Arakella v Paton

Arakella v Paton [2004] NSWSC 13, 60 NSWLR 334 Chapman v Chapman [1954] AC 429 CASES CITED : Commissioner of Taxation v Bamford [2010] HCA 10 Re Ritchie's Will Trusts [2005] QSC 81 Re Steed's Will Trusts [1960] Ch 407 Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004, 64 ATR 325

TEXTS CITED : Mowbray et al, Lewin on Trusts, 18th ed (2008) Sweet & Maxwell

PARTIES : NSFT Pty Ltd as trustee for the Neil Statham Family Trust (plaintiff)

SOLICITORS : PricewaterhouseCoopers (plaintiff)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2010/00064139 APPLICATION BY NSFT PTY LTD AS TRUSTEE FOR THE NEIL STATHAM FAMILY TRUST JUDGMENT 1 HIS HONOUR: This is an application for an order that would empower a trustee of a family discretionary trust to vary the trust deed to better manage and administer trust property. Such a power is commonly found in modern trusts. This is an old trust. The application is made under s 94 of the Trusts Act 1973 (Qld) because the governing law is the law of Queensland. This Court has jurisdiction by reason of Queensland cross-vesting legislation. 2 I propose to grant the application for the following reasons. THE TRUST 3 The plaintiff, NSFT Pty Ltd, is trustee for the Neil Statham Family Trust, a family discretionary trust established by a deed of settlement dated 21 March 1974 (the trust deed). 4 The original trustee was Hanini Pty Ltd. 5 The "Eligible Beneficiaries" identified in the trust deed are: (i) any children, grandchildren or great grand children of the Parent; (ii) any spouse of any child, grandchild or great grandchild of the Parent; (iii) any children, grandchildren or great grand children of the Brother; (iv) any spouse of any child, grandchild or great grandchild of the Brother; (v) any such other persons or companies (not being ineligible appointees) or charities as the Parent shall by notice to the Trustee before the closing date appoint to be beneficiaries for the purposes of this Deed.

"The Parent" means Neil Maxwell Statham. "The Brother" means Ronald Stanley Statham. 6 The trust deed does not include any power to vary the trust deed. 7 By a deed executed on 7 October 2002 Hanini Pty Ltd exercised the power available under the trust deed to resign and to appoint as trustee NSFT Pty Ltd, the plaintiff.

QUEENSLAND LAW GOVERNS 8 NSFT Pty Ltd is a Queensland corporation. In the 2002 deed Hanini Pty Ltd is described as having a New South Wales address while NSFT Pty Ltd is described as having a Queensland address.

9 Under cl 1(q) of the trust deed the "State" is defined as meaning "the State of New South Wales". Clause 6 stipulates that the proper law of the deed is that of New South Wales. However, cl 21 provides: "21. This Trust shall be irrevocable and is made under the laws of the State and the rights of all parties in and the construction and effect of each and every provision hereof shall subject to the provisions of Clause 19 above be subject to such laws and subject to the provisions of the said Clause 19 the situs of this Trust and of all beneficial interest therein shall be deemed to be the State". 10 Clause 19 provides: "If at any time it appears to the satisfaction of the Trustee that it would be desirable to do so the Trustee may in its sole and uncontrolled discretion resign and by instrument in writing appoint a successor trustee in any place outside the State and transfer to such trustee the Trust Fund and income thereof and thereafter this Deed shall be governed in all respects by the laws of that place". 11 In the circumstances, "that place" is Queensland and the Neil Statham Family Trust must be governed by the laws of Queensland. 12 Jurisdiction to make an order under s 94 of the Trusts Act 1973 (Qld) is conferred on this Court by s 4(1) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Qld) which provides: " 4 Vesting of additional jurisdiction in certain courts (1) The Supreme Court of another State or of a Territory has and may exercise original and appellate jurisdiction with respect to State matters." REASON FOR THE APPLICATION 13 The reason for this application is to minimise tax liabilities on tax property for the benefit of beneficiaries, as indicated in the following letter to Mr Neil Statham from PricewaterhouseCoopers dated 24 February 2010: " Amendment to the Neil Statham Family Trust

We have previously discussed the strategy and future plans for the family group, and the key part that the Neil Statham Family Trust plays in maintaining the assets accumulated through your lifetime for the benefit of your family.

The original deed was formed more than 35 years ago. Over the intervening period many changes effecting how trusts are administered have occurred, including how taxation is applied to the capital and income of a trust.

The trust deed controlling the Neil Statham Family Trust does not contain provisions allowing amendments to be made to the deed. As such, the trustee is limited with how it can address issues which arise as a result of subsequent changes.

In terms of taxation, it is usual for a modern trust deed to include clauses which allow the trustee to separately identify and distribute different types of income and capital. For example, the income of a trust could be segregated into domestic and foreign source, identify dividend franking or foreign tax credits, and appropriately deal with capital gains tax. This allows the tax concessions available within the Australian tax system to be accessed as intended.

Without the inclusion of such provisions the beneficiaries of the Neil Statham Family Trust will be adversely affected, particularly when it comes to the management of income tax. This has not been a factor in the past, as all retained profits of the underlying companies owned by the Neil Statham Family Trust has been retained and reinvested. However, you are now seriously contemplating the divestment and sale of the assets owned by these companies, or the underlying companies themselves.

These assets are many and varied, with all sorts of taxation characteristics and treatments, including pre and post CGT assets, goodwill, capital improvements, water rights and livestock. In addition, significant revenue and capital losses exist in the underlying company group.

It is not possible at this stage to quantify the adverse impact that could be experienced by the trust beneficiaries as a result of the lack of appropriate taxation terms in the deed, due to the broad range of potential outcomes from the divestment of assets.

However, it is clear that the beneficiaries will pay significantly more tax should the trustee not have the power or authority to properly identify and characterise tax attributes of funds or income received by it.

As such, it is recommended that you pursue the necessary actions to modernise the trust deed, including a general power to amend. This will allow the trustee to adapt to changes in legislation and regulation affecting the trust, and to better manage the trust assets for the benefit of the beneficiaries." 14 This trust was established before the introduction of capital gains tax. As shown by the decision of the High Court in Commissioner of Taxation v Bamford [2010] HCA 10, it is important for a trustee to be able to deal appropriately with income and capital gains. CURIAL EMPOWERMENT OF A TRUSTEE 15 The plaintiff's application to empower the trustee is made under s 94 of the Trusts Act 1973 (Qld) which provides: " 94 Court's jurisdiction to make other orders

(1) Where in the opinion of the court any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, retention, expenditure or other transaction is expedient in the management or administration of any property vested in a trustee, or would be in the best interests of the persons, or the majority of the persons, beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the disposition or transaction without the assistance of the court, or it or they can not be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument (if any) or by law, the court may by order confer upon the trustee, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the court may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income.

(2) The court may from time to time rescind or vary any order made under this section, or may make any new or further order; but such a rescission or variation of any order shall not affect any act or thing done in reliance on the order before the person doing the act or thing became aware of the application to the court to rescind or vary the order.

(3) An application to the court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust." 16 Section 94 of the Queensland Act is similar to s 81 of the Trustee Act 1925 (NSW), which 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.

(4) The powers of the Court under this section shall be in addition to the powers of the Court under its general administrative jurisdiction and under this or any other Act.

(5) This section applies to trusts created either before or after the commencement of this Act." 17 Section 81 of the NSW Act was considered in Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004, 64 ATR 325 by Campbell J. There the Principal of a discretionary family trust applied under s 81 for an order varying a trust deed to empower the Principal to extend the vesting date of the trust to 2058, primarily because the trust otherwise would vest in 2007 with adverse tax consequences. Granting the application, Campbell J held by reference to the authorities:

(a) in order to invoke the section it must be shown that, first, a question has arisen in the management or administration of property vested in a trustee and, secondly, the making of an order that the section authorises is expedient in the management or administration of the trust: at [41]-[43]; (b) the word "transaction" in s 81(1) extends to amendment of a trust deed: at [45]; (c) "expedient" means advantageous, desirable, suitable to the circumstances of the case: at [47]. The type of expediency which can be considered is not completely open ended because expediency means expediency in the interests of the beneficiaries: at [48]. It does not mean expedient only if it is expedient in the interests of the trust as a whole: at [50]; (d) the section can be used in a way that alters beneficial interests. In that regard subsection (1) expressly states that the power it confers extends to "adjustment of the respective rights of the beneficiaries": at [33]-[36]; (e) the section can be used to empower a trustee to carry out a scheme the sole purpose of which is to minimise the taxation liabilities on the trust property because such minimisation has the effect that the trust property is better managed and administered: at [61]. 18 Section 94 of the Queensland Act is in sufficiently similar terms to s 81 of the NSW Act as to make the decision in Stein directly in point. 19 In Arakella v Paton [2004] NSWSC 13, 60 NSWLR 334 Austin J held that s 81 empowered the Court to confer on a trustee a power to amend a trading trust deed to permit implementation of a proposal akin to a scheme of arrangement after obtaining the approval of a special majority of unitholders. The original power gave the trustee power to amend but only with the prior written consent of all unitholders. The purpose of the order was to make that provision workable or more workable.

20 In my opinion, modernisation of the trust deed to empower the trustee to vary it to better manage the trust property for the benefit of the beneficiaries, such as by allowing the trustee to separately identify and distribute different types of income and capital with consequential tax benefits, is expedient in the management or administration of the property vested in the trustee. Variation of the trust deed for that purpose cannot be effected by the trustee by reason of the absence of any power for that purpose vested in the trustee by the trust deed. In the circumstances, I consider it appropriate to make an order to confer upon the trustee the necessary power for that purpose.

21 However, the plaintiff's proposed blanket power of amendment of the trust deed goes too far because it is not confined to what "is expedient in the management or administration of any property vested in a trustee". It would be so wide as to empower the trustee to vary the trust deed in unrelated ways; for example, to re-define the classes of Eligible Beneficiaries. Therefore, in my view, it would go beyond what is permitted by s 94(1). Accordingly, the order has been remoulded so as to limit the power to the purpose the subject of this application: see [24] below. AN ASIDE 22 It may be mentioned in passing that the plaintiff had originally sought orders pursuant to s 95 of the Queensland Act, which empowers the Court to approve variations of trust on behalf and for the benefit of specified types of beneficiaries, but at the hearing amended the summons to rely on s 94. Section 95 provides: " 95 Power of court to authorise variations of trust

(1) Where property, whether real or personal, is held on trusts arising, whether before or after the commencement of this Act, under any instrument creating the trust, the court may if it thinks fit by order approve on behalf of - (a) any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting; or (b) any person (whether ascertained or not) who may become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons, so however that this paragraph shall not include any person who would be of that description, or a member of that class (as the case may be) if the said date had fallen or the said event had happened at the date of the application to the court; or (c) any person unborn; or (d) any person in respect of any discretionary interest of the person under protective trusts where the interest of the principal beneficiary has not failed or determined; any arrangement (by whomsoever proposed and whether or not there is any other person beneficially interested who is capable of assenting thereto) varying or revoking all or any of the trusts, or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts.

(1A) However, except - (a) in the case of an unascertained person whose entitlement is dependent on a future event which the court is satisfied is unlikely to occur; or (b) where the court approves of an arrangement on behalf of a person referred to in subsection (1)(d); the court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person.

(2) In subsection (1) - protective trusts means the trusts specified in section 64(1)(a) and (b) or any like trusts, the principal beneficiary has the same meaning as in section 64(1) and discretionary interest means an interest arising under the trust specified in section 64(1)(b) or any like trust." 23 Section 95 has no equivalent in the NSW Act and replicates s 1(1) of the Variation of Trusts Act 1958 (UK): Mowbray et al, Lewin on Trusts, 18th ed (2008) 1867 ff. The UK legislation was enacted to fill the gap revealed by the decision of the House of Lords in Chapman v Chapman [1954] AC 429 that the court has no inherent jurisdiction to approve variation of trusts on behalf of minor, unborn and unascertained beneficiaries merely on the ground that the variation is for their benefit. A person who already has an interest under the trusts, including a contingent interest, is outside this provision. The term "arrangement" in s 95 includes any proposal to vary or revoke any of the trust: Re Steed's Will Trusts [1960] Ch 407 at 419 (CA). The Queensland courts have entertained applications under s 95 in a number of cases: eg Re Ritchie's Will Trusts [2005] QSC 81 where earlier cases are cited. As s 95 is no longer relied on, it is unnecessary to consider whether it could have authorised the order that is sought.

ORDERS 24 The orders of the Court are as follows:

(1) Order pursuant to s 94 of the Trusts Act 1973 (Qld) that the Deed of Settlement dated 21 March 1974 between Thirty Watt Pty Limited as Settlor and Hanini Pty Limited as Trustee dated 7 October 2002 is amended by the addition of the following provisions of the Trust known as the Neil Statham Family Trust, of which the plaintiff NSFT Pty Ltd became the Trustee pursuant to a Deed dated 7 October 2002: 23. (a) The Trustee shall have power to separately identify and classify the property comprising the Trust Fund and income of the Trust Fund, as to their source and nature, and to make distributions accordingly; (b) the power in sub-clause 23(a) must not be used to divert or modify any interest of a beneficiary in the Trust Fund in respect of which the beneficiary has become absolutely entitled.

24. (a) the Trustee shall have power to vary any of the provisions of this Deed of Settlement so as to enable the Trustee to deal with any issue arising in the management or administration of the Trust Fund with respect to the identification or classification of property comprising the Trust Fund and income of the Trust Fund for tax or accounting purposes as shall to the Trustee seem expedient; (b) any variation of this Deed of Settlement by exercise of the power conferred by sub-clause 24(a) must not be used to: (i) divert or modify any interest of a beneficiary in the Trust Fund in respect of which the beneficiary has become absolutely entitled; (ii) infringe any applicable law or rule against perpetuities or relating to remoteness of vesting or the period within which income may be accumulated to otherwise extend the Closing Date or to bring about the invalidity of any provision of this Deed of Settlement; (iii) effect any variation of the following provisions of this Deed of Settlement: the definitions in sub-clauses 1(c), (d), (e), (f), (g) and (h); clause 5; and clause 16. (2) The plaintiff is to be paid its costs out of the Neil Statham Family Trust on the trustee basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.