Read the deed … another one (bites the dust)**

Today’s post considers the above-mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.

The following case study falls under the mantra ‘Read the Deed’.

Here, the factual scenario centred on a standard family trust.

However, when I say ‘standard’, I should put an asterisk. This is because we thought it was standard and the accountants that had sent the job in to us had been operating for about 10 years on the basis that it was a ‘standard’ family trust.

Under the trust deed, there was a principal (often also referred to as an appointor). In other words, there was a person who had the right to hire and fire the trustee.

As is well understood, in some trust instruments where there is a principal or an appointor, there is then under the power to vary a requirement that that principal or appointor consent to any purported variation before the trustee is permitted to proceed with the proposed variation.

Here, arguably, re-enforcing the assumption that the deed did seem to be a standard family trust, pursuant to the variation power, the principal was not required to consent to any variation.

Importantly, there was a variation that had been done about 12 years ago, which was two years before the current accountant became involved. Under the variation, there was the nomination of a bucket company. In other words, the nomination of a corporate beneficiary to help cap the tax rate at 30 cents – a standard strategy.

As part of a review and updating of the trust deed, we, in conjunction with the accountant, actually sat down and read the entire trust instrument.

What we discovered was that the second to last clause in the deed, buried with the general powers (for example, powers about the power to lend, the power to invest), was a clause that had a nebulous title of ‘Further Provision’.

The Further Provision clause was said to apply in relation to any exercise of the power to vary that resulted in the nomination of a new beneficiary.

The clause mandated that the trustee must obtain the principal’s consent before relying on the variation power.

The relevant deed of variation however did not have the principal’s consent. There was therefore 12 years of distributions to the bucket company, and every single one of those was void for the failure to comply with the trust instrument.

The only real solution, with the aid of hindsight, is to ensure in the future, always - read the deed, read the deed, read the deed, read the deed.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Queen song ‘Another one bites the dust’.

The One-Day Trust

Earlier posts have looked at various aspects of the mantra ‘read the deed’ – see -

Another reminder to ‘read the deed’

ATO reminder – read the deed

Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to the read the deed mantra in a ‘vidcast’ at the following link - https://vimeo.com/145349504

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

This case study involves a family trust deed produced by a reputable deed provider – or at least a well-known deed provider, producing a deed in 2009.

This particular deed provider had adopted a ‘schedule’ approach. That is, in the back of the document, they had a schedule. Under that schedule, they listed a number of key things. For example, they had the date of establishment, the trustee, the principal and the beneficiaries.

They then had the vesting date.

A further reminder - this is a well-known provider, with a well-known accounting firm, with a high net wealth client.

The date of establishment of the trust was listed in the schedule as 28 June 2009.

The vesting date was listed as 29 June 2009.

That is they had created a one-day trust.

This trust deed came to us 2015 as the client wanted to do a trust split and we said ‘we need to read the trust instrument’.

Ironically we had trouble getting a copy of the trust instrument.

For some weeks we only had a photocopy of the undated document, however we held firm that we really needed to see the entire document, with the schedule completed. When we finally got the stamped trust deed and completed schedule our entire advice was one sentence – that is ‘do you realise your trust ended over six years ago. What are we going to do about this?’

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:

Always ‘read the deed’

The recent decision of Mercanti v. Mercanti [2015] WASC 297 again reinforces the mantra ‘read the deed’, which is a theme that has featured regularly in previous posts (see for example - http://blog.viewlegal.com.au/2014/03/death-benefit-nominations-read-deed.html, http://blog.viewlegal.com.au/2013/08/a-further-reminder-read-deed.html, http://blog.viewlegal.com.au/2012/07/ato-reminder-read-deed.html).

As usual, a full copy of the decision is available via the following link – http://www.austlii.edu.au/au/cases/wa/WASC/2015/297.html

Broadly the background was as follows –

1. As part of a family succession plan, two family discretionary trusts were amended by deleting the original definition of ‘appointor’ for each trust.
2. This resulted in the father being replaced by his son as appointor of the two trusts.
3. The appointor power under each trust gave the person nominated the power to unilaterally change the trustee of each trust.
4. A later family dispute saw the son purport to exercise the appointor powers under each trust deed (as amended) to replace the trustees with a company he controlled.
5. The father attempted to resist the changes, in part on the basis that the earlier deeds of variation were not in accordance with the variation power in the trust deeds and therefore invalid.

In deciding that the change of appointor was valid under one trust deed, and invalid under the other, the court highlighted the overriding importance of reading the relevant trust instrument.  In particular –

(a)    One deed had a variation power that relevantly provided the ability to ‘vary all or any of the trusts, terms and conditions’. The scope of this provision was sufficiently wide to allow the original change of appointor and therefore the son was able to use his power to change the trustee.

(b)   The power under the second deed however only provided the ability to ‘vary all or any of the trusts’.  In other words, there was no express power to amend the terms and conditions of the trust deed.

(c)    The concept of ‘trusts’ does not ordinarily, and did not here, extend to the appointor clauses, meaning the purported variation of appointor was invalid and in turn the son’s attempted change of trusteeship ineffective.

In many respects the decision here is simply the application of principles explained in detail in the case of Jenkins v Ellett [2007] QSC 154, which will be the subject of next week’s post.

Until next week.

Image credit: Anders Bachmann cc

Changing trustees of trusts – Simple in theory … not so simple in practice

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

The decision in Balcaskie Investments Pty Limited v Chief Comr of State Revenue [2017] NSWCATAD 19 ("Balcaskie") was reported at 2017 WTB 4 [120].

The case is a timely reminder of the critical issues that can arise from a revenue perspective in relation to the superficially simple area of changing the trustee of a trust.

The starting point for any change of trusteeship is always the terms of the trust deed. In this regard, the 'read the deed' mantra has been regularly highlighted by us.

Assuming the trust deed creates the relevant power and the change of trustee documentation follows the procedure mandated by the trust instrument, there are 2 key revenue issues to be aware of, namely

1. Capital gains tax ("CGT");
2. Stamp duty provisions in the relevant jurisdiction (in the case of Balcaskie – NSW). 

Each of these issues is considered in turn below.

CGT consequences

Arguably the most commonly triggered CGT event is the disposal of a CGT asset (being CGT event A1).

A question that regularly arises, particularly in estate planning and asset protection exercises, is whether a change of trustee triggers CGT event A1.

Relevantly, s 104-10 of the ITAA 1997 provides as follows:

1. CGT event A1 happens if you dispose of a CGT asset; and 
2. you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: 

1. if you stop being the legal owner of the asset but continue to be its beneficiary owner; 
2. merely because of a change of trustee. 

Therefore, it is generally accepted that CGT event A1 does not occur as a result of a change in the trustee and the ATO acknowledges this position in Tax Determination TD 2001/26.

Similarly, there are numerous private binding rulings ("PBRs") that confirm the same outcome, such as PBR 1011623239706.

Stamp duty consequences

Unfortunately, while there are generally no stamp duty consequences for changing a trustee, the rules to gain access to the relevant exemption are different in each state.

Generally however, an exemption should be able to be accessed to mirror the revenue neutral CGT position, with the requirements likely to include at least the following:

1. the dutiable transaction was undertaken for the sole purpose of giving effect to a change of trustee; 
2. the transaction is not part of an arrangement: 

1. involving a change in the rights or interests of the beneficiary of the trust; 
2. terminating the trust; and 

3. transfer duty has been paid on all trust acquisitions for which transfer duty is imposed for the trust before the transaction. 

It is important to note that each state adopts its own approach in this area, and (for example) in New South Wales, additional requirements must be met including that the new trustee cannot be a beneficiary of the relevant trust.

Section 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:

1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 

This prohibition is relevant for trusts established in NSW obviously. It is however also relevant in other jurisdictions as well because many trust deed providers are based in NSW, or rely on precedents originally sourced from NSW.

In addition, the NSW requirements will need to be satisfied where a trust which has been established in another jurisdiction owns dutiable property in NSW.

As noted in Balcaskie, prior to the case, there had not been a reported decision interpreting the way in which the stamp duty exemption on changing a trustee under the NSW rules operates.

The trust deed in Balcaskie had a specific clause (inserted by a deed of variation some years after the deed was originally settled) that required any change of trustee to comply with the NSW stamp duty rules to ensure access to duty relief.

In particular, the relevant clause stated –

"The Original Trustee and the New Trustee and any future and past trustees are absolutely prohibited from being a beneficiary under the Trust Deed or from otherwise directly or indirectly benefiting under the Trust Deed and this clause will not be capable of amendment or revocation."
The separate power of variation clause in the trust deed was very widely crafted, and on the reading adopted by the NSW Office of State Revenue ("OSR"), created the power for the trustee to amend (and potentially remove) the above mentioned prohibition.

This apparent power of variation meant (in the view of the OSR) that the duty exemption on changing the trustee was not available.

The NSW Civil and Administrative Tribunal decided the conflict solely on the basis of a fundamental rule of construction.

That rule being that a specific provision must be read as prevailing over a provision of general import.

In this case, the rule meant that the specific prohibition had priority over the general power of variation. In turn, the OSR was therefore required to grant the duty exemption on the change of trusteeship.

The case may also impact on the OSR's interpretation of the law in other areas – for instance, the NSW OSR has historically adopted the view that a trust will not qualify as a 'fixed trust' for land tax purposes if there is a power for the trustee to amend the trust deed in a manner which alters the fixed entitlement. The Balcaskie decision arguably means the OSR should be considering the terms of the fixed trust deed as they exist at a particular point in time, regardless of any power the trustee may have to subsequently amend those terms.

Conclusion – always start by reading the deed

As explained regularly in this Bulletin, given the range of significantly adverse consequences that can result where a purported change to a trust is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.

Invariably, best practice dictates that the starting point must be to read the trust deed.

There must then be a methodical analysis of all potential revenue consequences.

Image courtesy of Shutterstock

Read the deed - another reminder re invalid distributions

A structure diagram of the trust in Harris v Harris [2011] FamCAFC 245 

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week extracted below.

Practitioners will be aware, from many previous articles in this Bulletin (and elsewhere), of the critical importance that trust deeds should be read before making any distribution of income or capital. While the "read the deed" mantra should be indelibly etched in practitioners' minds, regular reminders of the dangers of not doing this are not out of place.

One example of a family law case of Harris v Harris [2011] FamCAFC 245 where the range of potential beneficiaries was critical was profiled in our article at 2012 WTB 39 [1586].

In that case, the trial judge in a family court matter noted that the recipient of trust distributions (being a company), who was being challenged, was not in fact an eligible beneficiary of the relevant trust. If the company had been simply nominated as a potential beneficiary, then the distributions would have most likely been valid.

A more common example of where difficulties with invalid distributions arise, however, relates to where particular potential beneficiaries are in fact expressly excluded by the trust deed. The most common example in this regard is the exclusion of the trustee, be that the current, former or even a future trustee, from being a beneficiary of a trust.

These types of clauses are often found in deeds prepared by New South Wales advisers. This is primarily because s 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:

1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 

An example of a clause adopting an approach that ensures access to the stamp duty relief is as follows:

"The Trustee for the time being of the Trust can not be a beneficiary of the Trust. None of the continuing Trustees remaining after the retirement of a Trustee is or can become a beneficiary under the Trust, and none of the Trustees of the Trust after the appointment of a new Trustee is or can become a beneficiary under the Trust."

New South Wales is the only Australian jurisdiction that has this type of restriction on accessing the duty concessions for a change of trustee and, understandably, clauses drafted in this manner are extremely prevalent with deed providers or lawyers based in New South Wales.

In many instances, however, there may in fact be no other connection with New South Wales for anyone associated with the trust.

The risks created by this drafting approach will, therefore, often be less than obvious. Anecdotally, there would seem to be an increasing number of situations where invalid distributions are being discovered that stretch back over many years and involve significant levels of invalid distributions.The exact ramifications of this type of situation will depend on a range of issues, including how any default provision under the relevant trust deed is crafted. This said, an embracing by all advisers involved with the administration of the trust of the mantra "read the deed" would avoid the issue ever arising in the first place.

Until next week.

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: 

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

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust (see - 'Changing trustees of trusts – Simple in theory … not so simple in practice').

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).

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.

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

Image courtesy of Shutterstock

New (Financial) Year**, Same Story: avoid lost SMSF trust deeds

One of the key trustee duties of any form of trust is to know the terms of the trust deed and keep the original wet (not electronically!) signed trust instrument safe and secure. This duty is very difficult to discharge however if the trust deed is lost.

The case of Jowill Nominees Pty Ltd v Cooper [2021] SASC 76 ("Jowill") provides a recent insight into the issues a court will consider where a trust deed has been lost. Court application being the only pathway to achieve a solution that is binding on beneficiaries and third parties such as revenue authorities, as well as protecting the trustee where an original trust deed has been lost.

While Jowill involved a discretionary trust, many of the principles are applicable for self-managed superannuation funds (SMSFs).

Factual matrix

Broadly, the factual matrix involved a trust that was established in 1976 and for many years had as its substantive asset shares in Coopers Brewery Limited. The original trust deed was unable to be located and there was also no copy of the document.

There was however an advice letter from a lawyer in 2007, based on a review of the original trust deed that explained a number of key provisions including the range of beneficiaries. Other aspects were also able to be reverse engineered, such as the probable perpetuity period and the fact that the deed likely permitted capital distributions.

The capital distribution power was assumed to exist by the court on the basis of the lawyer's evidence that if it did not, this would have been flagged in the advice letter, particularly because the lawyer confirmed no trust deed read in 45 years of practice failed to contain such a provision.

Decision

The court confirmed that under the relevant state based Trustee Act it could vary the trust deed (effectively adopting a new deed here), so long as the following tests were met (all of which were, primarily due to the evidence of the lawyer that provided the 2007 advice letter):

• there is good reason to make the proposed exercise of powers;
• the proposed exercise of powers is in the interests of beneficiaries;
• the proposed exercise of powers will not result in 1 class of beneficiaries being unfairly advantaged to the prejudice of another class (here it was critical that all beneficiaries were represented before the court);
• the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust;
• the proposed exercise of powers will not disturb the trust beyond what is necessary to give effect to the reasons for the revocation or variation; and
• the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.

The deed approved by the court was based on a precedent as at 1978 of the firm that had likely drafted the trust deed, adjusted to align with the advice from 2007.

While the court did consider a request to simply revoke the trust, it ultimately confirmed its preference to approve the, varied, adopted trust deed as it was the least disruptive approach. The court confirmed the trustee could choose to exercise its discretion to make a capital distribution of the assets of the trust (which was its intention) and subsequently vest the trust, relying on the terms of the court approved deed.

Vesting issues

If a trust deed cannot be found, commercially with discretionary trusts it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.

Any vesting of a trust and subsequent distribution of assets, with or without court approval, is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.

Most of these can generally be ignored however in relation to SMSFs as a result of the leading case in relation to trust resettlements, namely FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and subsequent Tax Office statements (for example, see Private Ruling Authorisation Number 14613, which confirmed that amendment of an SMSF deed, that was not lost, by deleting all the operative provisions and inserting the terms of an updated trust deed did not cause a CGT resettlement).

Adopting a new deed

In the context of SMSF trust deeds (and indeed other forms of fixed trusts with a narrow range of known beneficiaries, who can be proved via other evidence), a court application for adopting a new trust deed is generally seen as being unlikely to be necessary from a trust law perspective.

That is, the trustee and interested beneficiaries can simply adopt a new deed.

However the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ care must be taken.

In this case a husband and wife established separate SMSFs appointing themselves as sole members. They declared a property owned by them as property of their respective SMSFs.

In considering who the ‘beneficiaries’ of each SMSF were, it was held that upon construction of the SMSF deeds, the class of beneficiaries was broader than each single member. This was because the trust deed allowed the trustee to pay benefits to the member’s dependants and even relatives (if there were no dependants, as defined under the superannuation legislation) of the member.

As such, in this case, the potential class of beneficiaries included 21 different people.

Best practice therefore dictates that each person who can enforce the due administration of the trust should be a party to and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed (see also Re Bowmil Nominees Pty Ltd [2004] NSWSC 161, which confirmed that where all potential beneficiaries agree to a variation, there is no need for the court approval).

Other approaches

Alternatively, a conservative approach (that may be appropriate if a court application is not commercially viable) can be to adopt a replacement deed and then establish a new SMSF and immediately the roll assets of the fund that had the lost deed into the new structure. The heritage SMSF would then be wound up.

Regardless of which approach is adopted, other than court application, if an SMSF trustee is adopting a new deed without any evidence as to the original terms, specific specialist advice should be obtained as to whether this will amount to a CGT resettlement. Fortunately, from a stamp duty perspective, most states have a concessional regime that any variation of an SMSF trust deed (even if it causes a duty resettlement) will be liable for only nominal stamp duty.

Conclusion

While it is possible to reconstitute the terms of a lost SMSF trust deed, the process is generally time consuming, commercially difficult and unnecessarily costly.

As with many similar areas, despite the potential triteness of the statement, when considering the implications of lost trust deeds, prevention is the best cure.

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 U2 song 'New Year’s Day’.

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Here we go again** - invalid BDBNs and failed changes of trusteeship

In holistic estate planning, disputes in relation to SMSFs - and particularly (purported) binding death benefit nominations (BDBN) - are arguably risks of such high probability that there is need for advisers to consider the issues habitually.

The decision in Williams v Williams & Anor [2023] QSC 90 provides a stark example in this regard.

The factual matrix in this case was arguably 'generic' for a material number of SMSFs, that is a blended family with competing interests and (arguably) less than ideal documentation.

In particular:

1. the deceased member of a sole member fund purported to sign a BDBN in favour of a 50% allocation to each of his second wife and his legal personal representative (LPR), for distribution of this portion under his will;
2. the trustees of the fund at the date of the relevant BDBN were the deceased and one of his 2 adult sons;
3. while the deed for the SMSF appeared to require the BDBN to be provided to both trustees in order to be effective, the son (in his role as co-trustee) denied having ever been provided with the document. The son as surviving trustee relied on the fact (that was accepted by the court) that he had not been given the BDBN as supporting a conclusion that the BDBN was void and should be ignored by the trustee, who instead should distribute the death benefit in its discretion.

In relation to the invalidity of the BDBN, the court confirmed:

1. the purpose of communicating a BDBN to the trustees is largely practical - that is, to give effect to a BDBN the trustees must know about it and, in the case of multiple nominations, must know which was current and which had been superseded (these points were confirmed in the decision of Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122, a case featured in other View posts, which in a similar factual matrix confirmed that a BDBN sent to the registered office of the corporate trustee was a valid approach for a member to provide the requisite notice to the trustees);
2. while the trust deed had standard provisions that deemed 'singular wording to include plural' and vice versa (a provision that is included by statute in all deeds and instruments, for example see section 61 of the Property Law Act 2023 (Qld)) - these type of provisions were subject to the context of the trust deed;
3. so too the provisions in the trust deed that provided 'the "Trustees or the Trustee for the time being of the Fund" and “Trustee” have the same meaning' were subject to the context of the wider deed and required that where there was more than one trustee the word 'trustees' should be taken to mean all the trustees;
4. thus while the deceased member was aware of the BDBN he had signed, and was also a trustee, the context of the trust deed required both trustees to be notified. This conclusion was further supported by the fact that the deed required that on receiving the written notice, certain further steps be taken, namely, the trustees creating a written resolution accepting the terms of the BDBN;
5. in other words, the knowledge of the deceased member could not automatically affect the co-trustee with knowledge of the transaction (see Cummings v Austin (1902) 28 VLR 347).

The other key aspect of the decision also serves as a blunt reminder of the 'read the deed' mantra so critical for all trust advisers, including in the SMSF space. In particular, a purported change of trusteeship by the surviving son to appoint his brother as a co-trustee was held to be invalid for a range of reasons, including:

1. the relevant documentation purported to have the deceased member as a party - at a minimum the relevant party would have needed to be the deceased member's LPR;
2. while the deed gave a two-thirds majority of members the right to appoint a trustee, the relevant documentation did not rely on these provisions;
3. while the deed also appeared to allow a member's LPR to assume the rights of the member in relation to trustee appointment, the definition of LPR under the deed was limited to a person who had obtained probate of the member's estate; and probate had not in fact been obtained. Therefore, for the purposes of the deed, there was no LPR of the deceased member and the provisions giving rights to the member's LPR were a nullity.

In many respects, a number of the failings in relation to the change of trustee documentation were analogous to the factual matrix in the case of Moss Super Pty Ltd v Hayne [2008] VSC 158, again another case featured in other View posts. In this decision, although not referenced in the Williams case, 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. 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 her capacity as founder.

In other words, while she signed in her capacity as the sole director of the new trustee, there was no provision where she also signed in her founder role.

Critically, the court found that where structures are created in which individuals have multiple roles to play, the requirements around those roles must be respected and complied with.

Based on the above failings in relation to the purported change of trusteeship - and further concerning conduct and clear conflicts of interest for the son - the court concluded it was appropriate to remove the trustee. The court determined instead to appoint independent trustees, relying on the largely discretionary right for a court to form a judgment on what is in the best interests of the beneficiaries, based upon considerations, possibly large in number and varied in character, which combine to support the conclusion, see Miller v Cameron [1936] HCA 13.

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 a line in the Whitesnake song ‘Here I go again’.

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

In preparing for the upcoming View webinar ‘Trust Horror Stories’ (see details below) 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. See the following post for a more detailed analysis of this aspect of many trust deeds –

Read the deed - another reminder re invalid distributions.

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 mentioned, our upcoming webinar ‘Trust Horror Stories’ will have many case study examples highlighting key issues to be aware of with managing trusts.


Find out more here - https://viewlegal.com.au/product/webinar-trust-horror-stories/

Watch the promo video below.

** for the trainspotters, one of Van Halen’s most popular songs is ‘Jump’ – see - https://www.youtube.com/watch?v=k8LdRJqjjRM and there is a prize for anyone who can confirm the list of contract riders for hair product.

Another reminder to ‘read the deed’

As highlighted in last week’s post, the need to ‘read the deed’ before making any variation to a trust deed is critical (see for example http://blog.viewlegal.com.au/2015/09/always-read-deed.html).

The case (Jenkins v Ellett [2007] QSC 154) mentioned in passing, in a previous post (see - http://blog.viewlegal.com.au/2010/09/when-power-to-vary-is-not-power-to-vary.html) and again last week, remains a leading example of this mantra.

As usual, a full copy of the decision is available via the following link - http://www.austlii.edu.au/au/cases/qld/QSC/2007/154.html

Broadly the situation in this case was as follows:

A principal under a trust deed had the ability to remove and appoint the trustee of the trust.

The principal purported to rely 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.

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.

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.

Until next week. 


Image credit: Jenni C cc

Vesting Dates and Trust Distributions: measure twice; cut once – read the deed … and then some

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article by View is extracted below.

As previously reported by us in the Weekly Tax Bulletin, there are a range of issues often overlooked in relation to trust distributions (see 2014 WTB 43 [1426]) and extensions to vesting dates (see 2014 WTB 44 [1446]). Rarely, however, do these issues arise together in the same factual scenario.

In the lead up to another 30 June, the decision in Domazet v Jure Investments Pty Limited [2016] ACTSC 33 (7 March 2016) is a timely example of the problems that can arise when a deed is not carefully reviewed before trust distributions are made.

The decision

In summary, a Family Trust was settled in the ACT on 1 April 1980. The Family Trust deed gave the trustee the power to nominate additional beneficiaries, including trusts, so long as the vesting date of the other trust was not longer than that of the Family Trust.

In 2009, a new trust (referred to as the "Finance Trust"), which was part of the same family group was purportedly appointed as a general beneficiary of the Family Trust.

The Family Trust had a cascading optional perpetuity period, which the parties wrongly interpreted as allowing the vesting date to be 80 years from the date of settlement. In fact, the Family Trust vesting date was 21 years after the death of King George VI's living issue as at 1 April 1980.

The Finance Trust, established in 2005, was set to vest either upon the election of the Trustee or a maximum of 80 years from settlement, making it prima facie ineligible. In an attempt to ensure the Finance Trust was an eligible beneficiary of the Family Trust, the vesting date was then amended to be one day before 80 years from 1 April 1980 (ie 31 March 2060).

Practically speaking, this meant that in order for the Finance Trust to be an eligible beneficiary of the Family Trust, it needed to be absolutely certain that at least one of King George VI's living issue in 1980 would still be living on 31 March 2039 (that is, 21 years before 2060), which the Court thought was possible, but not absolutely certain. This meant the appointment of the Finance Trust as a general beneficiary was invalid.

It appears from the decision that a number of capital distributions were purported to be made after the Finance Trust was invalidly appointed as an additional beneficiary. The invalid appointment meant that the distributions made to the Finance Trust would have been done in breach of trust. Furthermore, the invalid distributions would have also caused adverse tax consequences for the parties. This seems to have been a potential issue because the ATO had made submissions as part of the proceedings.

Perpetuity rules

It is critically important to not just read the deed, but also specifically consider which perpetuity rules apply. The difficulties arose in this case because amendments to the rule against perpetuities were progressively rolled out throughout Australia. The advisers which prepared the documents had wrongly assumed the ACT rules, which came into effect on 18 December 1985 (after the Family Trust was settled), were implemented at the same time as the Queensland rules were introduced (1 April 1973).

In this respect, the earliest change to the rule against perpetuities occurred in Victoria in 1968, whereas Tasmania only introduced new rules in 1992. When reviewing trusts which span between these dates, it is therefore critically important to firstly determine the trust's governing jurisdiction, but also consider which perpetuities rules apply.

Some possible workarounds

With the aid of hindsight, there were a number of alternatives that could have avoided the outcome that the parties ultimately faced: a substantive trust to trust distribution being invalid. In summary, the other alternatives that could have been adopted include:

1. The vesting date of the recipient trust could have been amended to provide that - notwithstanding any other provision of either trust instrument, it would automatically vest on or before the date of the distributing trust.
2. The requirement in the distributing trust that the recipient trust needed to vest before it could have simply been deleted. While it still would have been necessary for the recipient trust to have ultimately vested by the date of the distributing trust, it would have been possible to rely on the 'wait and see' rule rather than the distribution being void immediately on the date that it was made.
3. Depending on the factual matrix, the distributing trust could have made a distribution directly to the ultimate intended beneficiaries, even if that may have required a variation to the trust instrument (and thereby avoid the need to distribute to an interposed trust).

In any of the above cases, again with the aid of hindsight, a private ruling could have been sought from the ATO, or indeed a declaration from the Court could have been obtained. While both of these approaches obviously create significant time delays and cost exposure where (as here) there are significant funds at risk, these additional costs can be an appropriate investment.

In regards to the "wait and see" rule, the approach to be taken was summarised in the case of Nemesis Australia Pty Ltd v FCT [2005] FCA 1273 (14 September 2005) (reported at 2005 WTB 40 [1638]). The case confirmed that the "wait and see rule" in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date.

The "wait and see" rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust.

Rectification

The final main alternative to the issues faced in this case, which was the one ultimately adopted, was to seek rectification of the documentation from the Court.

The case provides a very detailed analysis of the way in which the rectification rules work, including heavily quoting Dr Spry, who has been featured prominently in trust related areas, both for his academic writing and his legal challenges in a personal family law dispute (see Kennon v Spry (2008) 238 CLR 366 (reported at 2008 WTB 51 [2303]).

Ultimately, although with some reservation, the Court did rectify the relevant documents to essentially adopt the approach outlined at paragraph (a) above. While it cannot be certain, it is likely that the rectification order settles a number of the potential taxation consequences resulting from what would have otherwise been invalid distributions.

At last some clarity with the streaming of franking credits? But trust law re-write still urgently needed

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.

For ease of reference, an earlier post addressing a previous decision in this matter is at the following link - http://blog.viewlegal.com.au/2010/11/streaming-decision-released.html

The recent case of Thomas v FCT [2015] FCA 968, reported in this Bulletin, considers a number of key issues relating to the distribution of franking credits by the trustee of a discretionary trust, including the ability to stream franking credits as a separate class of income.

It follows the well-publicised decision of the Queensland Supreme Court in Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417 (reported at 2010 WTB 49 [1884]), which relevantly held that franking credits could form part of the income of a trust estate for trust law purposes and be streamed to particular beneficiaries.  The Commissioner was not a party to that earlier decision.

The Thomas case explores the interaction between s 95 and s 97 of the ITAA 1936 dealing with trust income and Div 207 of the ITAA 1997 dealing with the imputation system.

The decision is a timely reminder of the need to ensure that trust distributions are made in compliance with the trust deed, the ITAA 1936 and the ITAA 1997, and of the complexities that can arise when streaming different classes of income.

Facts

A more detailed summary of the facts of the case are set out separately in this Bulletin, however in brief, the trustee of Thomas Investment Trust purported to distribute the trust's income in several consecutive financial years as follows:

• Around 90% of the franking credits and foreign income and 1% of the remaining net income to an individual beneficiary.
• The balance of the net income to a corporate beneficiary.

The Commissioner challenged the effect of the distributions and in essence, argued that the franking credits could not be distributed to a beneficiary independently of the franked dividend to which those franking credits related.

The taxpayer contended that the franking credits were in fact a class of income capable of being streamed to particular beneficiaries in accordance with the trust instrument.

A number of other matters relating to the trust instrument and distribution resolutions were considered by the Court, which are beyond the scope of this article.

Outcome

The judgment, which the Commissioner at least is likely to believe is a thorough and well-crafted decision, rejects the earlier conclusion in Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417 and provides significant guidance in relation to the streaming of franked dividends and franking credits.

It is widely understood that Div 207-55(3) of the ITAA 1997 provides that a beneficiary's share of a franked distribution is equal to the amount included when determining the beneficiary's share of the trust's income under s 95 of the ITAA 1936.

Div 207 also recognises and permits a trustee to stream some or all of a franked dividend to one or more beneficiaries to the exclusion of others, subject to the requisite powers under the trust deed.

Provided the relevant trust instrument expressly permits streaming of franked dividends as a separate class of income, a trustee can choose to make one or more beneficiaries specifically entitled to franked dividends, while distributing other classes of income to different beneficiaries.

Any beneficiary who is made specifically entitled to franked dividends is then entitled to the benefit of the franking credits attaching to those dividends.

In Thomas, the trustee purported to stream franking credits as a separate class of income from the dividends themselves.  This approach, permitted under the trust deed, saw one beneficiary receive the benefit of the tax offset under the imputation system at their marginal tax rate, while another beneficiary paid income tax on the dividend at the corporate tax rate.

The Court held that, although franking credits will generally have a clear commercial value to a beneficiary (as a result of the beneficiary's ability to claim a tax offset from the credit), a franking credit is not "income" for trust law purposes.

Specifically, although franking credits constitute statutory income for the purposes of the gross-up provisions, they are a notional, statutory creation in this regard and do not constitute "ordinary income" under trust law principles.

As a result, the operation of Div 207 makes it clear that franking credits can only "attach" to the franked dividend and cannot be streamed as a separate class of income, notwithstanding any other provision that may indicate to the contrary within the trust instrument.

The outcome of the case can perhaps be best summarised by the following quote from the judgment:

"What cannot occur if the tax offset is to be preserved…is an allocation of the s 95 net income amongst beneficiaries on a particular basis and a distribution of the franking credits otherwise attached or stapled to the franked dividends on an entirely unrelated basis, amongst the same beneficiaries." [Court's emphasis]

Lessons

A number of lessons can be taken from the case, including:

• As regularly highlighted in this Bulletin, it is critical to "read the deed" before purporting to exercise trust powers, particularly in relation to trust distributions.

• While reading the trust deed (including all valid variations) is necessary, it will not be sufficient by itself.  There are a myriad of related issues that need to be considered that may impact on the intended distribution, aside from whatever powers are set out in the trust instrument.  Examples include renunciations and disclaimers by beneficiaries, purported changes that are not permitted under the relevant trust instrument (see for example the article at 2015 WTB 37 [1373] in relation to amending trust deeds) and the effective narrowing (for tax purposes) of permissible beneficiaries due to the impact of family trust and interposed entity elections.

• The wording of the distribution minute or resolution will be critical for determining the consequences of the distribution.  Terms like "income" and "net income" will be defined differently depending on the trust instrument (even deeds that have been sourced from the same provider) and failing to understand those distinctions can result in inadvertent adverse outcomes for the trustee and beneficiaries.

• Distribution resolutions must also be crafted with reference to the trust instrument, trust law principles, the ITAA 1936 and the ITAA 1997.  For example, with increasing regularity, we are seeing trust deeds that require distributions take place before they are otherwise needed under the ITAA.

• Trustees should act with significant care when dealing with "notional" amounts such as franking credits, to ensure the intended tax and commercial objectives are achieved.

• Trustees have a duty to ensure they are aware of their rights and responsibilities under the trust deed and the limitations under the ITAA 1936 and the ITAA 1997.  A failure to discharge this duty can mean a trustee is personally liable.

Ultimately however the latest installment in this series of cases (so far) also highlights the need for the Government to prioritise the long awaited re-write of the legislation governing the taxation of trusts in order to simplify what continues to be an unnecessarily complex area of the taxation law.

Image credit: Dwayne Bent cc