Tax Files: Trust issues? There may be

Trust issues? There may be a solution…

BRIONY HUTCHENS, DW FOX TUCKER LAWYERS

Trusts 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, 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.

• The 1991 Deeds were a valid exercise of the power of amendment contained in the 1977 Deeds and did not create new trusts. In this regard, it is important to acknowledge that: a. The power of amendment in the 1977 Deeds was a very broad power and, on its words, did not contain any limitation to it being exercised after the trusts had vested in the beneficiaries absolutely. b. Peter and Anna, being the beneficiaries in whom the original trusts vested, consented to the variations. This was important in assisting the Court in overcoming any perceived inconsistency with the power of amendment being capable of being exercised after the trusts had vested. c. The new trusts declared by the 1991 Deeds were consistent in their purpose with the trusts declared by the 1977 Deeds in that they were, broadly, for the benefit of Peter and Anna and their relatives. As such, the Court found that the substratum, or basic purpose, of the trust had not changed. There was sufficient continuity of trust property, beneficiaries and the constitution of the trusts for it to be held that the 1991 Deeds effected a continuation of the existing trusts, not the creation of new trusts.

The decision of the Court that the original trusts did not come to an end and that the amendment power was capable of being exercised after the purported vesting of the trusts is particularly interesting given it contradicts the ATO’s statements in Taxation Ruling TR 2018/6 that once the vesting date has passed, the trust vests and the interest of the beneficiaries in the trust become fixed, and the power of amendment cannot be exercised to extend the vesting date of the trust. Whether the Commissioner will review this position in light of the McGown case remains to be seen. If he does, however, it is likely that any scope to amend the deed after the vesting date will depend on the terms of the amendment power and any other relevant facts, such as beneficiary consent, that may be required.

It is not uncommon for many of the issues encountered in the McGowan case to be uncovered by practitioners when undertaking dealings for clients in relation to their trusts, particularly in respect of older trusts settled in the 1970s or 1980s. There is often a lack of documentation surrounding the acquisition of assets of these trusts and it is surprisingly common to find assets registered in the name of persons or entities who are not the current trustee of the trust.

The McGowan case is therefore comforting in that it reassures practitioners that these issues are not always fatal. However, it should be noted that each case revolves around the particular facts of that case and while the McGowan case is encouraging, it does not present clients with a get out of jail free card in all circumstances.

It is clear from the judgment of the Court that the validity of the 1991 Deeds to vary and continue the terms of the original trusts relied heavily on the fact that the amendment power did not, on its terms, prohibit amendments being made after the trust had vested in the original beneficiaries, and the fact that the original beneficiaries consented to the exercise of the power after the vesting. These factors, and particularly the broad terms of the amendment clause, may not always be present. It does, however, give us hope that there sometimes can be a way forward when these problematic issues are encountered.

Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of South Australia. B

MEMBERS ON THE MOVE

MEMBERS ON THE MOVE

Stephen McEwen QC wishes to advise the profession that he now practices solely as a mediator, from 30 A Market Street, Adelaide. Enquiries as to fees and availability can be directed to: Email: stevekmcewen@gmail.com Mobile: 0407 554 305