TAX FILES
Trust issues? There may be a solution… BRIONY HUTCHENS, DW FOX TUCKER LAWYERS
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rusts have become one of the most popular private investment vehicles for families in Australia, with over 900,000 reported to be in existence. While they enable great flexibility, they can also be fraught with problems when they are not administered properly or their terms overlooked. The recent Victorian Supreme Court case of McGowan and Valentini Trusts [2021] VSC 154 (McGowan) is an excellent example of things that can go wrong, but also of the fact that these problems need not be fatal to the effective operation of the trust. Briefly, the facts of the McGowan case were as follows: • By separate deeds dated 14 February, 1977 Giuseppe and Norma Valentini created two trusts, one for each of their children Anna and Peter (1977 Deeds). The trustee of each trust was named in the deeds to be I.N. & G. Nominees Pty Ltd (ING) and the deeds were signed by Giuseppe and Norma on behalf of ING as its directors. • ING was not incorporated until 25 September, 1978, and therefore was not in fact in existence as at the date of the 1977 Deeds. • In November, 1977, Giuseppe and Norma purchased land at Victoria Street, North Geelong. The land was registered in the name of Giuseppe and Norma jointly and subsequently passed to Norma on the death of Giuseppe under a survivorship application. • At all times, the land was recorded as an asset of the trusts despite never being transferred into the name of ING and despite there not being any express declaration that the land was purchased by Giuseppe and Norma on behalf of the trusts. • The trusts, on their terms, vested absolutely in Anna and Peter when they each turned 30 years old, being 1 January, 1988 in the case of Anna and 14 February, 1991 in the case of Peter. • On 23 June, 1991, being after the date that the trusts, on their terms, vested,
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Deeds were executed by the settlor, ING (as trustee) and Peter and Anna (as beneficiaries) purporting to vary the terms of the trusts to, amongst other things, extend the vesting date and widen the class of beneficiaries (1991 Deeds). • ING has at all times continued to administer the trusts and, from the date of the 1991 Deeds, has administered the trusts in accordance with the terms as amended by those Deeds, including making distributions to beneficiaries who only qualified as beneficiaries following the 1991 Deeds. The facts raise a number of questions that the Court was required to consider, including: • Whether the trusts were validly established by the 1977 Deeds even though the trustee was not in existence at that time. • Whether the Victoria Street land was an asset of the trusts even though the land was purchased and held in the name of Giuseppe and Norma, not in the name of ING, and there was no express declaration that they did so on behalf of the trusts. • Whether the trusts came to an end when they vested in accordance with the terms of the 1977 Deeds, or whether they continued beyond that date. • Whether the 1991 Deeds were an effective exercise of the amendment power contained in the 1977 Deeds (given that the trusts had, on the terms of the 1977 Deeds, already vested absolutely in the beneficiaries). • Whether the 1991 Deeds operated to create new trusts over the trust property. Each of these issues, both individually and as a whole, created a number of possible consequences for tax purposes, including whether the income and expenses in relation to the properties were properly returned as part of the trust income and taxed to the beneficiaries of the trust, and
whether any capital gains tax consequences occurred on the purported vesting of the trust and/or the possible creation of new trusts pursuant to the 1991 Deeds. The potential financial impact of these consequences could be significant. In considering the issues, the Court took a pragmatic approach and in doing so held that: • The trusts were validly settled and created by the 1977 Deeds notwithstanding that the trustee (ING) was not in existence at the time. • Until ING came into existence, Giuseppe and Norma were the trustees of the trusts, given that in signing the deeds, albeit in the erroneous belief that they were doing so as directors of ING and not in their personal capacity, it can be inferred that they agreed to undertake the role of administering the trusts. • Upon ING being incorporated, it took over as trustee of the trust in place of Giuseppe and Norma. • The Victoria Street property, as well as other properties subsequently purchased in the name of ING, were properly assets of the trusts. Even though there was no express declaration of trust in respect of these properties, and in the case of the Victoria Street property it was not even held in the name of the trustee of the trusts, there was a sufficient body of evidence to support the conclusion that the property was held as an asset of the trusts. This evidence included statements made by Giuseppe and Norma to family members as to the existence of the trust and the properties being held in those trusts, and all available financial statements and tax returns showing the properties as an asset of the trusts. • The trusts did not come to an end on the original vesting date, but instead continued on the terms contained in the 1977 Deeds until such time as they were wound up.
