A SMORGASBORD OF TRUST ISSUES – ANSWERS TO ALL THOSE QUESTIONS
ON TRUSTS THAT YOU EVER WANTED TO ASK
BY
MICHAEL HERAGHTY
BARRISTER
NINTH FLOOR
SELBORNE CHAMBERS
SYDNEY
The Rule in Hastings-Bass – The Morning After Pill for Trustees?
1.
In Re Hastings-Bass Deceased [1975] 1 Ch 25, the English Court of Appeal
(Megaw, Buckley and Roskill JJ) were concerned with a settlement made on
1 April 1947 on the marriage of Peter Robin Hood Hastings (who later
assumed the additional name of Bass) (Captain Hastings-Bass) by his uncle,
Sir William Bass. The settlement established, inter alia, a protected life
interest for Captain Hastings-Bass and then, subject to a power of
appointment, for such son of Captain Hastings-Bass as should first obtain the
age of 25 years, within 21 years of Captain Hastings-Bass’ death, with
remainders over.
2.
Captain Hastings-Bass had 4 children. His eldest son, William Edward Robin
Hood Hastings-Bass was born in 1948.
3.
By a further settlement made in 1957, the aunt of William settled 500
pounds on William for life and then subject to a power of appointment, for
William’s children at 21, with remainders over. The settlement gave the
trustees an absolute discretion to give William, at 21, the whole or such part
of the capital as they thought fit.
4.
In January 1958, Captain Hastings-Bass, by a revocable deed of appointment,
appointed that the 1947 trustees should stand possessed of the 1947
trust funds for William at 25 absolutely. In March 1958, in the exercise of
the statutory power of advancement under Section 32 of the Trustee Act
1925, the Trustees of the 1947 Trust transferred funds out of the 1947 Trust
to the Trustees of the 1957 Trust. In making the transfer, the Trustees of
the 1947 Trust had as a primary consideration the saving of estate duty.
Captain Hastings-Bass died in 1964. The Trustees of the 1947 Trust took out
a Summons to determine whether or not estate duty was payable on the
death of Captain Hastings-Bass.
5.
The Revenue claimed that the funds remain subject to the 1947 Trust. At the
time when the transfer was made it was not thought that there was any
infringement of the perpetuity rule, but it was now common ground that as
William was not a life in being at the date of the 1947 Trust, all of the powers
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and beneficial trusts of the advanced fund other than William’s life interest
were void for perpetuity.
6.
Unfortunately for William Hastings-Bass, although the decision of
Danckwerts J dated 14 May 1959 in Re Pilkington’s Will Trusts [1959] Ch 699
considered there was no breach of the perpetuity rule, the Revenue
appealed from that decision and eventually in the House of Lords [1964] AC
612, it was held that a power of advancement was a special power and that
accordingly a trust called into existence by its exercise must be written into
the instrument creating the power for the purpose of applying the
perpetuity rule.
7.
It is hard to fathom that by reading the Hastings-Bass decision there
developed from that decision what has come to be the radical Rule in
Hastings-Bass.
8.
The ratio of Hastings-Bass was as follows:
“Where by the terms of a trust…, a trustee is given a discretion as
to some matter under which he acts in good faith, the court should
not interfere with his action notwithstanding that it does not have
the full effect which he intended, unless:
(1) What he has achieved is unauthorised for the power
conferred upon him, or
(2) It is clear that he would not have acted as he did:
(a)
(b)
9.
had he not taken into account considerations that he
should not have taken into account, or
had he not failed to take into account considerations
which he ought to have taken into account.”
[at page 41]
I think you will agree that Hastings-Bass is a case which needs to be read
very carefully if you are to ascertain how the Rule in Hastings-Bass has come
to be so important when considerations of tax arise.
10. Mr Justice Lloyd in Sieff v Fox [2005] 1 WLR 3811 at para 49 was a bit clearer
on what the Rule in Hastings-Bass means when he used the following words:
“Where a trustee acts under a discretion given to him by the terms
of the trust, where the effect of the exercise is different from that
which he intended, the court will interfere with his action if it is
clear that he would not have acted as he did had he not failed to
take into account considerations which he ought to have taken into
account, or taken into account considerations which he ought not
to have taken into account.”
11. Over the years, especially in offshore jurisdictions such as Guernsey and The
Cayman Islands, the Rule in Re Hastings-Bass has involved many attempts by
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trustees to undo transactions which have led to unexpected tax
consequences. It has been argued quite forcefully, that in a lot of the cases,
the trustees have acted negligently in not taking into account the tax
ramifications of their actions, especially the English capital gains tax
ramifications.
12. The criticism of the Rule in Hastings-Bass reached a crescendo in a Paper by
Lord Neuberger of Abbotsbury entitled “Trusts and Trustees” presented to
the Chancery Bar Association in London on 16 January 2009. His Lordship
said that the Rule in Hastings-Bass had become:
“a magical morning-after pill (for) trustees suffering from posttransaction remorse, but not to anyone else.”
His Lordship also had the following criticism of the Rule in Hastings-Bass:
“[There is]…. much to be said for the view that the Hastings-Bass
principle infringes the most fundamental requirements of any legal
principle. First, it is inconsistent with established law. Secondly,
the circumstances which it applies are unclear. Thirdly, the results
of its application are unclear. In other words, the Hastings-Bass
principle is unsatisfactory both in theory and in practice.”
13. A recent decision involving the application of the Rule in Hastings-Bass is
Futter v Futter [2010] EWHC 449. Mr Futter had established 2 life interest
settlements and each contained “stockpiled gains” for UK capital gains tax
purposes. If the “stockpiled gains” were brought onshore they would be
taxed at a high rate of capital gains tax. The Trustees were advised that
personal losses of Mr Futter and his children could be used to offset the
“stockpiled gains”. The Trustees went ahead accordingly, but the advice was
wrong. The Trustees applied to the Court to have the Rule in Hastings-Bass
applied in that they failed to consider the true capital gains consequences in
what they had done. The Revenue argued, unsurprisingly, that the Rule in
Hastings-Bass was not applicable but the Court held that the consequences of
invoking the Rule in Hastings-Bass was to make the transaction void so that
the unwanted capital gains tax consequences did not apply.
14. Two relatively recent articles by Justice R I Barrett: “The Principle in Re
Hastings-Bass” presented at the “Superannuation 2006” Conference
Melbourne on 23 February 2006 and by Justice Joseph Campbell “Should the
Rule in Hastings-Bass be followed in Australia? – Trustees’ Duty to Enquire
and Trustees’ Mistakes,” presented to the STEP Sydney Branch on 25
November 2010, continue that criticism.
15. There is much more law to be developed in both England and Australia on
the Principle in Hastings-Bass, but you can be assured that whenever
someone makes a tax mistake when implementing a decision of a trustee
then the Rule in Hastings-Bass will be relied upon.
Should the Settlor, Trustee or Appointor be Beneficiaries?
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16. Clients often ask whether the trustee, settlor or appointor can be a
beneficiary of a family discretionary trust. There seems to be some urban
myth alive that there is some magical rule of law which prevents any of
these individuals being beneficiaries of the trust.
17. To my knowledge, there is only one possible reason that I am aware of why a
settlor, or more particularly minor children of the settlor, should not be
beneficiaries of a trust settled by their parent.
18. This reason lies in Section 102 of the Income Tax Assessment Act 1936 (Cth)
(the 1936 Tax Act) which provides that if a person creates or settles a trust
under which a child of that person under the age of 18 can benefit, then the
Commissioner may assess the trustee to pay income tax on income applied
for the benefit of the minor child of the settler on the basis that the income
so applied is to be added to the income of the person who created or settled
the trust (i.e. the settlor/parent) so that the relevant marginal rate of tax of
the settlor/parent applies to the income derived by the minor child as if the
settlor/ parent had earned that additional income.
19. In the days of death duty there were also consequences for the settlor of a
trust in long forgotten Sections of the New South Wales and Commonwealth
Death Duty Legislation which could drag into a person’s estate for death duty
purposes the property or a trust settled or created by the Deceased.
20. There is no principle of law that I know of that would otherwise prevent a
trustee, settlor or appointor being a beneficiary of a trust.
21. It is quite common that a person is appointed a trustee of his or her father’s
or mother’s Will and that person is also a beneficiary of the trust, along with
other siblings. It is no different to the situation of a settlement created by a
trust deed and as long as, in the case of a family discretionary trust, the
trustee obeys the duty that he or she owes to the beneficiaries of considering
all of them when it comes to consider distributions, then I see no problem
with a trustee also being a beneficiary. To be sure, there is no rule of law
which says that a person cannot be a beneficiary of a trust of which he is also
the trustee.
22. Similarly, a settlor can also be a beneficiary of a trust and there is no law
preventing this.
23. The Appointor is usually the person who effectively “controls” the trust,
especially in relation to a family discretionary trust, because that person has
the ability to hire and fire the trustee. In most family discretionary trusts it
is crucial for the person who causes the trust to be established to be a
beneficiary (as opposed to the Settlor who creates the trust with the initial
donation of $10.00) as the assets of the trust are normally the fruits of his or
her lifetime efforts.
24. The next time someone asks you whether a settlor, trustee or appointor can
be a beneficiary of a trust, I suggest that you say that there is no reason,
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except that Section 102 of the 1936 Tax Act may make it undesirable if
children of the settlor who are under 18 are also beneficiaries.
Memorandum of Wishes
25. When a person who causes the creation of a family discretionary trust dies,
he or she normally leaves a Memorandum of Wishes to outline to the
continuing trustee what he or she wants done with the assets and income of
the trust after he or she dies.
26. There are a lot of people who wish to rule from the grave and I have seen
many and complicated Memoranda of Wishes which seek to restrict what
can and can’t be done for many years after the death of the person who
caused the trust to be created.
27. The person who makes the Memorandum of Wishes is usually the
Appointor, who normally has the power to hire and fire the trustee under
the trust deed and it would be normal for the Memorandum of Wishes to
also appoint a successor Appointor who will control the trust after the
original Appointor dies.
28. In my opinion, it is not very sensible to try and tie the hands of the
continuing trustee by making overly complicated provisions in a
Memorandum of Wishes as the views of the continuing trustee and the
successor Appointor will at some stage usually differ from that of the
original Appointor.
29. Granted, where a family is one prone to disputes, I can see good reason to
ensure that the successor Appointor, together with the successor trustees or
directors of the corporate trustee are “locked in”. This can be achieved in
the case of directors of the trustee by providing for automatic appointment
of the chosen persons as directors of the corporate trustee following the
death of the original director/Appointor.
Income Tax Traps
Section 102 of the 1936 Tax Act
30. I have already outlined the income tax trap relating to trusts in Section 102
of the 1936 Tax Act.
31. For example, if a father establishes a bank account naming himself as trustee
for his minor son and contributes the initial $10.00 into the bank account,
the Tax Commissioner would be entitled to tax the father as trustee, as if the
income earned from the bank account were the father’s own income and
therefore the relevant marginal tax rate applying to the father’s income
would apply to the income earned from the bank account.
32. The solution is to have a friend of the father put the initial $10.00 into the
bank account, in the same way as a friend normally donates $10.00 to
establish a family discretionary trust under a formal deed of settlement.
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Bamford’s Case and the Proportionate Method
33. In Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation
(2010) 84 ALJR 266, the High Court said that if the income for tax purposes
(roughly the taxable income) (tax income) of a trust exceeds its income for
trust purposes (roughly the net accounting profit of the trust) (trust income)
and there is a distribution of trust income by the trustee of a fixed dollar
amount to beneficiaries, followed by a distribution of the residue to another
beneficiary, the tax income is to be allocated according to the proportionate
method.
34. Let me demonstrate. In Bamford’s Case the trustee resolved to distribute the
trust income to:
The Bamford Children
Narconon Anzo Inc
Church of Scientology
Mr and Mrs Bamford
Church of Scientology
$643 to each child
The next $12,500
The next $106,000
The next $68,000 in equal shares
The balance of the trust income
35. A tax deduction of $191,701 claimed by the trustee was not deductible, so
the tax income of the trust increased by that amount to $379,231. The trust
income remained at $187,530, as the non-deductible expense was properly
deducted from the trust income.
36. The situation was:
Original tax income
Increase in tax income
Revised tax income
Trust income
Excess of tax income over trust income
187,530
191,701
379,231
187,530
191,701
37. It was realised that there was not enough trust income for the $68,000 for
the Bamfords and nothing left over to go to the Church of Scientology. The
trust income left over was $67,744 which was actually distributed equally
between the Bamfords ($33,872 each).
38. The High Court said that the excess tax income had to be distributed under
the proportionate method to the Bamfords (and the other beneficiaries,
excluding the Church of Scientology, in its capacity as the residuary
beneficiary) using the following formula:
Original distribution of trust income
Total trust income of the trust
=
33,872
187,530
39. The High Court said that that part of the excess tax income to go to each of
the Bamfords was:
$191,701 X 33,872
187,530
=
$34,624
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40. So the extra taxable income of $34,624 each, plus $33,872 each, being their
share of the initial tax income of $187,530, meant that a total of $68,496
should have been included in each of their tax returns.
41. Is there a way to anticipate such situations?
42. I think there is – taking the situation of Mr & Mrs Bamford only, by way of
example.
43. My proposal is that in the Bamford situation, the following resolution would
have solved the problem:
* Resolved that the Company, in its capacity as the trustee of the [Bamford]
Trust determines that Mr and Mrs Bamford are hereby presently entitled to
the following amounts of trust income in respect to the year ended 30 June
2000 year:
Equally between them – that percentage of the trust income for the year
ended 30 June 2000 which, when multiplied by the total tax income of the
Trust for the 2000 year, equals $68,000 (to the nearest dollar).
*Definitions of “trust income” and “tax income” need to be inserted.
44. Thus, Mr and Mrs Bamford would have each ended up with $34,000 of
taxable income, which was what was originally intended, not $68,496 each,
which is how things ended up.
45. Adopting my proposal, whether the tax income of the trust increases or
decreases, the relevant beneficiary would receive the same fixed dollar
amount, irrespective of whether the tax income changes because the trust
has extra assessable income or is denied an allowable deduction. This
applies provided there is enough trust income and/or tax income to
accommodate that fixed dollar amount.
Stamp Duty Traps
Section 54 of the Duties Act 1997 (NSW)
46. Section 54(3) is a particular trap which needs to be borne in mind when the
trustee of a trust is changed and “dutiable property” such as real estate, is to
be transferred from the old trustee to the new trustee.
47. The effect of Section 54(3) is that ad valorem stamp duty may well be
charged by the Chief Commissioner in respect of the transfer of the dutiable
property unless the Chief Commissioner is satisfied that:
"(a)
none of the continuing trustees remaining after the
retirement of a trustee is or can become a beneficiary
under the trust; and
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(b)
none of the trustees of the trust after the appointment of a
new trustee is or can become a beneficiary under the
trust; and
(c)
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.”
48. What this means is that when a trustee is changed and a transfer of real
estate is to be executed, the trustees should be excluded as beneficiaries of
the trust and that exclusion “entrenched” so that Section 54(3) cannot apply.
49. By “entrenched” I mean that the amendment clause should itself be
amended so that the effect is that the amendment clause cannot be used to
amend the deed to enable a trustee of the trust to become a beneficiary.
Section 55 of the Duties Act
50. It often happens that a client would like to provide part or the whole of the
purchase money for the purchase of real estate, but does not want his or her
name to appear on the title.
51. In this case, a Declaration of Trust is normally prepared, which recites that
the beneficiary concerned has contributed part or all of the purchase monies
and that the purchaser holds the property upon trust according to the
percentage contribution to the purchase price made by the beneficiary.
52. It needs to be borne in mind that Section 55 only operates where the
“apparent purchaser” has provided the purchase money.
53. In this regard you should note that Section 55(2) equates the word
“allotment” with the word “purchase”, so an allotment of shares as well as a
purchase of shares is covered.
54. The Stamp Duties Office is very enthusiastic about making sure that anyone
who claims the concessional duty of $50.00 chargeable in respect of a
Declaration of Trust in favour of an apparent purchaser can demonstrate
with evidence that the apparent purchaser has provided the relevant
purchase monies. I have quite often seen requests from the Stamp Duties
Office for the production of bank statements or trust account statements to
show that the money has come from the apparent purchaser.
55. A particular trap to be wary of is where mortgage funds are raised to pay for
part of the purchase price. If the mortgagor under the mortgage is the
trustee which it normally would have to be, because the trustee is the
registered proprietor, be careful that the loan covenants in the mortgage do
not provide that the loan is being made to the mortgagor, if all or a part of
the loan monies are said to be provided by the apparent purchaser. In this
case, the Stamp Duties Office will point to this and indicate that the loan
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document is evidence that the apparent purchaser has not provided the
purchase monies provided pursuant to the mortgage.
56. There needs to be an exact tracing of monies that can be identified as coming
from the apparent purchaser in order for the concessional duty under
Section 55 to apply.
Mere Power or Trust Power
57. I think the best way to distinguish between a mere power and a trust power
is as follows:
(a) A mere power is characterised by a clause providing for a taker in
default.
(b) A trust power is one where there is a power in the trustee to make a
decision, which amounts to an obligation to choose between various
beneficiaries, which is normally a discretionary object of a
discretionary trust.
58. It was fashionable in years gone by that in the case of the ultimate vesting of
a discretionary trust, you would always insert a taker in default or mere
power clause on the basis that you wanted to make sure that there was
someone who took the property if all other beneficiaries did not exist.
59. Some drafters of family discretionary trust deeds take the view that a trust
power is better because there might be stamp duty or capital gains tax
consequences if the takers in default in a mere power are altered.
60. As a result of the High Court decision in Commissioner of Stamp Duties NSW v
Buckle [1998] 192 CLR 226, there is little difference, in my opinion, in having
a mere power or a trust power as the final vesting clause.
61. In Buckle’s Case the High Court said that whether the relevant amendment
amended a clause containing a taker in default or a discretionary object, the
value of the “interest” of that beneficiary was so small that no appreciable
stamp duty applied.
62. Similar arguments apply in relation to the capital gains tax consequences of
varying the beneficiaries of discretionary trusts, but there are other
arguments as to why the alteration of beneficiaries of such trusts do not
attract capital gains tax consequences.
63. The end result is that there is not that much difference between having a
taker in default or a discretionary object clause as the ultimate vesting
clause in a family discretionary trust.
A Common Problem with Banks
64. The usual problem which occurs with banks is in relation to the powers of
the trustee.
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65. I have had a practice over the years of listing a long series of powers, and
then having a clause which gives the trustee all the powers of a natural
person, which is akin to the powers given to a company under recent
versions of the companies legislation.
66. My recent experience is that, especially where there is a margin loan
involved, banks have a set criteria of powers that they wish to have included
and in particular the following:
(a)
A power to grant a Power of Attorney
(b)
A power to open a bank account
(c)
A power to discount bills of exchange.
67. Whether or not you have a general power in the nature of the trustee having
all the powers of a natural person, my advice is to insert these specific
clauses, otherwise you will spend more of your client’s money in arguing
with the bank than if you had just agreed to the amendments in the first
place.
68. If there are boxes to tick on the form then you can rest assured that most of
the major banks will not alter the form.
Discretions – The Exercise of Powers
69. There are a multitude of decisions occurring now in relation to the way in
which trustees exercise their discretions under trust deeds.
70. The recent case of Finch v Telstra Super Pty Limited [2010] HCA 36 involved a
member of the Telstra Superannuation Fund.
71. The Court held in that Case that the formation of an opinion as to whether
the member concerned was entitled to a “total and permanent invalidity”
benefit did not involve the exercise of a discretion, but rather the formation
of an opinion.
72. In a very important case involving superannuation, the High Court held that
in relation to superannuation, where the trustee is required to form an
opinion, the trustee has a duty to properly inform itself before forming that
opinion.
Application of NSFT Pty Limited [2010] NSWSC 380
73. In this Case Biscoe AJ was asked to insert an amendment clause in a family
discretionary trust Deed which did not have an amendment clause in it.
74. The reason for the application was that the Trust Deed was more than 35
years old and thus did not have “streaming” provisions so that particular
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types of income, such as capital gains and dividend franking or foreign tax
credits could be allocated to particular beneficiaries, so as to minimise the
tax paid by the beneficiaries.
75. His Honour relied on Section 94 of the Trusts Act 1973 (Qld) (which was the
proper law of the Trust) which provides in part as follows:
"94 Courts jurisdiction to make other orders
(1)
Where in the opinion of the Court any sale, lease, mortgage,
surrender, release or other disposition, or any purchase,
investment, acquisition, retention, expenditure or other
transaction is expedient in the management or
administration of any property vested in a trustee, or would
be in the best interests of the person or the majority of the
persons beneficially interested under the trust, but it is
inexpedient or difficult or impractical to perfect the
disposition or transaction without the assistance of the Court,
or it or they can not be effected by reason of the absence of
any power for that purpose vested in the trustee by the trust
instrument (if any) or by law, the Court may by order confer
upon the trustee, either generally or in any particular
instance the necessary power for the purpose, on such terms,
and subject to such provisions and conditions (if any) as the
Court may think fit…”
The ultimate result was that His Honour made an Order allowing the
insertion of an amendment clause in the Trust Deed specifically to allow an
amendment to insert a streaming of income clause, but did not grant the
application of the trustee to insert an all encompassing amendment clause,
which he said, could amend other provisions, including the persons who
were eligible beneficiaries under the Trust.
76. So if your client’s Trust Deed has no amendment clause, you may be able to
have an amendment clause inserted in the Trust Deed to make appropriate
amendments that can benefit the beneficiaries.
77. New South Wales has a similar provision in Section 81 of the Trustees Act
1925 (NSW) to Section 94 of the Queensland Act.
Kennon v Spry [2008] 238 CLR 366
The Facts
78. Dr Ian Spry (Dr Spry) is a retired Victorian Queen’s Counsel. In 1968 he
created a discretionary trust called the ICF Spry Trust of which he was the
Settlor and the Trustee (the Trust). Dr Spry created the Trust by parol,
presumably by some verbal acknowledgment adopting the terms of the
Trust. The Trust was no doubt created by parol to avoid any stamp duty
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which would have been levied on any written Trust Deed establishing the
Trust.
79. In October 1991 Dr Spry prepared a document (the Trust Deed Terms) which
reduced the terms of the Trust to writing.
80. The beneficiaries of the Trust were Dr Spry, his brothers and sisters, Dr
Spry’s “issue” and the “issue” of his brothers and sisters and the spouses of
all those beneficiaries.
81. Dr Spry married Helen Spry on 29 December 1978 and there were 4
daughters of the marriage.
82. By a Deed executed in 1983 (the 1983 Deed of Amendment), Dr Spry released
all his rights under the Trust and confirm that by virtue of the 1983 Deed of
Amendment he ceased to be a beneficiary of the Trust. He also appointed his
wife to be a Trustee on his death or resignation and his daughter, Elizabeth
to succeed him upon her death or resignation.
83. In December 1998, when Dr Spry was experiencing marriage difficulties, he
executed a further Deed amending the terms of the Trust Deed by
irrevocably excluding himself and his wife as capital beneficiaries of the
Trust (the 1998 Deed of Amendment).
84. On 30 October 2001 Dr Spry and his wife separated and she subsequently
applied to dissolve the marriage.
85. In January 2002 Dr Spry established 4 separate identical discretionary trusts
each naming one of his 4 daughters as the primary beneficiary (the
Children’s Trusts).
86. By a Deed dated 18 January 2002, Dr Spry assigned to each of the Children’s
Trusts one-quarter of all the capital income of the Trust (the 2002 Trust
Assignments).
87. On 20 January 2002 Dr Spry conveyed to his 4 daughters shares held by him
beneficially (the 2002 Share Conveyances).
88. On 20 May 2002 Dr Spry appointed Edwin Kennon, his Accountant as joint
Trustee with him of each of the Children’s Trusts as from 1 July 2002.
89. The marriage was dissolved when the decree nisi became absolute on 17
February 2003.
90. In April 2002 Mrs Spry filed an application in the Family Court seeking
orders for property settlement and maintenance. In particular, she sought
orders under Section 106B of the Family Law Act 1975 (Cth) (Family Law
Act) setting aside the 1998 Deed of Amendment, the Deeds creating the
Children’s Trusts and the 2002 Trust Assignments.
The First Instance Decision
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91. At first instance, Strickland J found in favour of Mrs Spry.
92. Importantly, Strickland J found, in part, as follows:
(a)
(b)
In relation to the 1998 Deed of Amendment:
(i)
Dr Spry did not tell his wife of the Deed of Amendment.
(ii)
Dr Spry executed the 1998 Deed of Amendment knowing
the marriage was in trouble and that an order dealing with
the property of the parties, including the assets of the
Trust, was likely. He wanted to remove the assets of the
Trust from the reach of the Family Court and considered
the Instrument would achieve that result. He was looking
to defeat an anticipated order for property settlement.
(iii)
All the necessary elements of Section 106B was satisfied in
relation to the 1998 Deed of Amendment and it was open
to make an order setting it aside.
In relation to the January 2002 Trust Assignment:
(i)
At a time not long after separation at which it could clearly
be anticipated an order would be made dealing with the
parties’ property, Dr Spry determined, without informing
Mrs Spry, that it was time to move approximately
$3,500,000.00 from the Trust and place it in the Children’s
Trusts. He was concerned that despite the 1998 variation
the assets of the Trust might still have been within the
reach of Mrs Spry and the Family Court.
(ii)
The January 2002 Trust Assignment was made to defeat an
anticipated order in future proceedings.
93. Strickland J made, amongst others, the following order:
“That on or before 28 February 2006 the husband paid to the wife the
sum of $2,182,302.00.”
Court of Appeal Decision
94. On appeal to the Full Court of the Family Court (Bryant CJ and Warnick J,
Finn J dissenting) Dr Spry’s appeal was dismissed and thereafter Dr Spry’s
appeal led to the High Court.
The High Court Decision
95. By majority of 4 (French CJ, Gummow, Hayne and Kiefel JJ) to 1 (Heydon J)
the High Court held that the orders made by Strickland J be upheld and
accordingly that Dr Spry’s appeal be dismissed.
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French CJ
96. The Chief Justice considered that the question to be answered on the appeal
was whether Dr Spry or his wife, or both of them had, prior to 1998, interest
in relation to the assets of the Trust that could answer the description of
“property of the parties to the marriage” in Section 79(1) of the Family Law
Act 1975 (Cth), (the Act).
97. The legal title of Dr Spry to the Trust Fund coupled with the power to
appoint the whole of the Fund to his wife and her equitable right to due
consideration of whether she would receive a distribution from the Trust,
was property of the parties to the marriage for the purposes of Section 79.
98. As the 1998 Deed of Amendment effectively disposed of Mrs Spry’s equitable
right to be considered in the application of the Trust Fund, and having
regard to the Trial Judge’s conclusions about the purpose of the 1998 Deed
of Amendment, the Chief Justice held that the order setting it aside was an
appropriate exercise of the Family Court’s power under Section 106B. Mrs
Spry’s equitable right could then be considered as part of the property of the
parties to the marriage.
99. The Chief Justice also held that the setting aside of the 2002 Trust
Assignments was also appropriate.
100. The Chief Justice also said that the order by the Trial Judge that Dr Spry pay
to his wife the sum of $2,182,302.00 was appropriate.
101. The decisions of the High Court in Glenn v Federal Commissioner of Land Tax
(1915) 20 CLR 490, Privy Council in Commissioner of Stamp Duties (Q) v
Livingston (1964) 112 CLR 12 and of the High Court in CPT Custodian Pty
Limited v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 were
followed. Those Cases held that the law does not require for all purposes
and at every moment in time the separate existence of 2 different kinds of
estate or interest in property, the legal and the equitable title, and this is
especially so in relation to a discretionary trust.
102. His Honour referred with approval to the following statement by Gibbs J in
Ascot Investments Pty Limited v Harper (1981) 148 CLR 337 at 354:
“Except in the case of shams, and companies that are mere puppets of
a party to the marriage, the Family Court must take the property of
the party to the marriage as it finds it. The Family Court cannot
ignore the interest of third parties in the property, nor the existence
of conditions or covenants that limit the rights of the party who owns
it.”
Gummow and Hayne JJ
103. Their Judgment commenced by focusing very closely on the definition of
“property” in Section 4(1) of the Act which provides as follows:
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“Property, in relation to the parties to a marriage or either of them,
means property to which those parties are, or that party is, as the case
may be, entitled, whether in possession or reversion.”
104. Their Honours referred, with approval, to the comments by the Full Court of
the Family Court in In the Marriage of Kelly (No.2) (1981) 7 Fam LR 762 that
the definition of “property” was not broad enough to cover the assets held
by a family company or held by trustees of a discretionary trust. However,
they indicated that such a statement was not a sufficient answer to the
issues arising under the appeals.
105. As the wife was an object of the Trust, she had a right in equity to
administration of the Trust. This right of the wife was accompanied by a
fiduciary duty on the part of the Trustee, that is Dr Spry, to consider whether
and in what way he would exercise the power to make distributions of
income and/or capital from the Trust. However, the 1998 Deed of
Amendment removed any discretion under the Trust Deed to apply the
capital of the fund in favour of the husband or the wife. Subsequently the
2002 Trust Assignments had applied all the capital and income of the Trust
by assigning one-quarter of the capital and income to each of the Children’s
Trusts.
106. The right of the wife with respect to the due administration of the Trust was
included in her property for the purposes of the Act. In considering what
was the property of the parties to the marriage, it was important to
recognise not only that the right of the wife was accompanied at least by the
fiduciary duty of the husband to consider whether and in what way the
powers of distribution should be exercised but also that during the
marriage, the power could have been exercised by appointing the whole of
the Trust assets to the wife. The husband could not have conferred the same
benefit on himself as he could on his wife and so part of the property of the
parties to the marriage was his power to appoint the whole of the property
to his wife and a right to due administration of the Trust.
107. Once the 1998 Deed of Amendment and the 2002 Trust Assignments were
set aside by the Section 106B Orders, the property of the parties to the
marriage or either of them was to be identified as including the right of the
wife to due administration of the Trust, accompanied by the fiduciary duty
of the husband, as Trustee, to consider whether and in what way that power
should be exercised. And because, during the marriage, the husband could
have appointed the whole of the Trust Fund to the wife the potential
enjoyment of the whole of the Fund was “property” of the parties to the
marriage or either of them. In addition, because the relevant power
permitted the appointment of the whole of the Trust Fund to the wife
absolutely, the value of that property was the value of the assets of the Trust.
In stating what orders should be made under Sections 79 and 80 of the Act,
the value of that property was properly taken into account.
Heydon J
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108. His Honour took a very strict trust law view of the interest of the wife under
the Trust. He referred to Gartside v Inland Revenue Commissioners [1968] AC
553 and in particular the following classic description of the “rights” of the
object of a discretionary trust by Lords Reid and Wilberforce at [607]:
“No member of the nominated class of objects had a beneficial or
proprietary interest in any of the corpus or income of the Trust. What
any object had under the Trust was a mere expectancy; an
expectation or hope that the trustee may exercise his discretion in his
or her favour by the making of a gift.”
109. His Honour indicated that if the definition of “property” was given an
extended meaning beyond that referred to in Gartside’s Case this would lead
to a wholly unreasonable result. For example, it would mean that if a
discretionary trust existed under which a wife was among a class of objects
of a bare power of appointment having thousands of members who had
nothing to do with her family or the husband’s family, the Family Court of
Australia would have the power to make a Section 79(1)(a) Order altering
her “interests” in the assets of that discretionary trust favourably to her.
110. In conclusion His Honour held that the definition of “property” in Section
4(1) of the Act contemplates interests in property either owned otherwise
than as Trustee, or owned as beneficial interests in a trust, so that those
interests can be adjusted by orders made under Section 79. The definition
does not contemplate entitlements as trustee. The wife’s submissions would
enable a trustee who is not in law entitled to any personal enjoyment of the
trust property and who could never by his or her own act become entitled to
any personal enjoyment of it, to be treated as though he or she was so
entitled.
111. The wife’s submission would mean that if a husband (or a wife) were a
Trustee of a discretionary trust having a bare power of appointment among
persons who are not related to the trustee, and did not include the trustee,
the trustee would be, within the definition of “property” in Section 4(1),
“entitled” to the assets, and the “interests” of the trustee reflected in that
entitlement would be altered to the advantage of the other party to the
marriage.
Kiefel J
112. Her Honour held that the property of the Trust was “property” dealt with by
anti-nuptial or post-nuptial settlements made in relation to the marriage,
within Section 85A(1) of the Family Law Act. The Trust property included
assets to which the parties had contributed throughout the marriage and
was held for the benefit of the parties to the marriage.
113. Section 85A(1) required there to be a sufficient association between the
property the subject of a settlement and the marriage the subject of the
proceedings at the time when the Court determined the application of the
property settled under Section 85A(1).
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How far can the Family Court go in relation to family discretionary trusts?
114. In my opinion, a crucial factor in the majority decisions of the High Court
was the fact that the 1998 Deed of Amendment excluding Dr Spry and his
wife as capital beneficiaries, the establishment of the Children’s Trusts and
the 2002 Trust Assignments were executed at and after the time when the
marriage between Dr Spry and his wife was in difficulties. That was very
much on the minds of the majority.
115. In my opinion, if the Trust had been initially established so as to exclude Dr
Spry and his wife as capital and income beneficiaries, that exclusion
“entrenched”, Dr Spry and his wife were not the appointors of the Trust and
were not trustees of the Trust, then the same result would not have
followed.
116. If the reasoning of Kiefel J in relation to Section 85A of the Act is accepted
then, in addition, the Trust should not have been identified with an
accumulation of assets from the marriage, which, in my opinion, is drawing a
long bow.
117. The question remains as to whether the various authorities of the Family
Court, such as Kelly, In the Marriage of Ashton (1986) 11 Fam LR 457, In the
Marriage of Goodwin (1990) 101 FLR 386 and the decision of the High Court
in Ascot Investments are still good law.
118. These Cases emphasise that where a husband or wife has real or de facto
control over the assets of a trust, so that the trust is a “mere puppet” of a
party to the marriage, then the trust property is in reality the property of
that party.
119. French J refers to those Cases with approval.
120. Gummow and Hayne JJ also refer to Kelly with apparent approval.
121. On this basis I do not believe that the “control” cases will be abandoned by
the Family Court.
Issue and Married?
122. The meaning of the word “issue” is an incidental matter which arose in
Spry’s Case and which often arises in the sense of what is meant by the word
“issue” of a named person. In Spry’s Case, the uncertainty over what is meant
by the word “issue” and is a person who is “married” to such issue still
“married” after divorce, was avoided by Dr Spry by executing the 1983 Deed
of Amendment. The 1983 Deed of Amendment made it clear that the word
“issue” meant not only children but remoter issue and that the word
“married” meant that if any of the issue divorced, they fell outside the
category of beneficiaries. This is a point to note not only in Family Court
matters but in the drafting of Wills and Discretionary Trust Deeds.
The Amendment Power
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123. The implication of comments by French J is that so long as the amendment
power is wide enough, then such a Clause can be used to amend the
beneficiaries of a discretionary trust, both discretionary and default
beneficiaries. However, it follows that to make sure of this one should
include in the amendment clause for a family discretionary trust that the
power of amendment includes a power to add and delete beneficiaries.
How is it best to add or delete beneficiaries of a family discretionary trust?
124. In Spry’s Case, Dr Spry obviously took the view that from a stamp duty point
of view and perhaps from an income tax point of view, it was best for him to
disclaim his interest in the discretionary trust.
125. In my opinion, the decision of the High Court in Commissioner of Stamp
Duties NSW v Buckle [1998] 192 CLR 226 makes it clear that both the
discretionary and default beneficiaries of a family discretionary trust are of
such little value that from a stamp duty and income tax point of view no
question of a resettlement or a conveyance of property or the like of any
significance occurs when such a beneficiary is either added or excluded.
Protection from Creditors
126. The judgment of the Chief Justice, the joint judgment of Gummow and Hayne
JJ and especially the judgment of Heydon J, should give heart to those who
have put assets into family discretionary trusts in the hope that those assets
are protected from creditors.
Michael Heraghty
22 February 2011
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