The Arthur Desmond Coote Family Discretionary Trust

Deeds - Application for variation of trust deed - Deed of Variation evidencing consent of all adult parties executed - Court empowered to approve variation on behalf of infants if not to their detriment - No opposition to proposed variation of deed - Expiry date of deed extended - Turns on own facts

Trustees Act 1962 (WA), s 90

1 This is an application by originating summons dated 22 December 2006 for orders approving the variation of a trust deed.

2 The orders sought by the plaintiff, Arthur Desmond Coote, are in these terms:

"(1) this honourable court approves on behalf of the 5th to 9th named second defendants an arrangement to vary the Trust Deed creating the Arthur Desmond Coote Family Discretionary Trust so that the trust period as defined in that deed shall expire on 31 March 2052 or such earlier day as the trustee may determine in writing.

(2) the cost of the defendants be taxed and paid out of the trust fund of the Arthur Desmond Coote Family Discretionary Trust."

3 The application is supported by a number of affidavits filed on behalf of the plaintiff. The affidavits are those of Arthur Desmond Coote sworn 21 December 2006, the affidavit of Peter Constantinou sworn 8 March 2007, the affidavit of Rosemary Verna Wheatley sworn 12 April 2007 and the affidavit of Louise Anne Clark sworn 18 April 2007.

4 The principal documents are exhibited to the affidavits. In particular, exhibited to the affidavit of Rosemary Verna Wheatley is a Deed of Variation of the Arthur Desmond Coote Family Discretionary Trust sworn 10 January 2007. The recital to that deed sets out the background to the matter and refers to the application which is presently before me.

5 It is said in cl 2 of the deed of variation that the deed will have effect subject to and conditional upon the court making an order of the kind proposed in the orders before me.

6 Counsel for the plaintiff in his written outline of submissions dated 11 April 2007 sets out the background to the matter. The application is made under s 90 of the Trustees Act 1962 (WA) for an order of the Court to exercise its discretionary power to approve on behalf of certain infant beneficiaries an arrangement to vary the Arthur Desmond Coote Family Discretionary Trust to extend the trust period by up to approximately 45 years.

7 Section 90 of the Trustees Act provides that where any property is held on trusts under any settlement the Court may, if it thinks fit, by order approve on behalf of any person having an interest under the trusts any arrangement varying any or all of the trusts. The Court shall not approve an arrangement on behalf of any person if the arrangement is to his detriment.

8 The present application is made by the plaintiff as trustee of the trust. The first defendants are the adult children of the plaintiff. The second defendants are the grandchildren of the plaintiff of whom the first to fourth-named are adults and the fifth to ninth-named are infants.

9 The first and second defendants together comprise all of the beneficiaries of the trust.

10 The plaintiff in his capacity as trustee and all of the adult defendants have executed a deed consenting to the proposed variation. That is subject to and conditional upon the Court making the order that the trust period shall expire on the 31st day of March 2052. That is the deed of variation dated 10 January 2007 which is exhibited to the affidavit of Rosemary Verna Wheatley.

11 The second-named second defendant, Georgia Doreen Clark, has been appointed as guardian ad litem of each of the infant defendants and has appointed independent counsel who represent all of the second defendants.

12 I pause there to say that counsel for the defendants have appeared before me this morning and confirmed that they do not oppose the orders sought.

13 The Court is empowered under s 90 of the Trustees Act to approve an arrangement on behalf of any person having an interest under the trusts who by reason of infancy or other incapacity is incapable of consenting. It may not approve an arrangement if it is to that person's detriment.

14 The evidence bearing upon this matter is set out in the affidavits I mentioned earlier. Mr Constantinou is the accountant and adviser for the trust. The deed establishing the trust is exhibited to the affidavit of the plaintiff and the terms are summarised in par 4 of the affidavit of Mr Constantinou.

15 Relevantly, the specified class of beneficiaries, who are the only beneficiaries, are the children and grandchildren of the plaintiff. The trust period is the expiration of 35 years from the date of the original deed which was made 26 April 1972. The deed contains no power of variation.

16 The asset of the trust is essentially a one-half interest in Rutland Holdings Pty Ltd which, through subsidiaries, owns a successful sheet metal business. The plaintiff through another company, Festiva Investments Pty Ltd, which he owns and controls, effectively owns the other half interest in Rutland and controls it and its subsidiaries.

17 Rutland was incorporated to reduce the amount of state and federal death duties. The trust was established at the same time to give the plaintiff's children and grandchildren an ongoing interest in the underlying sheet metal business. Dividends from the profits of the sheet metal business have been passed up the chain of companies to Festiva and the trust and distributed by the trust to the five children.

18 The sheet metal business and the shares in Rutland held by the trust are pre-capital gains tax assets and a private binding ruling has been obtained from the Australian Taxation Office that the proposed extension of the vesting date of the trust will not cause the creation of a new trust, giving rise to a capital gains tax event.

19 The plaintiff wishes the trust to continue to provide benefits for his children and grandchildren but if no order is made by the Court to extend the trust period, he intends to exercise his discretion to vest the trust assets, being the shares in Rutland, equally between his five children.

20 Counsel for the plaintiff submitted in his written submissions that the word, "arrangement" in s 90 is very wide and includes any proposal put forward for variation, including extension of the term of the trust.

21 There are decided cases to say that in exercising the Court's discretion, the Court will consider the proposal for variation as a whole, taking into account the purposes of the trust and the settlor's intention. The Court may approve a proposal, having a purpose of gaining a taxation advantage.

22 Counsel submits that there is no detriment to the infant second defendants on whose behalf the Court has been asked to approve the arrangement but only benefits.

23 The primary benefit to the second defendants is clear. If an order is not made by the Court then the plaintiff intends to vest the capital of the trust, being the shares in Rutland, in his children the first defendants. If that were to be the case, there could be no certainty that the shares will continue to be available for the benefit of the grandchildren, as they could be disposed of by voluntary or involuntary transfer by the children. The grandchildren would also lose their contingent rights to dividends prior to vesting.

24 A secondary benefit for the grandchildren and all other beneficiaries is that if an order is made, and the capital gains tax event that happens on a beneficiary becoming absolutely entitled to a trust asset is postponed, so that the shares in Rutland will continue as pre capital gains tax assets until vesting or the happening of some other capital gains tax event, any increase in value after the current vesting date until then will not be subject to capital gains tax.

25 It is said that the plaintiff was clearly the directing mind in the establishment of the purposes of the trust; that is, providing an ongoing interest for the plaintiff's children and grandchildren in the underlying sheet metal business and minimising any diminution of the value of the assets. These purposes will continue to be fulfilled if the order is made.

26 It is said that the arrangement which is proposed will benefit all of the beneficiaries but in particular the second defendants, including those infants on whose behalf the Court's approval is sought, and the proposal as a whole can properly be sanctioned by the Court.

27 I have indicated that counsel for the defendants do not oppose the orders sought. However, for the sake of completeness, it is desirable that I bring under notice the written submissions put up by counsel for the second defendants in their document dated 16 April 2007.

28 In the second defendants' outline of submissions the nature of the application is noted. It is said that counsel has been instructed as independent counsel to represent the interests of the infant beneficiaries comprising certain of the second defendants.

29 Counsel says that he was instructed by the second-named second defendant, Georgia Doreen Clark, who has been appointed as guardian ad litem for each of the infant defendants. It is said there is no dispute that the Court has jurisdiction to approve an arrangement of the type being sought in this application.

30 Counsel for the second defendants respectfully adopts the submissions of law made by the plaintiff in the plaintiff's outline of submissions.

31 Counsel for the second defendants notes that the trustee and all of the adult beneficiaries have entered into the deed of variation dated 10 January 2007 mentioned earlier, subject to court approval to vary the trust deed so that the trust period expires on 31 March 2052.

32 It is said by counsel that he has reviewed the affidavits in support of the application. He notes that it was the intention of Arthur Coote to vest the trust in his adult children, being the first defendants, in the event the Court does not approve this variation. As set out in the affidavit of Peter Constantinou, the infant beneficiaries currently enjoy dividends from profits of the sheet metal business distributed by the trust to them. The infant beneficiaries remain contingently entitled to have vested in them the trust assets at any time.

33 Counsel submits that in the event that the Court approves this application for variation of the trust deed, he considers that the infant beneficiaries will continue to enjoy the following benefits under the trust, namely, continued contingent entitlement to dividends from the profits of the business; the possibility that the trustee may at some stage elect to exercise his discretion to vest some or all of the trust assets in some or all of the current infant beneficiaries. In that event if any vesting of trust assets are made directly to grandchildren rather than to the adult children (the first defendants) as will occur if the variation is not approved, there is the real prospect of capital gains tax being avoided, also to the benefit of the grandchildren.

34 Counsel submits that, conversely, he sees no disadvantage to the infant beneficiaries in the event that the Court approves the variations sought. The trustee, who has an absolute discretion, has given notice that in the event the variation is not approved, he intends vesting the trust assets in the adult beneficiaries. That will result in the infant beneficiaries being denied any contingent entitlement to dividend distributions or to future assets being vested in them.

35 Counsel concludes by saying that for all of these reasons it would in his respectful opinion be in the interests of the infant beneficiaries for the Court to approve the proposed trust deed variation.

36 Having regard to these submissions, I am persuaded by what has been put to me in the plaintiff's submissions, as approved by counsel for the defendants, that the proposed order should be made. I will make the orders sought accordingly.