[2014] NSWCA 367
Re Downshire Settled Estates [1953] Ch 218
1 All ER 103
re Walker [1901] 1 Ch 879
Re Z Trust [2009] CILR 593
Segelov v Ernst & Young Pty Ltd (2015) 89 NSWLR 431
[2015] NSWCA 156
Southgate v Sutton [2011] EWCA Civ 637
Source
Original judgment source is linked above.
Catchwords
[2014] NSWCA 367
Re Downshire Settled Estates [1953] Ch 2181 All ER 103
re Walker [1901] 1 Ch 879
Re Z Trust [2009] CILR 593
Segelov v Ernst & Young Pty Ltd (2015) 89 NSWLR 431[2015] NSWCA 156
Southgate v Sutton [2011] EWCA Civ 637
Judgment (11 paragraphs)
[1]
Judgment
This is an application under the Trustee Act 1925 (NSW), s 81. The application seeks an order conferring on the trustee of a family trust the power to distribute the trust's income (including capital gains) for a particular financial year, and to distribute the trust's residual capital, otherwise than in accordance with the trust deed.
The application before the Court concerns a trust known as the Browne Family Trust. The trust was established by Deed of Settlement ("the Trust Deed") in February 1995. The plaintiff is the Trustee under the Trust Deed. The Trust Deed has subsequently been amended but the amendments are not relevant to the present application.
The Trust was established at the instance of the late James (known as "Jim") Browne for the benefit of himself and his family. Mr Browne died unexpectedly in September 2015, leaving his widow, Diane Amante Browne, and four children: Anthony James (known as "Tony") Browne, Michelle Diane Browne, Deirdre Ann Browne and Laura Elizabeth Browne. For convenience and without disrespect I will refer to the members of the deceased's family by their first names.
Mr Browne was also instrumental in establishing a second trust for the benefit of members of his family. That trust was established by trust deed in May 2006 and is known as the "Browne North West Trust". The trustee of the Browne North West Trust is Daly River Pastoral Pty Limited. That company was controlled, during his lifetime, by Mr Browne, and is now controlled by Diane and Tony as directors.
When the application came before the Court in November 2017, the assets of the Browne Family Trust consisted of a service station at Tamworth in northern New South Wales. The property was leased to the operators of the service station and the Trust derived a rental income stream from the lease.
The assets of the Browne North West Trust consist of two rural properties in the Northern Territory, known as "Tarwoo" and "Granite Creek Station". Before Mr Browne's death, he caused part of Tarwoo to be subdivided for the purposes of development and sale. The subdivision resulted in eighteen subdivided blocks ranging in size from approximately 20 hectares to 120 hectares. The subdivision project was financed by the Commonwealth Bank of Australia ("CBA").
The subdivision project did not advance as rapidly as had been hoped. When the application came before the Court in November 2017, the sale of only three blocks in the subdivision had been completed. A further block was under contract but settlement of the sale was conditional upon the purchaser selling another property which had not yet occurred. The debt to the CBA had increased from approximately $1.4 million to $3.6 million.
The debt had been secured not only on the assets of the Browne North West Trust but also on the assets of the Browne Family Trust. It was also the subject of personal guarantees and indemnities by Diane and Tony.
In these circumstances, Diane and Tony wished to reduce the Browne North West Trust's debt to the CBA. For this purpose they wished to have the Browne Family Trust sell the service station property and apply the proceeds to paying down the CBA debt. Neither the balance of Tarwoo, nor Granite Creek Station was saleable.
Affidavits were filed from Laura and Michelle supporting the application. Dierdre has Down Syndrome, and there was no evidence as to her view (it being assumed, I suppose, that she is unable effectively to express consent or opposition).
[2]
Procedural history
There were points of similarity between this application and an earlier application concerning a family trust which was the subject of my judgment in Cisera v Cisera Holdings Pty Ltd [2017] NSWSC 960. That judgment was delivered in July 2017 and was the subject of an appeal. Some of the arguments presented to me at the hearing in November 2017 challenged, or sought to confine, aspects of my judgment and of the decision of the Court of Appeal on which I principally relied, Re Dion Investments Pty Ltd (2014) 87 NSWLR 753. Arguments along similar lines had been foreshadowed in the Cisera appeal.
The appeal was heard in February 2018. The Court of Appeal reserved its decision. Following this, in response to a message sent by the Court, counsel for the plaintiff indicated that the delivery of judgment on this application should be deferred so as to see what the Court of Appeal might say in the Cisera appeal.
Initially counsel proposed that the proceedings effectively be put on hold for six to eight weeks. In June, counsel inquired whether the Court, should it grant the application, would be prepared to date any order it might make as from the commencement of the proceedings. The purpose of this was to allow resolutions to be passed in the financial year ended 30 June 2018. The Court agreed, should the application succeed, to make any order with effect from the filing of the Summons on 31 August 2017. It was accepted that the Court would be making no finding, nor offering any opinion as to the efficacy, for accounting or tax purposes, of backdating the order in that way.
The Court of Appeal delivered its judgment in late November 2018: Cisera v Cisera Holdings Pty Ltd [2018] NSWCA 286. The Court rejected the challenge to Dion and dismissed the appeal. Following the delivery of the decision, counsel for the plaintiff lodged further written submissions. The matter came before me on 6 December and I sought further submissions and clarifications on a number of points.
Counsel for the plaintiff indicated that the further supplementary submissions would be provided around February. In mid-May, following an enquiry from the Court, counsel lodged final written submissions. Counsel indicated that the application had now become urgent for the plaintiff and requested that the Court's decision (or if no decision, then at least the orders) be delivered prior to 30 June. The Court has been able to accommodate this request.
[3]
Terms of Trust
Under the Trust Deed, the deceased had a special role. He was defined as the "Protector" of the Trust. The "Beneficiaries" were defined in clause 1.3. They included the deceased as Protector; Diane as the spouse of the deceased; and their children.
The "Vesting Date" was defined as the earlier of the day before the expiry of the "Perpetuity Period" (defined as a period of eighty years commencing on the date of the Trust Deed) and the day that the Trustee should in its absolute discretion determine. In effect, this permitted the Trustee to bring the vesting date of the Trust forward.
Article 4 dealt with appointment accumulation and distribution of income. It relevantly provided:
4.1 During the lifetime of the PROTECTOR the TRUSTEE may revocably or irrevocably appoint and thereafter pay or apply all or any part of the income of the then current INCOME YEAR or of any one or more subsequent INCOME YEARS to or for the benefit of any one or more of the BENEFICIARIES to the exclusion of the other or any others of them and in such shares and proportions as the TRUSTEE may in its absolute and uncontrolled discretion determine.
4.2 ACCUMULATION OF INCOME. During the lifetime of the PROTECTOR the TRUSTEE may revocably or irrevocably determine that all or any part of the income of the then current INCOME YEAR not appointed under Clause 4.01, be set aside and added to the CAPITAL of the TRUST FUND PROVIDED THAT in any subsequent INCOME YEAR the TRUSTEE may have resort to any such accumulations as though the same were part of the income of that subsequent INCOME YEAR.
4.3 INCOME DISTRIBUTION IN DEFAULT OF APPOINTMENT OR ACCUMULATION. Until the VESTING DATE any of the income of any INCOME YEAR not appointed under Clause 4.01 or set aside and added to the CAPITAL of the TRUST FUND under Clause 4.02 shall be held UPON TRUST for such one or more PERSONS as would have been beneficially entitled to the capital of the TRUST FUND had the VESTING DATE occurred on the second last day of that INCOME YEAR and if more than one in the same shares as those in which they would have been so entitled.
The term "Income Year" was defined as the financial year running from 1 July to 30 June. The Trust Deed contained a definition of "Net Income" which expressly included capital gains under the Income Tax Assessment Act 1936 (Cth), Part 3A. Rather surprisingly, that defined term was not used in article 4 or, it seems, anywhere else in the Trust Deed. Article 4 referred only to the "income" of "Income Years" of the Trust.
The application before the Court nevertheless proceeded on the assumption that capital gains on trust assets are, or at least can be treated by the Trustee, as income. It is not necessary for me to express any view on whether this is correct, but it does appear to be supported by clause 9.4, which gave the Trustee power to record capital gains as income in the accounts of the Trust and to distribute it accordingly.
Article 5 dealt with appointments and distribution of capital. It relevantly provided:
5.1 APPOINTMENT OF CAPITAL. Subject to the cesser of any interest in the income of the SETTLEMENT appointed by the TRUSTEE pursuant to Clause 4.01 of the TRUSTEE shall hold the TRUST FUND (or such part thereof as the TRUSTEE shall determine) upon trust for such one or more exclusively of the other or others of the BENEFICIARIES who shall be living or existing at the VESTING DATE and in such shares or proportions as the TRUSTEE shall revocably or irrevocably determine before whichever is the earlier of the VESTING DATE and the death of the PROTECTOR and at such age or time or respective ages or times and with such trusts for their respective advancement maintenance education and benefit as the TRUSTEE shall determine …
5.2 DISTRIBUTION OF CAPITAL IN DEFAULT OF APPOINTMENT. In default of any determination pursuant to Clause 5.01 and subject further to the cesser of any interest in the income of the SETTLEMENT appointed by the TRUSTEE pursuant to Clause 4.01 the TRUSTEE shall hold the TRUST FUND UPON TRUST for such one or more of the PERSONS identified in Clause 1.04 as shall be living on the VESTING DATE or then existing and in the order of priority inter se as therein indicated absolutely.
5.3 APPLICATION OF CAPITAL FOR BENEFICIARIES. During the lifetime of the PROTECTOR the TRUSTEE may at any time appropriate all or any part of the capital of the TRUST FUND and pay or apply the same to or for the benefit of any one or more of the BENEFICIARIES then living or existing or to the trustee of any other trust fund in which the BENEFICIARIES or any one or more of them has an interest whether vested or contingent but so that the power contained in this Clause 5.03 shall not be used -
(a) … or
(b) to pay or apply such appropriation to the trustee of any trust fund any part of which is limited to vest indefeasibility in interest later than the day before the expiry of the PERPETUITY PERIOD.
The first three places in the default distribution order specified in clause 1.4 for income and capital were:
Firstly, the PROTECTOR, but if the PROTECTOR shall not be living on the VESTING DATE then;
Secondly, the spouse of the PROTECTOR as at the VESTING DATE or if he or she shall not be living on the VESTING DATE then;
Thirdly, such of the CHILDREN of the PROTECTOR now living or born hereafter as shall be living on the VESTING DATE who attain the age of 21 years and if more than one as tenants in common in equal shares PROVIDED THAT in the case of any CHILD of the PROTECTOR who fails to survive to attain a vested interest but leaves ISSUE who are alive on the VESTING DATE and who attain the age of 21 years such ISSUE shall stand in the place of such deceased CHILD and take, if more than one as tenants in common in equal shares, the share which such deceased CHILD would have taken had he or she been living on the VESTING DATE and attained a vested interest in the capital of the TRUST FUND…
Article 6 dealt with the Trustee's powers and restrictions generally. Clause 6.2 provided:
VARIATION AND RESETTLEMENT. The TRUSTEE by resolution orally or in writing or by supplemental deed may revoke add to or vary all or any of the trusts or provisions hereof and by resolution orally or in writing or by the same and any other deed or deeds re-settle the TRUST FUND on any other trust or trusts for the BENEFICIARIES or any one of more of them PROVIDED THAT in the exercise of this power: -
(a) the provisions of Clauses 1.03, 1.04, 4.01, 5.01, 5.02 and this Article 6 shall not be revoked added to or varied after the death of the PROTECTOR;
…
(c) no part of the TRUST FUND shall be settled so as to vest indefeasibly in interest after the day before the expiry of the PERPETUITY PERIOD.
In summary, the Trustee's discretionary power to appoint capital, and to appoint income otherwise than in accordance with the default distribution order, was limited to the lifetime of the deceased as Protector. This means that Diane, as the deceased's widow, now receives all of the income of the Trust, and, should vesting occur during her lifetime, she will receive the whole of the capital of the Trust.
[4]
Proposed action by Trustee
The Trustee has now sold the service station. Contracts were exchanged in late February 2018 and the sale was completed early in June. The sale price was $2.6 million. The net proceeds of $2.465 million were paid to the CBA.
The sale of the service station resulted in a capital gain for income tax purposes in the 2017-2018 financial year which, according to estimates provided in the evidence before me at the November 2017 hearing, would have been approximately $1.94 million. If, as the terms of the Trust Deed provided, the net capital gain was to be distributed to Diane then it would carry with it a tax liability of approximately $480,000 in her hands.
The purpose of the application is to apply the proceeds of the sale, and any remaining assets of the Browne Family Trust, to reducing the debt to the CBA in a way which will minimise the amount of tax payable, thereby maximising the amount applied to debt reduction. The Browne North West Trust had, as at the beginning of the 2017-2018 financial year, carried forward capital losses of $1.22 million. The application seeks to empower the Trustee to distribute the capital gain from the sale in the Trust to the Browne North West Trust so as to mop up those capital losses.
The Browne North West Trust is a discretionary trust in conventional form. The trustee has a discretion to distribute the income of the trust among the "Discretionary Beneficiaries". In default of any such exercise of discretion, the income for each year is to be distributed to the "Primary Beneficiaries".
Originally the Primary Beneficiaries were the deceased and Diane. With the deceased's death, Diane is the sole Primary Beneficiary. The Discretionary Beneficiaries include the children and remoter issue of the Primary Beneficiaries and members of their families. The Trustee may also nominate any person or class of persons as Primary Beneficiary, including related corporations and trustees of related trusts.
On vesting, the capital of the trust vests in such Discretionary Beneficiaries as the trustee may appoint; or, if the trustee does not exercise the discretion, then in the Primary Beneficiaries (or in their stead, their descendants). The trustee also has power to make advances of capital.
The vesting date of the trust is defined as the earliest of: the last day of the perpetuity period (23 May 2086); 15 February 2075; or such earlier date as the trustee may appoint. It is curious that the definition includes the last day of the perpetuity period in 2086 when the trust must vest in any event by 2075, but there is no need to go into this for present purposes.
If the 2017-2018 capital gain in the Browne Family Trust was distributed to the Browne North West Trust, then, after deduction of losses, and assuming that the trustee did not exercise its discretion to the contrary, the residual gain would pass to Diane. Because of the absorption of the capital losses in the Browne North West Trust the ultimate distribution to Diane would fall to $0.72 million, carrying with it a tax liability of approximately $110,000. This would result in a tax saving of $370,000.
The Commissioner of Taxation takes the view that the exercise of the Court's power under s 81(1) usually does not trigger a disposal of the trust corpus for the purposes of capital gains tax: TD 2012/21. Apparently the Browne family's legal and accounting advisors consider that, for this reason, the scheme contemplated by the application would be effective to avoid the capital gains tax which would otherwise be payable on the disposal of the service station. Whether this view is correct or not is not a matter for the Court. But it is worth noting that TD 2012/21 is concerned with whether the exercise of the Court's power under s 81 involves a resettlement of the trust in question. In effect the scheme in this case involves the distribution, with the consent of Diane, of a capital gain to which she is entitled under the Trust Deed to another entity. TD 2012/21 says nothing about whether that would be effective to divest that capital gain of its character as income in her hands.
The application also seeks to empower the Trustee to distribute any other 2017-2018 income of the Trust to the Browne North West Trust. This is because the Browne North West Trust has carried forward tax losses, on revenue account, which are available to absorb that income. Finally, the application seeks to empower the Trustee to appoint the residual capital of the Trust to the Browne North West Family Trust. In effect, this would bring the Browne Family Trust to an end.
The Trustee of the Browne Family Trust and the trustee of the Browne North West Trust (referred to as the "Recipient Trust" or "RT") offered the following undertakings if the Court was to make the orders sought in the application:
(a) pursuant to clause 19 of the RT Trust Deed, the trustee of the Recipient Trust undertakes to make an irrevocable amendment to clause 1.1(22) of the RT Trust Deed will be made, ensuring that the Recipient Trust vests before the Recipient Trust vests;
(b) the Trustee of the Trust Estate undertakes not to vest the Trust Estate prior to the vesting of the RT Trust; and
(c) undertakings already proffered to use the income and capital appointed from the Trust Estate, by the trustee of the Recipient Trust, to pay-down the CBA loan.
Undertakings (a) and (b) are designed to ensure that the limitation in cl 6.2(c) of the Trust Deed (quoted at [23] above) are observed. In view of my conclusion about the application, I do not need to consider whether they would be effective for that purpose.
On 30 June 2018, the Trustee of the Browne Family Trust passed a resolution in anticipation of the Court granting the power which was sought. That resolution provided that, subject to the Court, by 30 June 2019, making the orders sought, all of the income of the Trust for the 2017-2018 financial year, including for this purpose the capital gain arising on the sale of the service station, be distributed to the Browne North West Trust.
The distribution of the 2017-2018 income, including the capital gain on the sale of the service station, leaves the Trust with a capital amount representing the service station's historical cost. As a matter of trust accounting, the historical cost may not be the same as the cost base for CGT purposes. According to the figures in evidence, the original purchase price of the service station, consisting of land and buildings, was approximately $771,000. Depreciation of $195,000 has since been accumulated. I am not sure whether, for trust accounting purposes, the depreciation would be applied against the historical cost; but on any view the Trust's residual capital would exceed $500,000.
The resolutions passed on 30 June 2018 do not deal with the residual capital of the Trust. If the application to empower the Trustee to appoint the capital of the Trust to the Browne North West Trust succeeds, that could then be done. The result would be that all of the assets of the Trust would be disposed of. In answer to a query from the Court, counsel for the plaintiff indicated that it is intended to "vest" the Trust. Whether counsel was referring to the appointment of the Trust's capital, or some formal termination of the trust after such an appointment has been made, is not important for present purposes.
[5]
Applicable law
Section 81 relevantly provides:
81 Advantageous dealings
(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court:
(a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and
(b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.
(2) The provisions of subsection (1) shall be deemed to empower the Court, where it is satisfied that an alteration whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument, if any, creating the trust, or by law is expedient, to authorise the trustees to do or abstain from doing any act or thing which if done or omitted by them without the authorisation of the Court or the consent of the beneficiaries would be a breach of trust, and in particular the Court may authorise the trustees:
(a) to sell trust property, notwithstanding that the terms or consideration for the sale may not be within any statutory powers of the trustees, or within the terms of the instrument, if any, creating the trust, or may be forbidden by that instrument,
(b) to postpone the sale of trust property,
(c) to carry on any business forming part of the trust property during any period for which a sale may be postponed,
(d) to employ capital money subject to the trust in any business which the trustees are authorised by the instrument, if any, creating the trust or by law to carry on.
(3) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.
In Dion, one of the orders sought under s 81 would have empowered the trustee to "modernise" the constitution of the trust by substituting a new trust deed. The application was rejected at first instance and its rejection was confirmed by the Court of Appeal. Speaking for the Court of Appeal, Barrett JA decided that s 81 could not be used to vary the terms of the trust in the trust deed in such a way.
The leading judgment in the Court of Appeal decision in Cisera was given by White JA. His Honour recorded the submission that Dion was incorrectly decided. He concluded that the submission did not address the central reasoning in that case. At [59] his Honour identified the central reasoning as being that:
the only dealings which can be authorised by the court under s 81(1) are dealings specifically related to the management or administration by trustees of trust property, quoad property (at [95]).
It followed that (at [59]):
If a power to be given to the trustee is not a specific power with respect to a particular dealing, or dealings of a particular kind, then it does not fall within the scope of the section (at [98] and [100]).
White JA added (at [62]):
Barrett JA was concerned to distinguish between orders authorising particular dealings or class of dealings in the administration or management of the assets of the trust and other amendments to the trust deed not related to dealings with the trust property, such as the proposed power of amendment to the trust deed that was in issue in Re Dion Investments, or the general amendments to the trust deed in James N Kirby Foundation Ltd v Attorney General (NSW) needed to accommodate the requirements of the Commissioner of Taxation for donations to the trust to be deductible, or the extension of the vesting day in Stein v Sybmore Holdings Pty Ltd. Barrett JA concluded in respect of the latter cases that they rested on an unsound foundation. They may be taken to have been overruled.
His Honour described the ratio of Dion as being (at [66]):
The power under s 81(1) must be exercised by only granting specific powers relating to the management and administration of the trust property that can be seen to be expedient.
He added at [68]:
It follows from what I have said that the reasoning and effect of the decision in Re Dion Investments is not confined to the particular matter primarily in issue in that case as to whether s 81(1) authorised the making of an order giving the trustee a general power of amendment of the trust deed. Rather, this Court disapproved of decisions which had found in s 81 an authority to alter the trusts on which trust property was held which would have been beneficial to the interests of the beneficiaries, or to the fulfilment of the trust purpose, but which were not concerned with the management or administration of the trust assets.
White JA considered that in substance (and despite the different ways in which it was expressed in the application) the applicant was seeking to vary the terms of the trust, which was not authorised by s 81. The appeal was dismissed for that reason. It was not necessary to consider my further conclusion that the extension of the vesting date was not, in any event, "expedient" in the particular circumstances of the case.
It follows that there are two issues for consideration in the present application. The first is whether the power sought is a power "in the management or administration" of property of the Trust in the relevant sense. The second is whether in the circumstances of the case, the grant of the power is "expedient" in that management or administration.
In his supplementary submissions of 30 November 2018, counsel for the plaintiff made some criticisms of the appeal decision in Cisera. Counsel submitted that, contrary to what White JA said at [62] and [68] (quoted above at [44] and [46]) Dion had not disapproved the Stein v Sybmore line of authorities. Counsel submitted that variations to beneficial interests under s 87 had also been accepted in Dion and asked (apparently rhetorically) whether Dion had been overruled by Cisera. Counsel suggested that the English authorities referred to by White JA need to be treated cautiously because the NSW Act contains s 81(2) which is not present in the UK Act.
Counsel also provided me with a copy of a passage from Professor Denis Ong's book Trust Law in Australia (5th ed, Federation Press 2018) at pages 337-342. The passage contains a discussion of s 81 and refers in particular to Dion. Professor Ong suggests that the decision is difficult to reconcile with the terms of s 81(2). The book was published after the Cisera decision was handed down, but only by a matter of days, and does not refer to that decision.
In this application, I am not concerned to evaluate these submissions. The Cisera appeal decision is binding on me. I consider the decision to be a reaffirmation of the approach taken by the Court of Appeal in Dion which itself is a relatively recent case. Even if I disagreed with the decision (which I respectfully do not) it would be my duty to follow it and seek to apply it.
[6]
Cases involving payment of income and capital
In Chapman v Chapman [1954] AC 429 an application under the UK equivalent of s 81 (Trustee Act 1925, s 57) reached the House of Lords. The application concerned three trusts established for the benefit of the settlor's children and grandchildren. The trust deed provided for the trustees to apply such income as they, in their discretion, should think fit for the maintenance for the grandchildren. Because of this provision for what was called "common maintenance", upon the death of the settlors, heavy estate duty would be payable on the assets of the trusts. The duty was expected to be about £30,000; the total amount settled was £77,300. Had the trust deed provided for maintenance to be paid to the children equally, this would not have happened.
The application sought to have the Chancery Division approve a scheme of arrangement under which the trust funds would be re-settled on terms which did not include the offending provisions for common maintenance. This would avoid the imposition of estate duty when the settlors died.
The application was dismissed by Roxburgh J. On appeal (Re Downshire Settled Estates [1953] Ch 218), the English Court of Appeal agreed with Roxburgh J that the application could not succeed under s 57. Counsel conceded in the House of Lords that this was so (see at 459, 465); in the House of Lords, the argument (which was unsuccessful) was that the application could succeed under the court's power to sanction a compromise between beneficiaries.
The majority in the English Court of Appeal considered that s 57 should be interpreted in the light of the previous Chancery practice. The same view was taken in the House of Lords. One of the classes of cases in which applications for the Court's jurisdiction had previously been exercised was where the Court allowed maintenance out of income which the settlor or testator directed to be accumulated. Lord Morton of Henryton said of these cases (at 455):
It is said, and said truly, that in some cases under this head the court's order resulted in an alteration of beneficial interests, since income was applied in maintaining beneficiaries, notwithstanding that the testator or settlor had directed that it should be accumulated or applied in reduction of incumbrances…This jurisdiction is too well established to be doubted today.
His Lordship cited with approval the explanation given for this line of authority by Pearson J in In re Collins (1886) 32 Ch D 229 at 232:
"…where a testator has made a provision for a family, using that word in the ordinary sense in which we take the word, that is, the children of a particular stirps in succession or otherwise, but has postponed the enjoyment, either for a particular purpose or generally for the increase of the estate, it is assumed that he did not intend that these children should be left unprovided for or in a state of such moderate means that they should not be educated properly for the position and fortune which he designs them to have, and the court has accordingly found from the earliest time that where an heir-at-law is unprovided for, maintenance ought to be provided for him."
Lord Morton described the following statement by Farwell J in In re Walker [1901] 1 Ch 879 at 885 as the "general rule":
I decline to accept any suggestion that the Court has an inherent jurisdiction to alter a man's will because it thinks it beneficial. It seems to me that is quite impossible.
Lord Morton said that the maintenance cases "must be regarded as an exception, and I think the only real exception, to that general rule" (at 456; see also Lord Asquith of Bishopstone at 469).
In Cameron v Jeffress [2014] NSWSC 702, Hammerschlag J had to consider an application to vary the terms of trusts established in the testator's will for the benefit of his family. The trust estate was valued at more than $88 million. The will trusts provided for the vesting of the capital sum for a period of five years. In the meantime, the trust assets were to be held on terms requiring the trustees:
(1) to pay an indexed amount of $300,000 per annum to the testator's widow for her lifetime;
(2) to pay an indexed amount of $135,920 to the deceased's daughter;
(3) to make discretionary power for the maintenance, education and advancement of the deceased's grandchildren.
Once the trust vested, five years after the testator's death, the trustees were required, after excluding the amount set aside for the payment of the indexed amount to the deceased's widow, to divide the remainder of the estate and distribute it in specified shares to the deceased's children and grandchildren.
Among the deceased's assets was a shareholding in a private company which had been put into liquidation. It was expected that the liquidator would make a distribution exceeding $42 million.
The difficulty being faced by the trustees arose out of the tax treatment of income and capital gains. As his Honour pointed out at [35], under the Income Tax Assessment Act 1936 (Cth):
A beneficiary is presently entitled to, and has an interest in possession in, trust income, if the beneficiary can demand payment of it from the trustee, which is the case where the income is legally ready for distribution and the beneficiary would have a right to payment if the beneficiary were not under a disability. Whether a beneficiary is so entitled is a matter of trust law. The terms of the trust instrument will usually govern the position.
The trust income for the financial year ended 30 June 2014 was expected to be $800,000. The distribution from the liquidation of the company was expected to produce income for tax purposes of an additional $48.5 million. The beneficiaries (including the widow) would be assessed on that distribution but would have no entitlement to receive it. The will contained no power of accumulation.
The application to his Honour under s 81 was for orders conferring power on the trustees to accumulate the income received (including the distribution) and then to pay the $300,000 annual payment to the widow (and the other payments specified in the will) out of capital. This was to ensure that the liability to pay the tax fell on the trustees, who would receive the income and were in a position to discharge the tax burden.
His Honour saw the result created by the tax legislation as an anomaly which would be removed by taking this approach. He said at [44]:
If the terms of the trust were varied so as to permit the trustees to accumulate all the income of the trust and then to pay it, otherwise in accordance with the trusts to the beneficiaries, it seems, and all of the parties having taken advice appear to be satisfied, that the anomaly will be removed. This is because in that event there will be no income of the trust to which any of the beneficiaries will be presently entitled and the trustees will be assessable on the entire income of the trust. If it be relevant, the total amount of tax payable will be the same, but the identity of those who will be assessed on the income on which it is to be paid will differ.
His Honour referred in passing to the debate about whether a "transaction" in s 81(1) extends to amendment of the trust deed (a question raised by Young AJ at first instance in Dion, and not resolved by the Court of Appeal until after Hammerschlag J's decision). He did not find it necessary to go into the controversy and made the order granting the power sought. He said at [50]-[52]:
[50] Here, the transaction (or transactions) which would, but for an order, be beyond the power of the trustees is (or are) the accumulation of income of the trust and payment out of it to beneficiaries. These proposed actions also fall within the descriptions "acquisition" or "expenditure" in s 81(1), as the case may be.
[51] Section 81(2) expressly provides for an alteration, whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument, so as to permit the otherwise unauthorised transaction. The present orders are within power even if Young AJ's conclusion is correct.
[52] I am satisfied that it is expedient and in the interests of at least some of the beneficiaries, in particular Eileen [the widow], for the orders sought to be made.
In Dion, Barrett JA referred to the decision in Cameron v Jeffress. He also referred to two other decisions in which a trustee was granted power to partition trusts in favour of family members into separate trusts for different groups, each of the "sub-trusts" to be governed by the same terms as the original trust. The decisions were Re Z Trust [2009] CILR 593, a decision of the Grand Court of Cayman Islands; and Southgate v Sutton [2011] EWCA Civ 637; [2012] 1 WLR 326, a decision of the English Court of Appeal. In both cases, the partition was considered desirable because different groups of beneficiaries lived in different tax jurisdictions and this created difficulties with double taxation and with treating the beneficiaries equally.
Dion concerned a discretionary trust. Clause 4(a) of the trust deed required the trustee to hold the property on trust to pay or apply the whole or such part of the settled property as the trustee might think fit amongst the beneficiaries, and to accumulate any surplus of any income not so paid or applied. The application sought powers:
1. to adopt a system of accounting based on financial years;
2. to pay or allocate to any beneficiary any amount of capital gains even if there is no other amount of income in a particular year;
3. to decide what was income and what was capital for a particular year; and
4. to maintain associated accounts.
Barrett JA said at [109]-[114]):
[109] As to items (a) to (d), the primary judge correctly rejected the proposition that an order under s 81(1) could empower the trustee to amend the trust deed by incorporating new terms as proposed. A result generally as sought by Dion Investments Pty Ltd may, however, be achieved by orders under s 81(1) that directly confer powers which supplement and, as necessary, override the provisions of the trust instrument.
[110] The court could make an order to the effect that the trustee had power, in managing and administering the trust property in accordance with clause 4(a) of the trust deed, to deal separately with the income of each and every year ending on 30 June, to distinguish income from corpus on the footing that receipts or gains of such a nature as to be within assessable income for the purposes of the taxation legislation are of an income nature regardless of their character at general law, to maintain in respect of each beneficiary such account or accounts as the trustee thinks fit and to credit to each such account (and thereby allocate to the particular beneficiary) the whole or a part of an amount paid or applied under clause 4(a) in respect of that beneficiary. I do not suggest that this would be the precise wording. I am concerned only to outline the concepts.
…
[112] Because the processes contemplated by the postulated new power would not, of themselves, involve discrimination among beneficiaries (the potential for discrimination being inherent already in the discretion that clause 4(a) entails), creation of the power would not involve any change of beneficial interests or adjustment of the respective rights of beneficiaries.
…
[114] An order along the lines outlined could properly be made under s 81(1) on principles underlying RE Z Trust, Sutton v England (above) and Cameron v Jeffress. The evidence - particularly the KPMG advice - establishes that it is expedient in the management and administration of the trust property by way of efficient and economical effectuation of clause 4(a) that the powers should be given to Dion Investments Pty Ltd as trustee.
[7]
Grant of power "in the management or administration" of property of the Trust
One of the issues in Cisera was whether the proposed extension of the vesting date for the trust in that case fell within the list of dealings in s 81(1) and, in particular, whether it was a "transaction". As I read the judgment of White JA, his Honour ultimately did not need to decide this question, because, whether or not the extension of the vesting date was a "transaction", it lacked a sufficient relationship with specific dealings related to the management or administration of the trust property.
In the present case, the applicant seeks to have the Court confer power which is specific: namely, a power to pay the income and capital gain in the 2017-2018 financial year to the Browne North West Trust. Barrett JA's observations in Dion at [111], and referred to by White JA in Cisera at [65], suggest that such a distribution would be an "expenditure" and perhaps a "transaction"; furthermore, I think it would be a "disposition". But it remains necessary to ask whether the making of such a distribution would be dealing "in the management or administration" of the property of the Trust.
Counsel for the plaintiff relied heavily on Hammerschlag J's decision in Cameron. Counsel emphasised that the effect of the scheme approved by his Honour was to alter the beneficial rights in the income and capital of the trust which had been established by the will. Counsel also relied on the decision in Dion, to the extent that it sanctioned the grant of power to allocate income and capital gains between different beneficiaries.
I think the circumstances in Cameron v Jeffress were quite different to those in the present case. The imposition of tax on income which was not actually received by the beneficiaries would have defeated the testator's intention to benefit his widow and the other beneficiaries who were to receive income before the trust vested. It would also have created a difficulty in treating the beneficiaries of the will equally. As a matter of trust law, the tax would ultimately be borne by the corpus but the widow was to have no entitlement to the corpus beyond her indexed lifetime payment. The power which was conferred on the trustee to accumulate income was a familiar one. The result of the scheme was that the beneficiaries were to receive the same payments in the same amounts as were provided for by the will.
I think the circumstances in Dion, too, are different from the present case. The powers granted by the Court only contemplated a discretion in the trustee to allocate income between members of the class of beneficiaries identified in the trust deed. The point made by Barrett JA at [112] (quoted above) shows that the Court did not contemplate that the grant of the powers would involve any change in the beneficial interests, or adjustment of the respective rights of the beneficiaries, not contemplated by the trust deed.
The partition cases (Z Trust and Sutton v England) likewise did not affect the terms on which the trust property was to be held. And a critical element of those cases was that, without partition, the trustee's obligation to treat the beneficiaries equally was an impediment to the trustees in their administration of the trust.
The present case does not have any of these features. The terms of the trust clearly require that the income and the capital gain for the 2017-2018 financial year be distributed to Diane. The trustee is simply asking for power to depart from the terms of the trust and make the distribution instead to the Browne North West Trust. None of the cases to which I have referred goes so far.
Downshire and the cases which have followed it draw a distinction between the grant of a power not provided for in the trust deed (or in the Act) as part of the "management and administration" of trust property, on the one hand, and the alteration of the terms of the trust, on the other. According to those decisions, s 81(1) cannot be used for the latter purpose, which can only be achieved (in the jurisdictions where it is available) by involving a wider statutory power to amend the terms of the trust.
The passage which I have cited from Chapman (at [55] above) makes it quite clear that the circumstances in which the "management and administration" of the trust would justify the grant of a power to appoint capital or income otherwise than in accordance with the terms of the trust are exceptional. On no view would any recognised exception apply in the present case.
The distinction was referred to by Barrett JA at [94] in this way:
Variation of the terms of a trust (including by way of conferral of some new power on the trustee) is not something within the ordinary and natural province of a trustee. It is not something that is "expedient" that a trustee should do; nor, fundamentally, is it something that is done "in management or administration of" trust property. A trustee's function is to take the trusts as it finds them and to administer them as they stand. The trustee is not concerned to question the terms of the trust or seek to improve them. I venture to say that, even where the trust instrument itself gives the trustee a power of variation, exercise of that power is not something that occurs "in the management or administration of" trust property. It occurs in order that the scheme of fiduciary administration of the property may somehow be reshaped.
Of course it may be said that any exercise of the Court's power under s 81(1) is, in a sense, a variation of the trust deed: cf White JA in Cisera at [60]. But the distinction drawn in the cases is not inconsistent with this. In Municipal and General Securities Co Ltd v Lloyds Bank Ltd [1950] Ch 212 at 223 (approved in Downshire at 231), Wynn-Parry J said that s 57:
…cannot be construed as having such wide import as would allow a complete rewriting of the trust deed or the substitution of a completely different object from that for which the trust was brought into being.
The references to a "complete" rewriting of the trust deed and to a "completely" different object are important. The grant of power of a power to do something which is not mentioned in the trust deed, or is even contrary to a term of the trust deed, is not necessarily impermissible; it is a question of identifying what, in substance, are the key objectives of the trust.
The majority in Downshire described the section as permitting dealings related to the management or administration by the trustees of trust property, quoad property. The words "quoad property" are significant. They connote some sort of ongoing administration of the property which is to be the subject of the power. That feature is completely lacking in this case, where the power relates to distributions of income and capital which, once made, will no longer belong to the trust.
It is true that the UK s 57 does not contain an equivalent of s 81(2). But in Arakella v Paton (2004) 60 NSWLR 334; [2004] NSWSC 13 Austin J said at [112] that, despite the presence of s 81(2):
What emerges is that the Court's power under s 81 cannot be used to subvert the beneficial disposition in the trust instrument, but if an order is made in the management or administration of trust property, it is permissible under the section to accommodate the beneficial interests to the new situation created by the order. In my opinion that position is indistinguishable from the approach taken by Myers A-J in the Ku-ring-gai Council case. It is unnecessary to debate whether it is different from the position under the UK provision, as explained by the English Court of Appeal in the Chapman case.
This statement was supported by his Honour's analysis of previous authority, in particular Ku-ring-gai Municipal Council v Attorney General (1953) 19 LGR (NSW) 105 and Perpetual Trustee Co Ltd v Godsall [1979] 2 NSWLR 785. Barrett JA in Dion also evidently did not consider that the presence of s 81(2) made the Downshire line of cases any less authoritative in NSW.
In Cisera at [34]-[36], [52] and [59] White JA referred to Downshire, Chapman and to passages in Dion which applied the reasoning from those cases. His Honour also referred to Arakella at [37]-[38], quoting the passage which I have quoted at [82] above. His Honour made it clear (at [60]-[66]) that the distinction between s 81(1) and statutory powers of amendment of a trust remains a feature of NSW law. Even if his Honour did not expressly approve those decisions, I consider I should follow and apply them in this case.
For these reasons the distribution of the income from the 2017-2018 financial year to the Browne North West Trust would not be a dealing in "the management and administration" of the property of the Browne Family Trust, and falls outside s 81. The same conclusion applies to the appointment of the capital of the Trust to the Browne North West Trust.
[8]
Expediency
For completeness, I will consider whether, if the relevant dealings fell within s 81, the grant of power would be "expedient in the management and administration" of the Trust property.
The justification that counsel for the plaintiff put forward for the application was the desirability of paying down the debt of the Browne North West Trust to the CBA. That is something which indirectly affects the interests of the Browne Family Trust, because the Trustee has guaranteed the Browne North West Trust's debts to the CBA. In a commercial sense, therefore, the Trust might benefit from the paying down of the debt and the reduction of the amount of interest being charged on the outstanding amount.
Even so, it is important to focus on the Trust's interest. If the guarantee is called upon, the Trust will have a right of exoneration from the Browne North West Trust (together with rights of contribution from Tony and Diane). The Trust has no interest in the assets of the Browne North West Trust as such, and will not benefit from any of the profits if the subdivision is eventually successful.
What this means is that the Trust has no need to make, nor any real interest in making, a distribution to the Browne North West Trust. If the interests of the Trust were thought to require the contingent liability under the guarantee to be reduced, the Trust's assets could be realised and the proceeds lent to the Browne North West Trust for that purpose. But the Trustee already has wide powers of borrowing and lending under the Trust Deed and would not need the Court's sanction for taking that step.
If it had been desired to sell the service station and accumulate the capital gain in the Trust so that more money was available to reduce the debt to the CBA, then an application could have been made for a power to accumulate the income (including the capital gain) for this purpose. But no such application has been made. Of course, had the capital gain been accumulated in the Trust, it would have been taxable at top marginal rates.
As I have described, the scheme proposes that the capital gain, to the extent not mopped up by losses in the Browne North West Trust, will be distributed through that trust to Diane. If that money is to be applied to debt reduction, presumably it is intended that Diane will lend it back to the Browne North West Trust. But if the terms of the Trust Deed are simply allowed to take their course, then there is nothing to stop Diane from lending, or giving, the amount she receives from the Browne Family Trust to the Browne North West Trust. It is just that that will cost Diane more in tax. The same is true for the other 2017-2018 income of the Trust.
It is less easy to see the purpose of an order empowering the Trustee to appoint the remaining capital of the Browne Family Trust to the Browne North West Trust. That capital amount, will, on the fact of it, not be taxable. That will be so whether it is distributed to Diane or to the Browne North West Trust. There is nothing to stop the Trustee from distributing the capital to Diane so that she may, if she chooses, pass it on to the Browne North West Trust so as to reduce debt. There is no need to depart from the terms of the Trust and distribute the capital directly to the Browne North West Trust just because Diane consents to that step.
What all of this underlines is that the real purpose of the application is to use the losses in the Browne North West Trust so as to avoid the tax which would otherwise be payable by Diane on distribution of the income (including the capital gain from the sale of the service station) from the Browne Family Trust. From a taxpayer's point of view, the avoidance of tax would nearly always be expedient. But any such expediency does not arise in the administration of the Browne Family Trust as such. It arises because of extraneous factors: cf Ku-ring-gai Municipal Council v Attorney General (1954) 55 SR (NSW) 65, especially at 74. In particular, it arises because of the decision to establish the Browne North West Trust as a trust separate from the Browne Family Trust.
In Cisera at first instance ([2017] NSWSC 960), I said at [71] that the management and administration of the trust property is not an end in itself, and expediency must be judged by some external objective. At [72]-[74], I said that the Court must ultimately use as its touchstone, for determining what is expedient, the intentions of the settlor as expressed in the trust deed. I accepted that for this purpose some provisions of the trust deed might be regarded as merely mechanical. In saying this, I had in mind a test similar to that described at [55] above. I adhere to these views.
I also accepted that in a discretionary trust there may be more room for latitude in determining what is "expedient". But for practical purposes the Browne Family Trust is now a fixed trust. The only relevant discretionary element is the power to bring the vesting date forward, and that is not relevant for present purposes (for these reasons, the fact that the Browne children consented, except for Deidre who is unable to, is irrelevant).
Kenneth John Sorrenson, the Browne family's solicitor, gave evidence in an affidavit in these proceedings that at the time the Browne North West Trust was established, the deceased asked him whether profits in the Browne Family Trust could be used to soak up losses in the Browne North West Trust. Mr Sorrenson said that he told Mr Browne that they could. This advice was apparently correct during Mr Browne's lifetime, as it would have been possible for the Browne North West Trust to be appointed as a beneficiary and have income distributed to it. But whether or not the advice was correct, it cannot be relevant to the resolution of this application. It postdates the settlement of the Browne Family Trust which is the relevant trust for present purposes. In any event, the deceased's subjective intentions are irrelevant: Segelov v Ernst & Young Pty Ltd (2015) 89 NSWLR 431 at [83]; see also Chapman at 272.
The clear intent of the settlor of the Trust Deed, as objectively determined, was that upon the death of the deceased as Protector, the trust would become a fixed trust in favour of Diane and then the Browne children (subject only to the discretion to bring the vesting date forward). Distributing the income and capital of the Trust to the Browne North West Trust instead is, in my view, quite contrary to the objectives of the Trust. It would not be a step which would be "expedient" in the management and administration of the Trust assets in the relevant sense.
[9]
Constitution of proceedings
One of the questions which I sought further assistance from counsel for the plaintiff was a procedural one. In Cisera the plaintiffs were the family members who were promoting the application, and the trustee was the defendant. After the proceedings were commenced, a solicitor with expertise in trust and taxation matters was joined as second defendant to act as contradictor.
In the present proceedings, the plaintiff, and the only party to these proceedings, is the trustee itself. I asked counsel for submissions on whether constitution of the proceedings in this way, and without a proper contradictor, was proper or desirable.
In response, counsel suggested that in Cisera a contradictor had been seen as appropriate because of the potential for challenge to the decision in Dion. Counsel submitted that the law was now clear in the light of the Cisera appeal decision and no contradictor was therefore necessary.
I am not wholly convinced by these submissions. In this case, as in the proceedings before me at first instance in Cisera, I have been urged not to read the decisions of the Court of Appeal (in Cisera, Dion; in this case Dion and the Cisera appeal decision) more widely than they need to be. The case was all about how far Dion and Cisera go in the particular context of this case.
Not all cases have followed the practice of making the individual proponents of the application the plaintiffs and the trustee the defendant. In Dion, the trustee was the plaintiff and the sole party. In Andtrust v Andreatta [2015] NSWSC 38 and Paloto Pty Limited v Herro [2015] NSWSC 445, the plaintiff was the trustee; although the beneficiaries or other parties affected by the orders sought were joined as defendants, it seems that they supported the application. The same was true in Bull v Boreas Pty Ltd [2015] NSWSC 761, except that the trustee was joined as one of two co-plaintiffs.
But I think the debate in this case calls the appropriateness of a trustee being the plaintiff into question. The trustee's task is to administer the trust in accordance with the trust instrument. I have already quoted (at [78]) what Barrett JA said about this in Dion at [94]. I question whether it is the trustee's role to seek additional powers so that the trust can be administered in a different way.
The question of costs illustrates another problem with the trustee being the plaintiff. If the application is unsuccessful the trustee will not be entitled to costs out of the trust fund. The trustee may well be financially embarrassed by such an outcome. But that is not all. It will only be if the Court upholds the application, and orders that the costs be paid out of the trust assets, that the expenditure will have been justified in the interests of the trust. For the trustee to incur expenditure in propounding the application in anticipation of a successful outcome seems somewhat presumptuous.
These considerations suggest to me that the way that the Cisera application was constituted is the preferable one. Those who are promoting the change, who would usually be beneficiaries of the trust or other interested persons, should, at least at the outset, bear the financial cost of propounding the application. The trustee should be joined as a defendant but would usually adopt a position of neutrality.
Nor do I think that having a contradictor should necessarily be confined to cases which might be the subject of appeal (if such cases can always be identified in advance). In any case where there is room for debate, the Court may be assisted by the presentation of argument on an adversarial basis.
In a case such as the present, where what was proposed was a tax minimisation scheme, the Commissioner of Taxation would have been an obvious candidate to be a contradictor. In other cases, there is no reason in principle why the trustee could not arrange for the presence of a contradictor. Even if the trustee is a proprietary company and the promoters of the application are directors of the company, independent advice and representation can always be obtained. If the trustee is in any doubt, in a particular case, about whether to act as a contradictor, or to join someone else to do so, the Court's advice can be sought on that question.
In the end, because of the conclusion I have reached, I do not need to decide whether there should have been a contradictor in these proceedings.
[10]
Conclusions and orders
I have concluded that the application fails and must be dismissed. I will make no order as to costs, to the intent that the plaintiff will bear its costs of the application without recourse to the Trust assets.
The orders of the Court are:
Summons dismissed.
No order as to costs.
[11]
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Decision last updated: 25 June 2019