Arakella Pty Ltd v Pattern [2022] NSWSC 527 | Case summary

Question 2 - Prayer 3 of the Summons

Prayer 3 poses the question of whether the Trustee is justified in disclaiming and/or surrendering its powers to appoint income and /or capital to any beneficiary of the Trust Estate whilst the beneficiary is a "foreign person" as that term is defined for the purposes of the Land Tax Act and the Duties Act.
Of relevance is s 28 of the Conveyancing Act 1919 (NSW) (which provides ("Conveyancing Act") as follows: (1) A person to whom is given any power (other than a power coupled with a duty), whether coupled with an interest or not, may by deed release or contract not to exercise the power. (2) Any such person as aforesaid may by deed disclaim any such power, and after such disclaimer shall not be capable of exercising or joining in the exercise of the power. (3) On such disclaimer the power may be exercised by the other or others, or the survivors or survivor of the others, of the persons to whom the power is given, unless the contrary is expressed in the instrument creating the power. (4) This section applies to powers created by instruments coming into operation either before or after the commencement of this Act.
The question therefore is whether the powers contained in the Trust Deed (which are sought to be released), being the powers to appoint income and/or capital, are powers which are coupled with a duty.
Buckley J in Re Wills' Trust Deeds [1964] Ch 219 at 227-229 ("Wills' Trust Deeds") distinguished between: 1. "beneficial powers" - where the donor intended to allow for a donee to confer a benefit on the donee; and 2. "vicarious powers" - where the donor intended that the donee would, in exercising the power, act on the donor's behalf to achieve the desired ends, in respect the donor has reposed its confidence in the donee.
Buckley J considered that a vicarious power "would not inappropriately be called a power coupled with a duty or coupled with a trust, or a power in the nature of a trust" (Wills' Trust Deeds at 228).
Further, at 228 in Wills' Trust Deeds, Buckley J considered that: … if the donee be himself an object of the power so that he could at his own option appoint the whole of the trust property in his own favour, I conceive that it would be impossible to regard the power as having any fiduciary character, for such a power would be equivalent to ownership …
As a result, relevant in determining whether the Trustee has a power coupled with a duty (for the purposes of s 28 of the Conveyancing Act), is determining whether the Trustee can benefit under the terms of the Trust Deed.
In this regard, I note that the Trustee is not a "beneficiary" as determined by the First Schedule of the Trust Deed. As a result, and pursuant to the analysis of Buckley J in Wills' Trust Deeds, I consider that the Trustee has a power which is coupled with a duty.
In this case the Trustee has a positive obligation to preserve the trust property.
A power coupled with a duty is a term referring to a power which it would be a breach of trust to release, as well as one to which a duty attaches. As a result, I consider that the Trustee cannot disclaim and/or surrender the power to appoint income and/or capital to a beneficiary of the Trust Estate.
Furthermore, s 28 of the Conveyancing Act refers to powers, and not trusts. If a "Beneficiary" meets the definition of "foreign person", then even if the powers could be released (pursuant to s 28 of the Conveyancing Act), it does not necessarily follow that the trusts could be surrendered or released.
As a result, I consider the answer to the question posed in Prayer 3 of the Summons is "yes", being that the Trustee would not be justified in disclaiming and/or surrendering its powers to appoint income and/or capital to any beneficiary of the Trust Estate whilst that beneficiary is a "foreign person".

Section 81 of the Trustee Act

As a result of the answers above prayer 4 of the Summons filed on 23 December 2021 seeks an order pursuant to s 81 of the Trustee Act permitting the Trustee to release all of the trusts and powers (referable to the Trust Estate) such that any beneficiary of the Trust Estate that is a "foreign person" as that term is defined in the Duties Act and the Land Tax Act is not a beneficiary whilst they are a "foreign person".
Relief pursuant to s 81 of the Trustee Act is sought for the following reasons.
First, the effect of the State Revenue Legislation Further Amendment Act 2020 (NSW) ('Amending Act'), which received assent on 24 June 2020, which amended: 1. the Duties Act; 2. the Land Tax Act; and 3. the Land Tax Management Act 1956 (NSW).
The Amending Act provides for exemptions from refunds of surcharge purchaser duty and surcharge land tax payable in respect of residential land held by the trustee of a discretionary trust, if the trust prevents a foreign person from being a beneficiary of the trust.
At [11] of the Brunskill Affidavit (and see Annexure "J"), Mr Brunskill deposes to the advice of a firm of accountants known as Enhance Financial Partners outlines the liability that will be imposed on the Trustee of the Trust Estate if the "amendments" to the terms of the Trust Estate are not made. It will be an annual liability of (at this stage) 2% of the taxable value of the land (which is residential property) held subject to the Trust Estate. In particular, there will be a charge of approximately $14,250 each year.
Secondly, there is no power to vary contained in the Trust Deed.
Thirdly (and finally), s 28 of the Conveyancing Act cannot be used to disclaim the trusts contained in the Trust Deed.
As a result, the Trustee is seeking an order pursuant to s 81 of the Trustee Act which will allow a release/surrender.
Subsection 81(1) of the Trustee Act provides as follows: 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. [emphasis added]
Relevantly for current purposes, ss 81(1) of the Trustee Act provides as follows: 1. where in the management and administration of any property vested in the trustee; 2. any surrender, release or transaction; 3. is in the opinion of the Court expedient; 4. the surrender, release or transaction cannot be effected by reason of absence of any power vested in the trustee by either: 1. the instrument creating the trustees; or 2. by law, then the Court may by order confer on a trustee the necessary power for the purpose (on such terms and subject to any provisions and conditions), and that there may be an adjustment of the respective rights of the beneficiaries.
Subsection 81(2) of the Trustee Act provides as follows: 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. [emphasis added]
That is ss 81(2) of the Trustee Act provides (and amongst other things) that the power conferred on the Court (pursuant to ss 81(1) of the Trustee Act): 1. deems to empower the Court to authorise a trustee to do or abstain from doing an act which otherwise be a breach of trust; and 2. such act (or abstention) to which the Court empowers the trustee may be an alteration (whether by extension or otherwise) of the trusts or powers conferred on the trustees by the trust instrument or by law.
Importantly, and as will be discussed later in these submissions, the express terms of: 1. ss 81(1) of the Trustee Act allows an order effect an "adjustment of the respective rights of the beneficiaries"; and 2. ss 81(2) of the Trustee Act permit an "alteration" (which must be a variation) of the "trusts or powers conferred on the trustees" pursuant to the trust instrument or by law.
There are two New South Wales Court of Appeal decisions of relevance, being that of Beazley P and Barrett and Gleeson JJA in Dion Investments and that of Bathurst CJ, Beazley P and White JA in Cisera v Cisera Holdings Pty Ltd [2018] NSWCA 286 ("Cisera Holdings"). An issue in Cisera Holdings was whether Dion Investments was correctly decided ([9] in Cisera Holdings), to which it was held that Dion Investments was correctly decided ([67] in Cisera Holdings).
Furthermore, the Court of Appeal in Cisera Holdings applied Dion Investments. As a result, these submissions demonstrate that the order sought pursuant to Prayer 5 of the Summons is consistent with the reasoning in Dion Investments, as well as the High Court's decision in Riddle v Riddle (1952) 85 CLR 202 ("Riddle v Riddle") and the Full Court's decision in Ku-ring-gai Municipal Council v The Attorney-General (1954) 55 SR (NSW) 65 (Roper CJ in Eq, Brereton and Maguire JJ) ("Ku-ring-gai Municipal Council Case").
In neither Dion Investments, nor in Cisera Holdings were the express terms discussed dealt with by the Court of Appeal (but were noted by the Full Court in the Ku-ring-gai Municipal Council Case). They were discussed (and indeed, the difference between s 81 of the Trustee Act and s 57 of the Trustee Act 1925 (UK) ('UK Act') in Riddle v Riddle and Ku-ring-gai Municipal Council. It was noted that at [34] in Cisera Holdings, White JA did observe (but did not analyse) that s 57(1) of the Trustee Act 1925 (UK) "did not include the words found in s 81(1)(a) of the New South Wales Act "including adjustment of the respective rights of the beneficiaries"" and s 57 of the Trustee Act 1925 (UK) "did not include a provision to the effect of s 81(2) of the New South Wales Act".
Indeed, in the publication by Denis SK Ong, Trusts Law In Australia (5th ed, 2018, Federation Press) at pages 337-341, Ong concludes that section 81 of the Trustee Act is in fact a power to "alter trusts in any manner whatsoever, provided that such alteration is effected expediently in the management or administration of trust property" (Ong at p 341). Further, at 341 in Ong, the author concludes as follows: It is therefore suggested that, given the practicably comprehensive power conferred on the Supreme Court of New South Wales to alter trusts, fundamentally or otherwise, to effect expedient transactions in the management or administration of trust property, it would be superfluous to introduce into New South Wales the variation of trusts legislation that applies in the other Australian jurisdictions. [Ong's emphasis].
Ong was published prior to the Court of Appeal's decision in Cisera Holdings. However, it was published after (and discussed) the NSW Court of Appeal's decision in Dion Investments, being the decision of which was followed in both the decision of Justice Parker in Cisera v Cisera Holdings Pty Ltd [2017] NSWSC 960 ("Cisera") and the Court of Appeal's decision in Cisera Holdings.
An issue that arises in these proceedings is what the scope of ss 81(1) and 81(2) of the Trustee Act in fact is, and what the words an "adjustment of the respective rights of the beneficiaries" and "alteration" of the "trusts or powers conferred on the trustees", allow and whether those words (chosen and used by the legislature) in fact allow for an alteration of trusts.
Furthermore, s 81 of the Trustee Act is beneficial legislation. It ought to be construed beneficially.
In Re Dion Investments Pty Ltd [2020] NSWSC 1661 at [34]-[43], I considered the application of s 81 of the Trustee Act in circumstances similar to the application now before the Court. Indeed, in Re Dion Investments Pty Ltd [2020] NSWSC 1661 the trustees sought orders pursuant to s 81, being the power to surrender/release trusts and powers to the extent that a "foreign person" may benefit under the trust concerned, being a "direct abstention from the doing of an act, namely the alteration of the trusts and powers such that a "foreign person" will not be able to benefit from the Trust Estate (s 81(2))" (at 36) and see also [42] to [43] in Re Dion Investments Pty Ltd [2020] NSWSC 1661.
I came to the view there that: 1. there was a proposed dealing (being a "surrender and / or release) ([35] and [36]); 2. there was an absence of power ([37]); 3. the "expediency" criteria was satisfied given the tax savings ([38] to [41]), with the result I ordered a direct conferral of a power to release and / or surrender the trusts and powers (referrable to the trust) which may benefit a "foreign person" ([42] and [43]).
I am satisfied that this matter is entirely analogous with circumstances in Dion Investments. See also Budumu Pty Ltd [2021] NSWSC 522 and Cecil Investments Pty Ltd [2021] NSWSC 211.
The wording of s 81 of the Trustee Act provides that: 1. the Court may confer a power on the trustees, either generally or in any particular instance (paragraph 81(1)(a) of the Trustee Act); 2. the power may be subject to provisions and conditions, "including adjustments of the respective rights of the beneficiaries, as the Court may think fit" (paragraph 81(1)(a) of the Trustee Act); and 3. the Court is deemed to be empowered "where it is satisfied that an alteration whether by extension or otherwise of the trusts or powers conferred on the trustees by the instrument, if any, creating the trust, or by law is expedient" (ss 81(2) of the Trustee Act); and 4. the authorisation may be permitted notwithstanding that, without the authorisation by the Court, the act (or omission) would otherwise be a breach of trust (ss 81(2) of the Trustee Act).
Austin J in Arakella Pty Ltd v Pattern (2004) 60 NSWLR 334 ("Arakella v Pattern") considered at [81] that ss 81(1) of the Trustee Act imposed two conditions upon the exercise by the Court of its jurisdiction to make an order conferring power on to trustees to enter into a transaction, being: 2.4.1 the Court is of the opinion that the proposed transaction is expedient in the management or administration of any property vested in the trustee; and 2.4.2 the transaction cannot be effected by reason of the absence of any power for that purpose vested in the trustee.
It is submitted that once the "jurisdictional bar" is satisfied, then the Court's discretion is confined only by the subject matter, scope and purpose of the legislation (Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 per Gummow A-CJ, Kirby, Hayne and Heydon JJ at 90 [59] and Kiefel J at 128 [196]).
Pursuant to prayer 4 of the Summons, the Trustee seeks a "direct" abstention of doing an act, being the alteration of the trusts and powers such that a "foreign person" will not be able to benefit from the Trust Estate. An abstention from doing an act is specifically provided for in ss 81(2) of the Trustee Act, which uses the words "authorise the trustees to do or abstain from doing any act or thing" (the chapeau in ss 81(2) of the Trustee Act).
The "release" or "surrender" sought by the Trustee are contemplated "transactions" (dealings) outlined in ss 81(1) of the Trustee Act.
That is, the Trustee is seeking a "direct" surrender/release of the trusts and powers, being dealings specifically provided for in ss. 81(1) of the Trustee Act. Further, the surrender and / or release is in the management or administration of property vested in the Trustee.
I should observe that whilst Barrett JA at 774-5 ([100]) in Dion Investments did observe that an order under s 81 of the Trustee Act cannot permit the Court to empower the trustee to amend the trust instrument or the terms of the trust Barrett JA at 773-4 ([96]) cited with approval the observation by Farwell J in In re Mair [1935] Ch 562 at 565, by observing that: When the court, acting under s. 81(1), confers on a trustee power to undertake a particular dealing (or dealings of a particular kind), 'it must be taken to have done it as though the power is being put into operation had been inserted in the trust instrument as an overriding power' ….
In particular, Barrett JA in Dion Investments held regarding s 81 of the Trustee Act: 1. it allows the Court to confer "power(s)" upon the trustee, which themselves must meet the scope of the "transactions" contemplated in ss 81(1); 2. if the order (and the resultant power(s)) are granted, the sole and direct source of the "power(s)" is in the orders (at 774 [97] Dion Investments); 3. there must be an absence of the "powers" sought; 4. the "power(s)" granted by the order: 1. "supplement and, as necessary, override the contents of the trust instrument" (774 [97] in Dion Investments); 2. "coexist with (and, to the extent of any inconsistency, override) those conferred by the trust instrument or by law" (774 [100] in Dion Investments); 3. the "content" of the trust instrument "is supplemented and overridden 'as though' some addition had been made to it" (774 [96] in Dion Investments); 4. the "terms of the trust are reshaped accordingly" (774 [96] in Dion Investments); and 5. "directly confer powers which supplement and, as necessary, override the provisions of the trust instrument" (at 777 [109] in Dion Investments).
That is, an order under s 81 may confer powers, which either coexist, or if inconsistent override, the "terms of the trust". The dealing permitted by an order pursuant to s 81 of the Trustee Act is "taken as though" it had been "inserted in the trust instrument as an overriding power" (per Barrett JA at [96] in Dion Investments).
It is submitted that the relief sought in Prayer 4 of the Summons if granted would be a direct conferral of the authority to "surrender" or "release" trusts and powers, within the scope of s 81 of the Trustee Act (provided that the expediency test is satisfied).
I accept that the evidence indicates that "proposed transaction" will have the benefits of reducing the annual land tax change on the Trustee with respect to residential property held subject to the Trust Estate. At this stage, that would amount to an annual charge of approximately $14,250 per annum.
The existence of a taxation advantage is not a bar to the conferral of the power pursuant to s 81 of the Trustee Act. To the contrary, the existence of a tax advantage may, in itself, form the basis of expediency in the management and administration of trust property for the purposes of s 81 of the Trustee Act. For example: 1. In Re Sykes (1971) 1 NSWLR 597 at 602, Helsham J (as his Honour then was) observed that "the powers conferred on the Court by s 81 should not be withheld merely because their exercise is sought to enable the avoidance of a revenue impost". 2. Campbell J, in Stein v Sybmore at [55], observed that "[a]s well, the minimisation of the capital gains tax and stamp duty on the trust property provides a separate basis upon which the conferring of the power is expedient". 3. Biscoe AJ in Application of NSFT Pty Ltd [2010] NSWSC 380 at [20], considered that "modernisation of the trust deed [pursuant to s 94 of the Trusts Act 1973 (Qld)] … with consequential tax benefits, is expedient in the management or administration of the property vested in the trustee". 4. White J (as his Honour then was) in Barry v Borlas Pty Ltd [2012] NSWSC 831 at [22]-[23] agreed with Campbell J in Stein v Sybmore, that the scope of s 81 of the Trustee Act includes preserving trust property and making it financially productive "which included planning to minimise the impact of tax and duty on the trust property". 5. Stevenson J in Soo v Soo [2016] NSWSC 1666 at [6] observed that: … there are numerous decisions of this Court to the effect that the tax effective administration of a trust is a matter to which regard may properly be had in considering whether or not to exercise discretion under s 81(1) of the Act: for example Re Sykes (deceased) … ; Stein v Sybmore Holdings Pty Ltd … and Barry v Borlas Pty Ltd …
The above observations are consistent with the Court of Appeal's observations in Kearns v Hill (1990) 21 NSWLR 107, when considering the context of family discretionary trusts.
In Dion Investments, the Distribution Powers were held to be expedient in the management or administration of the property vested in the trustee (Dion Investments at 777 [114]), particularly given the evidence of the potential taxation savings based on advice of KPMG ([19] to [25] in Dion Investments).
That is, expediency is found in the tax advantages that arise upon the surrender or release being approved by the Court pursuant to s 81 of the Trustee Act.
In this case the relief sought is quite specific and it relates to a particular "surrender" and/or "releases" with respect to the trusts and powers.
I am satisfied that the relief sought in Prayer 4 of the Summons, being a release and/or surrender of the trusts and powers which as contained in the terms of the Trust Estate, such that any beneficiary that is a "foreign person" as that term is defined in the Duties Act, the Land Tax Management Act 1956 (NSW) and/or the Land Tax Act cannot benefit under the terms of the Trust Estate whilst they are a "foreign person".
The relief falls within the scope of the power of the Court in s 81 of the Trustee Act, as it: 1. is an issue in the management or administration of property vested in the Trustee (ss 81(1) of the Trustee Act); 2. is a release or surrender (ss 81(1) of the Trustee Act); 3. is given the tax savings, expedient (ss 81(1) of the Trustee Act); 4. cannot be effected by reason of absence of power (in the trust instrument or at law) (ss 81(1) of the Trustee Act); 5. may adjust the respective rights of beneficiaries (paragraph 81(1)(a) of the Trustee Act); and 6. may be an alteration whether by extension or otherwise of the trusts or powers (ss 81(2) of the Trustee Act).
I am satisfied that the matter is relevantly "on-all-fours" with that before the Court in Re Dion Investments Pty Ltd [2020] NSWSC 1661, Budumu Pty Ltd [2021] NSWSC 522, Casibond Pty Ltd: In the matter of the George Tsivis Family Trust [2021] NSWSC 320 and Cecil Investments Pty Ltd [2021] NSWSC 211, as the same considerations apply with respect to the application of s 81 of the Trustee Act.

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Arakella Pty Ltd v Pattern

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