it as it goes against virtually all the benefits of having a discretionary trust in the first place (quite aside from the significant tax and duty risks of such a variation).

Instead, our strong preference is to use one or more of strategies such as memorandums of directions, crafting control roles (such as appointor or principal powers), family councils, bespoke constitutions, trust splitting, trust cloning, independent trustees or gift & loan back arrangements to achieve the required objectives.

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 Queen song ‘Another one bites the dust’.

View here:

Brown M&Ms, go jump**invasion by aliens and when trust beneficiaries aren’t beneficiaries

In preparing for the View webinar ‘Trust Horror Stories’ we had a timely reminder of the mantra to ‘read the deed’.

The read the deed mantra is analogous to the famous contract rider of rock band Van Halen requiring M&Ms in their dressing room; with all the brown ones removed.

Originally thought to be the very definition of an outlandish group of prima donnas, the truth was all about the detail – if Van Halen ever saw brown M&Ms on arrival at a venue they were on notice that the venue operator did not sweat the detail.

On more than one occasion they used the existence of a brown M&M as cause for cancelling a gig; or perhaps more bluntly, telling the venue to go ‘Jump’.

Contract lawyers have long been renowned for a similar technique when crafting ‘force majeure’ provisions and randomly including events such as inability to complete a contract due to invasion by aliens or abduction by unicorns to flush out those who are not checking every line.

In the trust deed example we had this week, a trustee company had been distributing income from a trust to itself as a corporate beneficiary (ie to cap the tax rate at 30%).

Aside from the asset protection issues that can arise from using a corporate trustee as a corporate beneficiary, the other main issue to consider was whether the company could in fact be a beneficiary of the trust – in other words did the deed include the trustee as a beneficiary.

As is quite often the case with trusts established in New South Wales (in particular), in this instance, the trustee was in fact expressly excluded as a potential beneficiary of the trust. A previous post has a more detailed analysis of this aspect of many trust deeds (please contact me if you would like access to this and can not easily locate it).

The invalid distribution, which unfortunately had been made over a number of years, meant that a range of quite complex issues arose in relation to the trust, with a multitude of tax, trust law and accounting issues needing to be addressed. The solutions available for each issue were, at best, problematic.

As usual, please make contact if you would like access to any of the content mentioned in this post.

View here:

Death Defying**: AKA Contribution reserving

Contribution reserving has for many years been largely viewed as a strategy that in most instances will be too aggressive to comply with the approach the Tax Office is comfortable with in this space.

This said, the Tax Office Determination (TD) 2013/22 does appear to confirm that, subject to the governing rules of an SMSF trust deed, some basic contribution reserving can occur.

In particular, assuming the trust deed and the fund’s reserving strategy, are complied with, then TD 2013/22 supports an approach along the following lines:

1. a fund member can make a contribution to a SMSF that is double their concessional contribution cap in the one financial year;
2. half of the contribution can then be applied to, for example, an 'unallocated contribution account'. Arguably, an unallocated contribution account is analogous to a reserve account;
3. the other half would then be counted towards the relevant member's concessional contribution cap for the first financial year; and
4. in the second financial year, the trustees of the fund would resolve to allocate the amount applied to the unallocated contribution account to the relevant member and it would then be applied to that member's concessional contribution cap in the subsequent year - i.e. the year of actual allocation.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Hoodoo Gurus song 'Death Defying'.

View here:

Coming home** by extending trust vesting dates

As mentioned in last week’s post, the need to ‘read the deed’ is critical on a number of levels, particularly in relation to the vesting date of a trust.

A previous post also explores when a court may approve the extending of a vesting date for a trust.

The two other main pathways that may assist in this regard are:

1. using a specific power in the trust deed that allows the vesting date to be extended; and
2. using the variation power (if it is broad enough).

Whether a general power of variation will be broad enough was considered in the case of Andtrust v Andreatta [2015] NSWSC 38.

Essentially the decision confirms that where a trust deed contains a power to vary the trust, it should be assumed that the power includes the ability to extend the vesting period, subject to the perpetuity period rules.

In particular, it was held:

‘It does not seem to me to be stretching language unduly to say that a trust to distribute or hold income up until a defined date, and upon that date to distribute capital, is “varied” if that defined date is extended. Thus, as a matter of language, it seems to me that the power to vary the trusts set out in the deed should be taken to include a power to vary them by extending the time for which they are to endure.’

In other words, as explored in other View posts, any variation power should generally be construed widely and beneficially, including in relation to the ability to extend a vesting date even if there is no specific power to do so (see cases such as Kearns v Hill (1990) 21 NSWLR 107 and Nisus Pty Ltd [2022] NSWSC 369).

However, where there is not a sufficiently wide power to vary a trust in relation to the vesting date (or indeed no power to vary at all), the conservative view is that court approval is required.

This said, as explored in other View posts, variation of the terms of a trust may be able to be achieved with the unanimous consent of the beneficiaries if all are in being, sui juris and absolutely entitled (see the rule in Saunders v Vautier (1841) 4 Beav 115). In this style of situation it may also be prudent to have the settlor be a party to the variation deed, if they are alive and have capacity.

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 Fine Young Cannibals song ‘Johnny come home’.

View here:

Embrace the ceremony** and ‘read the deed’

As highlighted in previous posts, the need to ‘read the deed’ before making any variation to a trust deed is critical – and a case that remains a leading example of the mantra is Jenkins v Ellett [2007] QSC 154.

Broadly the background in this case was as follows:

1. A principal under a trust deed had the ability to remove and appoint the trustee of the trust.
2. The principal purported to relay on a power of variation to remove himself as principal and name a replacement, which effectively changed the schedule to the trust deed that automatically appointed the principal’s legal personal representative (LPR) as his replacement on death.
3. When the LPR of the principal purported to exercise the principal powers following the death of the original principal and was challenged, the Court held that the previous attempted variation was invalid, effectively confirming the LPR’s authority to act as the principal.
4. The attempted variation was held to be invalid because the relevant power in the trust deed was crafted so that it could only be used in relation to the ‘trusts declared’, and in particular did not extend to varying the schedule to the trust deed.

Generally the decision here is cited as authority for a number of principles including:

1. If an attempt is made to made to amend fundamental provisions (such as appointor powers or indeed the amendment power itself), there must be a specific ability to do so under the trust instrument. This said, if the power to vary under a deed is wide, this can allow a trustee to change an appointor without their consent; and without destroying the substratum of the deed (see Cihan v Cihan [2022] NSWSC 538, a case explored in other View posts);
2. conversely, ancillary provisions should be able to be amended so long as there is a robust power of amendment in the trust deed;
3. this said, the trust deed may expressly prohibit certain amendments, thereby effectively ‘hard wiring’ those clauses;
4. furthermore, the exercise of a power of amendment must comply with any restrictions on the exercise of power, for example the need to obtain prior consent from a principal or appointor. The case of Re Cavill Hotels P/L [1998] 1 Qd R 396 (which has featured in previous posts) is also often quoted in this regard);
5. any power of variation should be construed widely and beneficially, such that (as one example), even if there is no specific power to amend or extend a vesting date, a wide power of variation will give this ability (see Nisus Pty Ltd [2022] NSWSC 369);
6. in situations where the purported amendment is not within the powers under the deed (or has the consequence of destroying the ‘substratum’ of the trust) it will be held to be invalid and ineffective; see for example Kearns v Hill (1990) 21 NSWLR 107.

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 New Order song ‘Ceremony’.

Listen here:

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’.

View here:

When cross owned insurance policies are Glorious

In business succession arrangements, cross owned insurance policies are rarely, if ever, utilised. Avoiding the use of cross owned policies is driven by a range of commercial reasons and the fact that invariably adverse tax consequences are unnecessarily triggered as the desired commercial outcomes can normally be achieved utilising self owned policies that almost always deliver favourable tax outcomes.

One scenario where cross owned insurance arrangements historically provided significant potential benefit however related to where a self-managed superannuation fund (SMSF) borrows funds via an instalment trust arrangement to acquire an asset which forms a substantial part of the total value of the fund.

An example of how this approach (which was given in principle support by the Tax Office historically) worked is as follows:

1. The SMSF establishes an instalment trust and borrows funds from a third party to acquire an asset.
2. The (say) only two members of an SMSF are concerned that on the death of one of them, the ability to pay out the member’s entitlement may be impossible to achieve without selling the underlying asset (i.e. neither member’s account balance is large enough to represent the entire value of the acquired asset).
3. If the members took out self-owned insurance policies, this would obviously not assist, given that the exiting member would effectively be entitled to an even greater share of the total assets of the fund.
4. In contrast, if permissible under the trust deed for the SMSF, if cross owned policies were implemented, then the remaining member’s balance would be the one that increases and the cash from the insurance policy could be used to pay the death benefit, while the continuing member would effectively have their member balance represented entirely by the asset originally acquired via the instalment trust.

Despite the above, since 1 July 2014, the view of the Tax Office has been that the superannuation rules do not allow SMSFs to provide insurance for a member, unless the insured event is consistent with one of the following conditions of release:

1. death;
2. terminal medical condition;
3. permanent incapacity; and
4. temporary incapacity.

The Explanatory Memorandum associated with the amended rules made it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy.

This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted. 

** for the trainspotters, the title today is riffed from the Breeders song ‘Glorious’. 

View hear (sic):

Court's unilaterally removing trustees - the Judge will carry the Weight**

Posts over the last 2 weeks have explored a number of aspects of the super death benefit case of Marsella.

One other key aspect of the case also explored what issues a court will consider before a trustee is removed against their will.

Another View post considers a number of the key issues in this regard, as explained in the decision about one aspect of the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).

The Marsella case quotes the decision in Elovalis v Elovalis [2008] WASCA 141 and summarises the approach the courts must take in this area as follows:

1. In determining whether a trustee should be removed the chief consideration is the welfare of the beneficiaries.
2. The Court will have regard to the security of the trust property, the efficient and satisfactory execution of the trust and the faithful and sound exercise of powers conferred upon the trustee.
3. A breach of trust will not necessarily lead to the removal of a trustee, nor will the existence of a conflict between duty and interest.
4. At times, however, such factors may be sufficient to justify the trustee’s removal.
5. Ultimately, whether the Court exercises its discretion turns upon the circumstances of each case - or, as quoted from the case of Miller v Cameron (1936) 54 CLR 572:

'a judgment (to remove a trustee against their will) must be largely discretionary.

A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.

But in a case where enough appears to authorise the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary Judge is entitled to especial weight.'

Thus, in Owies and Owies v JJE Nominees Pty Ltd (ACN 004 856 366) (in its capacity as trustee for the Owies Family Trust) [2022] VSCA 142 (a case also featured in other View posts) the trustee was removed due to the court concluding that over a number of years the trustee had failed to:

1. act impartially;
2. give real and genuine consideration to the interests of two of the three primary beneficiaries;
3. appreciate that the relations between the beneficiaries and the trustee were irreconcilably damaged.

Therefore, it was not in the best interests of the beneficiaries for the trustee to continue in office.

Similarly, in JPD as Guardian v DMS as Trustee [2022] QSC 181 a trustee of testamentary trusts set up for infant children, who was a friend of the deceased mother, was removed by the court at the request of the father (who was divorced from the mother at the time of her death).

The reasons included the trustee:

1. demonstrating a pattern of holding a very low opinion of the father (who had no wealth and was not in paid employment) and giving no genuine weight to the importance of his position in the children’s lives as their sole guardian and surviving parent;
2. not making any attempt to consult with the father adequately;
3. unilaterally reducing income distributions to the children by around 75%;
4. purporting to evict the father and the children from a home owned by the trust, and requiring a move to a new property owned by the trust;
5. rejecting a request (which the court believed was reasonable) by the father to move the family to Brisbane;
6. regularly and inappropriately intervening in parenting aspects of the children.

As usual, please contact me 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 Aretha Franklin song 'The Weight'.

Listen here:

Trustee duties and payment of super death benefits: you must work on it**

Last week’s post explored the original decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65.

The case provided another example of the types issues that need to be considered by trustees of self managed superannuation funds before making a decision on how to distribute a member’s death benefits.

The original decision was upheld, essentially without any exceptions in the appeal case of Caroline Elizabeth Wareham and Martin Wareham (as trustees of the Swanson Superannuation Fund) v Riccardo Giacomo Marsella (both personally and as executor of the estate of Helen Freeth Marsella (also known as Helen Freeth Swanson)) [2020] VSCA 92.

The central arguments by the trustees on appeal revolved around their belief that they had exercised their discretion validly and therefore the payment of 100% of the death benefit to one of the trustees personally should be reinstated. As mentioned in last week's post, in essence this result would have been analogous to the outcome in the similar earlier case of Katz.

In rejecting the argument, the appeal court confirmed:

1. The trustees (through their lawyers) were on record as stating their belief that the deceased's surviving husband (who she had been married to for over 30 years) was ‘(not a) Beneficiary of the Fund’ - a conclusion that was plainly wrong.
2. There was also evidence to suggest the trustees believed they owed ‘no duty to the estate or other beneficiaries’ - again an erroneous assumption.
3. Furthermore the evidence supported a conclusion that the trustees had failed to look at the trust deed for the fund - a further breach of their duties.
4. Ultimately therefore the court concluded that if the trustees did not exercise their discretion upon real and genuine consideration, there was no proper exercise of the discretion. The fact that the discretion could have been properly exercised in the same way (ie to pay the benefit entirely to one of the trustees, as was the case in Katz) could not alter that position.
5. The court also confirmed the importance of the decision in the case of Karger v Paul (featured in other posts by View), and the fact that there are three obligations on a trustee exercising a discretion, namely:
• to do so in good faith;
• upon a real and genuine consideration (a requirement that is so obvious that it is often not mentioned); and
• in accordance with the purpose for which the discretion was conferred.

As usual, please contact me 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 Alicia Keys song ‘Work on it’.

Listen here:

I want it all** - Duties of SMSF trustees and yet another case concerning death benefit payments

In recent years the number of reported decisions in relation to death benefit payments by SMSFs have increased significantly. This is particularly so given that for many years the only substantive decision was from 2005, namely the case of Katz v Grossman [2005] NSWSC 934.

The decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65 provides another example of the types of issues that need to be considered in this area, and is particularly interesting given that there were some aspects analogous with the Katz decision, and yet the court reached the opposite conclusion.

Briefly in the Marsella case:

1. the deceased was the sole member and a co-trustee with her daughter of an SMSF (similar to Katz);
2. while historically a binding nomination had been signed, it had lapsed; and in any event was invalid as it nominated the member's grandchildren (who were not dependants as defined under the superannuation laws);
3. the daughter appointed her husband as the co trustee following her mother's death (similar to Katz);
4. the deceased's will provided certain benefits to her second husband. All remaining assets under the estate then passed equally to her daughter and her son (similar to Katz);
5. the daughter and her husband resolved to distribute 100% of the death benefit to herself ignoring her brother (again similar to Katz) and her step father.

Unlike Katz, where the daughter was entitled to retain the entirety of the death benefit, in Marsella the payment was held to be invalid and the daughter and her husband were removed as trustees of the SMSF.

The court listed a number of reasons for reaching this conclusion, including:

1. the daughter acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties and the way in which the superannuation laws are structured in this area;
2. the daughter acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict;
3. as a result she was not in a position to give real and genuine consideration to the interests of the dependants;
4. the above conclusion was supported by the outcome of the exercise of discretion, which itself was contrary to one of the daughter's key arguments - that being that her mother wanted the daughter and the brother (and the grandchildren) to benefit from the death benefit; and yet she paid 100% of the benefit to herself;
5. ultimately, the court believed that the outcome of the daughter's decision was ‘grotesquely unreasonable’ which helped support the conclusion that the discretion was never properly exercised, or was exercised in bad faith;
6. thus, the fact that the daughter was within the class of potential objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for proper purposes.

The above conclusions were upheld on appeal, and that decision will be explored in next week’s post.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, an obvious choice, with Queen and 'I want it all'. 

 View here:

The (heavy) duty** to account

A reminder came to me recently about the duty of trustees ‘to account’.

Relevantly the High Court in Byrnes v Kendle [2011] HCA 26 highlighted that the term 'duty to account', encompasses several important obligations:

1. A duty to keep records;
2. A duty to report to the beneficiaries or the court concerning the administration of the trust; and
3. The duty to pay amounts, the trustee is obliged to pay to the beneficiaries.

The trustee's duty to account is a fundamental fiduciary obligation imposed upon a trustee.

In discharging that duty, the trustee is required to keep proper accounts of the trust.

Importantly however, in relation to the right of a beneficiary to request information from a trustee, there is likely to be a divergence in terms of the level of detail a trustee of a discretionary trust is required to provide a beneficiary, as opposed to the trustee of a unit or fixed trust.

In particular, in relation to discretionary trusts, where each beneficiary only has a mere expectancy (that is, as explained in other View posts, the right to be considered), the duty to account imposed on a trustee is likely to be less onerous than for fixed trusts.

This is because the trustee of a discretionary trust also has a duty to act in the best interests of all beneficiaries - which means disclosure of certain information on demand of some beneficiaries may not in fact be appropriate, if the trustee on reasonable grounds so decides.

Practically, where there is contention around these issues it may be the conclusion in Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] 2 A.C 709 is most relevant. In this case it was relevantly held that a beneficiary's right to seek disclosure of trust documents and accounts, is best approached as one aspect of the court's inherent jurisdiction to supervise, and if necessary intervene in, the administration of trusts.

The nature of any court's intervention will depend on the court's discretion on a case by case basis.

In particular, the court will determine:

1. whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all;
2. what classes of documents should be disclosed, either completely or in a redacted form; and
3. what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, ‘Heavy Duty’ is a song from Spinal Tap. 

 View hear (sic):