Go your own way - The Rinehart Ruling – a key aspect **

Following last week’s post in relation to the, suspected, Tax Office Ruling in relation to the Rinehart trust dispute matter, there was some discussion about one key aspect of the reasoning.

In particular, the question of when a beneficiary becomes absolutely entitled to a particular capital asset as against the trustee is generally seen as critical.

The position appears to be that, where a trustee has a right of indemnity (and lien over) the relevant asset, it is not enough that the beneficiary has a ‘vested and indefeasible’ interest in the trust capital.

Instead, the beneficiary must have the right to force the trustee to transfer to them the asset, subject only to the payment of the trustee's expenses.

In order for this to be the case the better view appears to be that one of the following tests must be met, despite some suggestions to the contrary in the Tax Office’s Taxation Ruling 2004/D25 (TR 2004/D25), mentioned in last week’s post –

1. If the trust is over particular assets, then the trustee has a clear duty to transfer those assets to the beneficiary, without the trustee having any express or implied power of sale under the trust instrument.
2. Alternatively, if the trustee has a power of sale, the beneficiary must have demanded a particular asset be transferred to them and must tender sufficient funds to the trustee to satisfy the trustee’s right of indemnity.
3. Finally, absolute entitlement may be created by a trustee resolving to exercise a power under the trust deed (or at law) that a particular asset be immediately distributed to the beneficiary.

Importantly, and as flagged by the Tax Office in TR 2004/D25, a trustee’s right of indemnity of itself is irrelevant to the question of whether absolute entitlement exists. Rather it is a trustee's power of sale that will generally prevent a beneficiary being able to demonstrate absolute entitlement. However this point is unfortunately not clear in TR 2004/D25, despite the Ruling running to over 100 pages.

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

** For the trainspotters, ‘Go Your Own way’ is another song by legendary band Fleetwood Mac from 1977.

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Little lies ? The Rinehart Private Ruling **

Obviously, there has been an enormous amount of interest in relation to the Rinehart trust dispute matter over an extended period of time.

Interestingly, the centrepiece of the dispute, at least from a tax perspective, does not always receive a significant amount of attention.

Given what has been disclosed publicly, there are many who believe that Ms Rinehart successfully obtained a private ruling from the Tax Office in relation to whether there were any capital gains tax (CGT) consequences of the trust, which is the focus of the dispute, vesting when Ms Rinehart’s youngest child turned 25.

While it cannot be certain, it appears that private ruling authorisation No. 1012254771092 relates to the Rinehart matter. As usual, if you would like a copy of the ruling please contact me.

The private ruling carefully considers whether CGT event E5 occurs on the vesting of a trust. CGT event E5 is said to occur when a beneficiary becomes ‘absolutely entitled' to a CGT asset of trust as against the trustee.

The ruling then goes onto explore in some detail the broad position that the Tax Office adopts in these areas based on Taxation Ruling 2004/D25 (TR 2004/D25). Again, as usual, if you would like a copy of the ruling please contact me.

The Tax Office confirms that while TR 2004/D25 remains in draft, so long as it is not withdrawn, it does represent its view of the law.

Based on the analysis of TR 2004/D25, the ruling concludes that because no beneficiary was able to call for any one or more of the assets to be transferred to them, they were not entitled to any assets as against the trustee, and therefore, CGT event E5 did not occur on the vesting of the trust.

An interesting footnote in this regard is that CGT event E5 was essentially based on similar UK legislation. The CGT rules in the UK however, unlike in Australia, explicitly state that absolute entitlement can be triggered for jointly owned property even when the trustee's right of indemnity is yet to be satisfied.

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

** For the trainspotters, ‘Little Lies’ is a song by legendary band Fleetwood Mac from 1987.

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Can trusts last forever now? **

Following on from recent posts it is useful to understand that the majority of Australian jurisdictions decided that a life in being plus 21 years was too complicated. Instead, the rule was replaced with a statutory provision which allows up to 80 years as the maximum length of trust in Australia.

As mentioned last week, there are exceptions to this rule. In relation to discretionary trusts, the highest profile exception is in South Australia where the rule has effectively been abolished.

Another exception is in relation to superannuation funds.

Superannuation funds are simply a form of trust instrument, although a highly regulated form of trust due to the Superannuation Industry Supervision Act which imposes a whole range of specific rules.

In relation to the core of the underlying structure of a superannuation fund however, it is simply a trust structure. Importantly however there is no concept of an ending period. In other words, in theory superannuation funds can last forever.

There are obviously tax issues for self-managed superannuation funds meaning maintaining the structure indefinitely may not be a particularly smart idea. However in the context of trust vesting, superannuation funds are a clear and obvious exception to the vesting rules.

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

** For trainspotters, ‘Forever now’ is song by legendary Australian band Cold Chisel from 1982.

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(Don’t ask me) why do trusts have vesting dates? **

Arguably trust vesting as a concept is an area of the law where you can ask 4 different lawyers for a view and you will get 5 different answers as to where it actually came from.

The theory I enjoy the most and the one that probably resonates most closely to what is possibly the truth is that, historically, trusts or as known in early English law, 'uses' could last forever.

In other words, trusts were the same as the modern-day company. There was no ending date; a trust was a structure that could last in perpetuity.

The story goes that there were forms of death duties back in the early English law. What was happening was that wealthy families would arrange for an initial transfer of assets into a trust on death.

While, there would be tax payable on that initial transfer of assets into the trust (that is, the death duty) once the asset was inside the trust, it was effectively protected from tax forever.

In other words, from a tax perspective, it was sheltered because there would be no further transfer of the asset on later deaths and therefore no further revenue to the monarchy.

The allegation was that King Henry VIII (after it took the revenue authorities about a hundred years to work it out) eventually was unimpressed that the revenue was drying up.

The reason that tax collections were drying up was because all the wealthy families were putting their assets into trusts and then effectively just skipping the death tax and making it an elective tax for later generations.

The solution, as is often the case in the structuring area, was to create the revenue outcome by imposing a limit on the life span of trusts.

Hence, you’ll see in many trust instruments, particularly earlier trust instruments, this idea of the 'life in being' of King Henry VIII or some other member of the royal family.

This is because the rule imposing the limit was set as the life in being as at the date of establishment of the trust plus 21 years. In most states (other than South Australia, which effectively has no statutory limit) the life in being approach has been replaced with a maximum period of 80 years.

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

** For trainspotters, ‘Why’ is song by Annie Lennox.

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I fought the law … **

As set out in last week's post, this week's post considers some possible solutions to the issues that arose in the Domazet decision.

The first work around is probably the easiest and the best one in some respects. Simply, the No.2 trust could have included a clause that said, “Our trust automatically ends the day before the No.1 trust.” This one sentence would have arguably avoided the issue.

The second idea would have been to amend the trust deed for No.1 trust and remove the prohibition. In other words, amending the terms of the No. 1 trust instrument so that it required any other recipient trust end before the No.1 trust.

This idea, would have essentially relied on the wait and see rule which has been explored in previous posts.

The third idea is that the No.1 trust could have skipped distributing to No.2 and simply distributed directly to the relevant beneficiary. Many might however say, “Well Matthew, that sounds nice, but I suspect there would have been a lot of wider tax planning strategies that were being utilised by the No.2 trust.” Thus, there should be an asterisk next to this idea because in many instances this style of approach may not have actually worked.

The fourth idea is in fact what they actually did in the Domazet case, which is they applied to the court for rectification.

The rectification adopted the first approach outlined above (that is the variation to amend the vesting date of the No. 2 trust).

Thus, while the taxpayer 'won', they had all the issues that go with a rectification. They had pain, they had suffering, they had delays, they had vastly increased costs, and they had significantly more attention.

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

** For the trainspotters, see early punk outfit The Clash perform the Sonny Curtis (of 'The Crickets' fame) song 'I fought the law and the law won'.

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Trust distributions and the Domazet decision – it’s a miracle !**

Domazet is arguably, one of the highest high profile trust vesting-related cases. As usual, if you would like a copy of the decision please contact me.

The factual matrix in board terms was as follows.

The original trust was set up in the 1970s, named here as the No. 1 trust.

Many years later there is a desire to distribute to another trust (named here as the No.2 trust). The No.1 trust was set up in the 1970’s. The No.2 trust set up in the 2010s - in other words, many years later.

The provisions in the trust deed for the No.1 trust provided that distributions to another trust as beneficiary were possible, as long as the receiving trust ended before the vesting date of the No.1 trust.

Here, No.1 trust, or the trustee and its advisers assumed that the vesting date of the No.2 trust would be 80 years.

The reason they assumed that is because the Australian Capital Territory (ACT) had at one point introduced the statutory 80-year perpetuity period and the No. 1 trust was established in the ACT.

It was therefore assumed that the legislation applied. The problem was that they had misunderstood the way the statutory limit had been implemented.

In particular, each Australian jurisdiction implemented the 80 years statutory limit at different points in time. The adviser for the No.1 trust was Queensland-based.

The Queensland legislation had come in before the No.1 trust was set up. So, they just assumed that would be the case in the ACT. In fact, the ACT legislation came in after the No.1 trust was set up.

They then amended the No. 2 trust to ensure it ended with 80 years of the No. 1 trust being set up.

What this meant in the practical sense was that when the distributions took place, the No.2 trust in fact had a vesting date after the No.1 trust because the No. 1 trust did not with certainty have an 80 year life.

This was a big problem because it meant that distribution was void according to the terms of the No. 1 trust.

What that meant was that the No.1 trust would be assessed, as if there was no trust distribution at all, which triggers a flat rate of tax of 48.5 cents. To the extent there were any capital gains, the 50% general discount would also be completely ignored.

Next week's post with consider some possible solutions given the factual matrix here.

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 Culture Club song 'It's a Miracle’.

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Within you; without you - When is a Trust not in fact a Trust? **

 

The ability of third parties to attack arrangements on the basis they are void because they are a sham has been looked at in previous posts (please contact me if you would like access to these and can not easily locate them).

Arguably one of the leading cases which explores the ability of a trustee in bankruptcy to attack trust assets using the rules in relation to sham transactions is Lewis v Condon; Condon v Lewis [2013] NSWCA 204. As usual, please contact me if you would like a copy of the decision.

Although the facts were somewhat complex, at the centre of the dispute was a trust that had been established by a lady who subsequently became bankrupt and admitted that the structure facilitated ‘her purpose to deceive her former husband, the Family Court and to avoid tax’.

In considering whether the assets of the trust were exposed to attack from a trustee in bankruptcy on the basis that the trust was a sham the Court held relevantly as follows –

1. Before any trust will be held void as a sham, it is necessary to show that there was an intention that the structure created not bear its apparent legal consequence. That was not the case here;
2. Even where a trust is established with an admitted purpose of deceiving, this is not enough to mean it is a sham, indeed here such an intention was in fact ‘entirely consistent with the creation of a genuine discretionary trust’;
3. Once it was established that the trust on creation was not a sham, subsequent events cannot turn the structure into a sham.

The decision also confirmed that in a practical sense, a new trustee holds office from the time of their appointment replacing the previous trustee and not from the time trust property is formally transferred.

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

** For trainspotters, ‘Within you; Without you’ is the only George Harrison written song on the Beatles release ‘Sgt Peppers Lonely Hearts Club Band’.

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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’.

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One way or another** way to convert water into wine - trust to company rollovers

The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning.

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 Blondie song ‘One way or another’.

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Converting water into wine (or family trusts into fixed trusts) is way cool**

Previous View posts have considered various aspects of fixed trusts.

For a myriad of structuring issues, one issue that appears to be raised more regularly is whether it is possible to convert a family discretionary trust into a fixed trust.

This issue was considered some years ago by the Tax Office in Private Ruling Authorisation Number: 1012991136582. As usual, if you would like a copy of the ruling please let me know.

Broadly the factual matrix was as follows -

1. a 'standard' family trust held an asset;
2. the trust had a widely crafted power of variation;
3. he trustee resolved to make a capital distribution of the balance in the unrealised capital profits account to certain beneficiaries, with this amount left unpaid (ie meaning it was a debt owed by the trust to the beneficiaries);
4. by agreement there was then a conversion of the debts (and some other outstanding loans) to equity such that each of the relevant beneficiaries had a certain percentage of ‘equity’ in the trust;
5. relying on the power to vary, the trustee then amended the terms of the trust deed to convert it into a fixed unit trust.

After analysing the provisions of its Tax Determination in relation to resettlements (namely TD2012/21, see our previous post that explores this) the Tax Office confirms that so long as the amendments are within the powers of the trust deed, the continuity of the trust will be maintained for trust law purposes.

This is because the ultimate beneficiaries of the trust after the proposed amendments would be the individuals who were the objects of the trust before the variation. The fact that the extent of the interests of the beneficiaries in the trust change as a result of the variation was seen as irrelevant.

Therefore, the amendments to the terms of the trust did not trigger capital gains tax (CGT) event E1 or CGT event E2, being the 'resettlement' CGT events.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement.

CGT event E2 happens if a CGT asset is transferred to an existing trust.

The Tax Office further confirmed that CGT event E5 was not triggered by the conversion of a family trust to a fixed trust.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary.

CGT event E5 does not however happen if the trust is a unit trust and thus this exemption was held to apply here.

The Tax Office also confirmed that there are no other CGT events that happened when the family trust was converted into a unit trust. This is because the amendments were within the trustee's powers contained in the trust instrument. This means that the continuity of the trust was maintained for trust law purposes.

A similar conclusion was reached by the Tax Office in Private Ruling Authorisation Number 1051886979078.

The above post is based on an article that originally was published in 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 King Missile song ‘Jesus was way cool'.

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(I will follow**) the leading case about fettering of a trustee’s discretion

Previous View posts have considered the issues of a trustee fettering its discretion in the context of an insurance funded buy sell arrangement.

The principle in relation to the probation on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628.

In this case the key concepts concerning fettering were summarised as follows –

‘… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey’s Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …’

Thus in the case mentioned above of In re Vestey’s Settlement, a binding decision to indefinitely make set annual distributions to a particular beneficiary was held to generally be seen as invalid due to the rule against fettering.

The decision in Lambert and Commissioner of Taxation [2013] AATA 442, another case featured in other View posts, further reinforces the above points.

In this case the court confirmed that a trustee is under a fiduciary duty to exercise its powers and discretions upon real and genuine consideration in accordance with the purposes for which the discretion was conferred.

In particular, as confirmed in Karger v Paul [1984] VR 161, it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration, or as set out in Partridge v The Equity Trustees Executors and Agency Company Limited [1947] HCA 42, there must be the 'exercise of an active discretion'.

Other examples in this regard include:

1. the granting of a call option under a lease for the lessee to buy the property was an invalid fetter on the ability for the trustee to sell the property (see: Re Stephenson's Settled Estates (1906) 6 SR (NSW) 420). This outcome should be contrasted to the conclusion in last week's post, where the trust deed expressly allows a trustee to grant options.
2. an attempt by a willmaker to mandate via a letter of wishes about how distributions from a testamentary trust set up under the will should made, was an invalid fetter on the trustee's wide discretionary powers for the trustee under the will (see: Burns v Burns & Anor [2008] QSC 173). Specifically it was confirmed that trustees (and third parties) cannot fetter the future exercise of the trustee’s powers. Any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.
3. as an example in contrast, it has been held that more general statements about the preferred manner of a trustee exercising its discretion - that do not in fact create a binding obligation on the trustee - are not an invalid fetter. Simply because a trustee consistently, and every year for many years in a row, follows an identical approach in determining how to exercise its discretion, this will not automatically mean the trustee has forgone having any real choice (see: Entrust Pension Ltd v Prospect Hospice Ltd [2013] PLR 73, [37]).

Next week's post will consider one of the leading cases where an arrangement that would have been under the above principles amounted to a breach of the rule against fettering of a trustee’s discretion was in fact enforced.

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 U2 song 'I will follow’.

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Seven dwarves, pizzas for the homeless and pre-chopped broccoli florets** – taking the detail to a whole new level

Following last week’s post, where I mentioned that, particularly in New South Wales, it is often the case that trustees are expressly prohibited from being beneficiaries of discretionary trusts there were a number of questions relayed to me. Thank you also for the suggestions as to what hair product Van Halen would have likely demanded at the height of their fame in the mid 1980s.

The key reason the ‘trustee can’t be a beneficiary’ prohibition is so prevalent in New South Wales is that under the stamp duty laws there, in order for a trustee to be permitted to be appointed (particularly where there is a change of trustee of a pre-existing trust), that trustee must not be a potential beneficiary of the trust.

Obviously, there are a range of asset protection related issues in this regard as well. At the centre of these issues is the fact that a trustee is directly liable for misadventures of the trust. As a general rule, the maximum value of a trustee company from time to time should never be more than a nominal amount – ie $2. A trustee company receiving distributions as a corporate beneficiary will breach this rule immediately.

Importantly however, many trust deed providers that offer deeds nationally, will incorporate the prohibition on a trustee being a potential beneficiary, even for trusts that do not otherwise have any connection with New South Wales.

This prohibition will often be weaved into a trust instrument in a less than obvious manner. Unless there is a pedantic approach to reviewing the terms of a trust deed the prohibition will be missed.

In summary – yet another example of the importance of the mantra ‘read the deed’.

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

** for the trainspotters, the singer of the theme song of ‘Trainspotting’, being ‘Lust for Life’ Iggy Pop allegedly had a contract rider requiring seven dwarves, pizzas to give to the homeless, and pre-chopped broccoli florets (to make them easier to throw away).

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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.

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Appointors (or sisters) doing it for themselves **

Last week's post considered the ability of a trustee in bankruptcy to exercise the powers of an appointor or principal of a family trust who is bankrupt as their personal property.

A related issue that has been the subject of many years of debate is whether the holder of an appointor role can exercise it so as to appoint themselves.

For many years, the case of Re Skeats' Settlement (1889) 42 Ch D 522 has been seen as the leading decision, and it confirmed that an appointor could not appoint themselves as trustee. In particular the case held that '...the universal rule is that a man should not be judge in his own case; that he should not decide that he is the best possible person, and say that he ought to be the trustee'.

This blanket prohibition has however been iterated over the years and, subject always to the provisions of the relevant trust deed, the position now appears to be that the trustee appointment power is a species of special ‘fiduciary power’ that must be exercised for the benefit of objects of the trust.

This means that an appointor may appoint themselves (or a company they control) as trustee of a trust, as long as it is not for fraudulent purposes and permitted under the deed.

An appointor choosing to appoint themselves as trustee will however only by permitted in ‘exceptional circumstances’, where the court is assured that the trusts will be executed in the interests of the beneficiaries.

The decision in Australian Conservation Services v Liladel Holdings [2017] ACTSC 162, provides a concise summary of the rules in this area.

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

** for the trainspotters, 'Sisters are doin' it for themselves' is a song from 1985 by the band the Eurythmics, listen hear (sic) -

Trustees in bankruptcy making plans for appointors (or Nigel) **

Last week's post considered the ability of an attorney to exercise the powers of the donor as an appointor or principal of a family trust.

A key related question is whether a trustee in bankruptcy can act on behalf of a bankrupt for any principal or appointor role held by a bankrupt under a family trust.

As with incapacity (as mentioned last week), generally a well crafted trust deed will expressly address the issue and include a clause along the following lines -

'If the principal suffers the loss of lawful capacity through the committing an ‘act of bankruptcy’, then the principal is the financial attorney of the principal under a valid enduring power of attorney.'

The property of a bankrupt 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…’ (see section 116(1)(b) of the Bankruptcy Act).

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 (Re Burton; ex parte Wily v Burton (1994) 126 ALR 557 and Lewis v Condon; Condon v Lewis [2013] NSWCA 204).

Further, the decision in Dwyer v Ross (1992) 34 FCR 463 suggests that a trustee in bankruptcy cannot compel the trustee of a trust to exercise the trustee’s discretion in favour of a bankrupt beneficiary. To do so could be construed as a breach of the trustee’s duty to the solvent beneficiaries of the trust. It would be against the interests of the beneficiaries as a whole to exercise the power in that way.

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

** for the trainspotters, ‘Making Plans for Nigel’ is another song by the band XTC, from 1979, listen hear (sic) –

Parents joined to a child’s family law dispute (for no reason?**)

Anecdotally, there appears to be an increasing number of situations where the parents of a spouse are forcibly required to provide disclosure of their personal arrangements as part of their child’s property settlement proceedings.

Arguably, the highest profile case in this regard was MacDowell and Williams [2012] FamCA 479.

In this case, the parents of a woman going through a property settlement allegedly had access to wealth in excess of $20 million.

Following a marriage of around 7 years, the husband as part of the matrimonial litigation tried to get access to the wills of his former in-laws and the deed for a trust, which he believed his wife was a primary beneficiary of.

Acknowledging that each situation would depend largely on the facts, the court in this case decided:

1. While the husband could get a copy of the trust deed, the court flagged it was unlikely that the trust would be taken into account in any form under the property settlement (i.e. it would be treated neither as an asset or a financial resource), given that the wife was only one of many potential beneficiaries and had received less than $30,000 of distributions from the trust during the entire marriage;
2. The wills did not need to be disclosed on the basis that the parents had full testamentary capacity and may change their wills, or indeed, may otherwise spend or dispose of a substantial part of their wealth; and
3. The privacy of the parents’ personal affairs was seen as an important factor in denying access to the wills and estate planning documents.

Interestingly, the court did however note that if the wife’s parents had lost capacity or they were in extremely poor health, then it may have created a situation where the wills would be required to be disclosed.

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 Church song 'It’s no reason'.

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A 101 tip on changing (everyday)** trustees

A regular theme in previous posts is how critical it is to ensure that the provisions of a trust instrument are followed precisely when taking steps in relation to the trust.

The SMSF related case of Moss Super Pty Ltd vs. Hayne [2008] VSC 158 is one example of this principle, in the context of a change of trusteeship.

In summary:

1. As is becoming increasingly common, there were issues around the rightful controller of the SMSF following the death of one of the members;
2. The surviving member purported to change the trusteeship of the SMSF, so that a company of which she was the sole shareholder and director would be appointed;
3. The trust deed set out the process by which a change of trusteeship could take place and specifically required the ‘founder’ to appoint any new trustee;
4. While the sole director of the new trustee company was also the founder, she did not in fact sign the change of trustee documentation in the capacity as founder;
5. In other words, while she signed as the sole director of the new trustee, there was no provision where she also signed under the founder role; and
6. Critically, the court found that, as was the case here, legal structures are created where individuals had multiple roles to play, the requirements around those roles must be respected and complied with.

In many respects, the decision reflects a number of analogous situations in the context of family trusts including the case of re Cavill that has been featured previously.

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 Culture Club song ‘Changing every day’.

Listen hear (sic):

Rooms for the memory** - she said v he said evidence in court proceedings

Last week's post explored the case of Callus v KB Investments - [2020] VCC 135.

The decision also provides a useful summary of the approach a court must take when considering the evidence from opposing litigants.

In summary it was stated:

1. Human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the process of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience (see: Watson v Foxman (1995) 49 NSWLR 315 at 319).
2. The best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollection of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts (see: Blue v Ashley (No 2) [2017] EWHC 1928).
3. Where there is conflicting evidence, the court will place ‘primary emphasis on the objective factual surrounding material and the inherent commercial probabilities’ together with documentation tendered in evidence' (see: Bullhead Pty Ltd v Brickmakers Place & Ors [2017] VSC 206).

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 Michael Hutchence/Ollie Olsen song 'Rooms for the Memory’.

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Do beneficiaries need to believe in love** when concerned about trustee distributions?

Many previous posts have considered the overriding duty of trustees of trusts - and the fact that a trustee must exercise its discretion in good faith, upon real and genuine consideration and for a proper purpose.

Again with 30 June rapidly approaching, the decision in Callus v KB Investments - [2020] VCC 135 provides a useful example of the approach the courts will take in this area.

Relevantly the factual matrix involved:

1. A family trust set up by the parents of the family (on apparently standard terms);
2. Over time, all adult children benefited in various ways from the assets of the trust;
3. Some years after the trust was established, a new trustee company was appointed, with one of the adult sons the sole director of the company;
4. Around 3 years later the trust distributed one of the properties of the trust to the sole director in his personal name;
5. On discovering the transfer some years later, a sister brought proceedings to unwind the transaction and have the trustee replaced.

In letting the transfer stand, however also removing the trustee, the court confirmed:

1. While the trustee did not give any reasons for its decision to transfer the asset, it was not required to under the trust deed.
2. In any event, no record was provided of the decision – and even if there had been a document disclosing the reasons produced, the trust deed provided that the trustee was not bound to disclose any document setting out any reasons for any particular exercise of the trustee’s power.
3. The trustee was entitled to transfer the property to the son under the terms of the trust deed, which provided that the trustee may in its absolute discretion transfer any property ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’ - with specific provision also confirming the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
4. The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.
5. In contrast, due to the clear hostility between the son and one of his sisters (their relationship had deteriorated significantly following the transfer) the court was of the view that the trustee should be replaced, applying the rules explored in many previous posts centred on the test that 'the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests'.

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 Human League song 'Love Action (I believe in love)'.

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The Mirror (man)** test - trustee powers of investment

Previous posts have considered various aspects of a trustee's powers.

Given another 30 June is on the horizon, it is timely to remember that the scope of a trustee's powers is often limited when relying on the provisions of the state based legislation in the area - reinforcing the preference to have comprehensive powers set out under the trust deed wherever possible.

The decision in G v G (No. 2) - [2020] NSWSC 818 is a useful point of reference in this regard.

The case involved the powers of a trustee of a protected estate (where the underlying sole beneficiary had lost capacity to manage their own affairs). As there was no trust deed regulating the trust, the relevant trusts act applied.

The key question in contention was whether the trustee had the power to invest assets of the trust in a retail superannuation fund (as opposed to a self managed superannuation fund).

The reason for the proceedings being the view that a payment by a trustee (which it was argued that by analogy, included a protected estate manager) into a superannuation fund is not an 'investment' of trust property by the trustee.

This was said to be because, by the payment into the fund, the trustee divests itself of trust property, loses control of that property and puts the property beyond the protective control of the court, albeit that, as a member of the fund, but without a property interest in the fund, the beneficiary (not the trustee) obtains a right to future benefits.

Furthermore, the trustee had arranged a binding death benefit nomination in favour of the legal personal representative of the estate of the beneficiary.

The court confirmed:

1. The trustee had the power under the relevant legislation to invest, or to authorise a private manager to invest, a protected estate into membership of a Regulated Superannuation Fund (although perhaps not a self managed superannuation fund, without deciding that issue).
2. This was at least in part because a protected estate manager stands in the shoes of the protected person and is the substitute decision maker. A protected estate manager does not hold property for the benefit of the protected person. Rather the protected estate manager controls the property which always remains in the name of the protected person.
3. There was however no power under the legislation for the making of a binding, or indeed any other form of nomination, for the payment of a death benefit payable by the trustee of a superannuation fund.
4. This was despite the fact that the court acknowledged that the prevailing view in Australia is that a binding death benefit nomination is not a testamentary act either because it is merely the exercise of a contractual right or the rules of the fund pursuant to which the nomination is given to the trustee confer a discretion on the trustee as to the identity of the person, or persons, to whom the benefit is to be paid.
5. Rather it was held that the management of an estate terminates on the death of the protected person and therefore the manager's power to make a decision about what happens to the protected person's funds after their death cannot be valid.
6. Thus, here, the proper course of action in relation to the nomination was there to be a separate court application authorising the effective making of a gift out of the estate of a protected person, and (perhaps) also an application for a statutory will (another topic considered regularly in View posts).

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 Human League song 'Mirror Man'.

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