JKB Holdings Pty Limited v de la Vega [2020] NSWSC 1715 | Case summary

Supreme Court of NSW|2020-11-23|Before: Ward CJ, Lindsay J

Judgment

HER HONOUR: This is an application by summons filed on 9 November 2020 by the trustees of a trust referred to as the Australian Trust (the Trust), seeking judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) (Trustee Act) that they are justified in approaching the Court for an order directing them to transfer the assets in the Trust to Rosa Charlotte Sophia Rodriguez Grieve, in circumstances where it was contemplated by orders earlier made by Lindsay J on 26 June 2018 (the Orders) that such an application might be made. In this judgment, I shall refer to Rosa by her first name without intending any disrespect.
By the summons, the plaintiffs also seek orders: directing the transfer of the assets in question; directing the plaintiffs to terminate or executive the Trust on and effective from 30 December 2020; and an order pursuant to s 71 of the Trustee Act vesting the assets in the Trust in Rosa on and effective from 30 December 2020.
The application is supported by affidavits sworn by each of plaintiffs, the trustees. First, an affidavit sworn 2 November 2020 by Charles Gordon Cupit. Mr Cupit is a professional accountant and a director at Bedford Advisory CA Pty Limited, and was appointed as co‑trustee of the Trust by orders of the Court in proceedings to which I will refer shortly. The second is an affidavit sworn 3 November 2020 by Lucinda Maree Aboud. Ms Aboud is a lawyer and is also a co‑trustee of the Trust set up for the benefit of Rosa pursuant to the orders that were made on 26 June 2018.
The trustees also rely on an affidavit affirmed 2 November 2020 by Andrew Powell, the school principal and head of school at the Ascham School. Rosa was a member of the year 12 class of 2020 at Ascham School and Mr Powell has deposed to her character and approach, and in particular has deposed that, in his experience (which covers many decades as a teacher), he has found Rosa to demonstrate a maturity beyond her years.

Background

The background to the current application can be gleaned from the Statement of Facts contained in the Judicial Advice Statement that has been filed in the proceedings, and the material that has been tendered on the application.
Briefly, Rosa (and her sister Luna)'s father, Felipe Rodriguez Svensson, died on 6 October 2015 in the Netherlands. The deceased was survived by his wife (who is not Luna and Rosa's mother) and by Luna and Rosa. Luna and Rosa's mother, Josephine, is the deceased's former de facto spouse. The deceased and Josephine separated in January 2004.
The deceased left two testamentary instruments dated 17 August 2006 and 29 December 2006, respectively. In broad terms, the deceased left his estate as to 10 per cent to his wife, 45 per cent to Luna on the terms of an "administration of goods" governed by the Dutch Civil Code and 45 per cent to Rosa, also on the terms of an "administration of goods" governed by the Dutch Civil Code. Jack Theseus Lowenstein and the deceased's wife were appointed the executors under the Will.
By a settlement agreement dated 18 November 2016, the deceased's wife was removed as administrator of the deceased's estate, such that at that time Mr Lowenstein remained the only administrator.
Proceedings were commenced in this Court by Luna and (through her tutor (her mother) by Rosa on 5 October 2016. I will refer to those as the Family Provision Proceedings. The parties to the Family Provision Proceedings were Luna, Rosa by her mother as tutor, Jack as the first defendant and the deceased's wife as the second defendant. Those proceedings were settled by deed of release dated 4 July 2018 following Orders made by Lindsay J on 26 June 2018.
Amongst other things, by the June 2018 Orders, the Court allocated the residue of the deceased's estate in regard to all aspects then located in Australia as to 50 per cent to Luna, who was at that stage 20 years of age, and as to 50 per cent on trust for Rosa, who was at that stage 15 years of age - thereby establishing the Trust of which Rosa was and is the sole beneficiary.
Pursuant to order 1(iv) there was imposed a condition on the Trust in the following terms: iv. It is a further condition of the Australian Trust that it may not be terminated by a request or demand from the second plaintiff [Rosa] calling for a transfer to her of her interest in the Australian Trust prior to her turning 21 years pursuant to the legal rule known as the rule in Saunders v Vautier or on any other legal basis or claim, except and unless there be an order of this Court directing a transfer to her prior to the age of 21 years.
For the purposes of those Orders, it is relevant to note that the deceased's estate included funds transferred from the Netherlands and two parcels of real property - a property located in Bronte, which is a residential property (the Bronte Property); and a property located in Robertson, which is a rural property (the Robertson Property) (together, the Properties). The current registered ownership in respect of the Properties is as to tenants in common, whereby Luna owns one half of the Properties and the trustees of the Australian Trust, as joint tenants, hold the other half of the Properties on the terms of the Trust.
If orders are made as sought by the summons, it is the intention of both Luna and Rosa to occupy the Bronte Property as their main residence within the meaning of the Income Tax Assessment Act 1997 (Cth), and their principal place of residence within the meaning of the Land Tax Management Act 1956 (NSW) (Land Tax Management Act), as soon as the current tenancy of the Bronte Property expires and prior to the date this year on which Rosa will turn 18 years of age. They propose to retain the Robertson Property as an investment property.
The context in which the present application is brought arises because there is an issue in respect of land tax payable in respect of the Properties which has had the effect that the Trust has operated at a loss since its establishment by the Orders. In the year 30 June 2019, the net losses were $24,798. In the year ended 30 June 2020, the net losses were $21,245. The trustees consider that it is in the best interests of Rosa to transfer the trust property to her when she turns 18, before land tax will next accrue in respect of the Properties. The trustees' view is that the costs of the administration of the Trust outweigh the benefits to Rosa, in circumstances where Rosa and her sister intend to make the Bronte Property their home.
I have been provided with an opinion from Mr Bennett of counsel on the issue of land tax (Ex C). That opinion is to the effect that the Properties are subject to the New South Wales land tax regime; that land tax is payable by the owner of the land upon the taxable value of order for land, which, at midnight on 31 December each year, is owned by them within New South Wales and which is not exempt (see ss 7, 8 and s 9(1) of the Land Tax Management Act); and, that the taxable value of all land owned by a person is the total sum of the average value of each parcel of that land, less any deduction allowed by the Land Tax Management Act for the use of certain land for primary production and similar purposes (see ss 9(2)-(3) and s 9AA of the Land Tax Management Act). Mr Bennett has advised that the issue, therefore, is whether a "parcel" of property is owned by an "owner" and whether there is no exemption from liability to land tax (within the meaning of the Land Tax Management Act).
Mr Bennett has opined that the Bronte Property and the Robertson Property will both be a single and separate parcel of land for land tax purposes. He notes that it is the owner of the land that is liable for land tax, and by reference to the definition of owners under s 3 of the Land Tax Management Act, that during the course of the trust, where the trustee is entitled to possession or to the income from any letting of the relevant properties, the trustee is the owner. Mr Bennett has also advised that there are circumstances in which s 25 of the Land Tax Management Act allows for the equitable interest holder, most commonly beneficiaries of the trust, to be treated as the owner, which would have the effect of rendering the beneficiaries liable to land tax, rather than the trustees. I do not propose in these short reasons to go through Mr Bennett's reasoning in relation to this.
Suffice it to say that Mr Bennett has formed the view that the Robertson Property will be exempt from land tax if the trustees or a tenant of them satisfies the primary production exemption in s 10AA of the Land Tax Management Act, regardless of any "owner" characterisation. The Bronte Property will be subject to land tax unless the Trust is a fixed trust, or for Rosa, a concessional trust. Mr Bennett notes that the principal place of residence exemption is otherwise not available to the Trust and that it is also denied to Luna, while ever the Trust holds, and interest in the Bronte Property. Mr Bennett has advised that transferring the Bronte Property interest from the Trust to Rosa would resolve this problem both for the Trust and for Luna. Mr Bennett has also referred to the capital gains tax consequences in relation to the Properties. His view is that the sooner that Luna and Rosa can make the Bronte Property their main residence, the sooner the calculation of capital gains tax will improve because they will be able to avail themselves of the main residence exemption.
I have also been provided with an opinion from Mr Meek of Senior Counsel that the proposed transfer which would have the effect of terminating the Trust is in his view in the interests of Rosa (Ex D).
It is noted that the administration costs of the Trust are in the order of approximately $4,500 per year. As to Rosa and Luna's circumstances, Luna has returned in July 2020 from a period in which she resided and studied in the United States, and intends to move into the Bronte Property together with Rosa as soon as possible. It is the intention of Luna and Rosa to rent the Robertson Property. Rosa has applied to study for a Bachelor of Veterinary Biology and Doctor of Veterinary Science degree at the University of Sydney, depending on her HSC results. If she does not achieve the necessary ATAR to be accepted into this course, she intends to study the Bachelor of Science curriculum in order to "feed into" veterinary science and then apply for the Doctor of Veterinary Science. Rosa will apply to other universities in the Sydney area but the University of Sydney is her first choice.
Ms Aboud has deposed that she has recently met and spoken with Rosa and is very confident that Rosa will more than adequately be able to make sensible financial decisions and move forward with Rosa and Luna's plan to reside in the Bronte Property. If the Trust is terminated, Ms Aboud says that she is available to assist Rosa, and Mr Cupit has deposed that he is also available to provide financial advice if Rosa were to seek it.
Although the Family Provision Proceedings were brought on behalf of Rosa by her mother in her capacity as her tutor, there is no evidence from Josephine on the current application. I am, however, informed by Senior Counsel that Josephine is aware of the applications and has not taken any steps to oppose the application.
Senior Counsel for the plaintiffs has noted that at the time of the creation of the Trust, the impost of land tax was known, and that the impost of the land tax upon the trust assets has been moderated to a small degree by the letting of the Bronte Property, bringing in some rental income; but that if the land holding by the Trust does not alter until Rosa attains the age of 21, further land tax will be payable by the Trust up to that time in the order of about $180,000. The trustees' motivation for considering the termination of the Trust and the transfer of the assets is essentially related to the ongoing tax liability and the cost of administering the Trust. In particular, if the land tax is payable out of the assets of the Trust, it will have the effect of substantially eroding the cash assets of the Trust, by the time that Rosa attains the age of 21. The cash held by the trustees at the present has already reduced by some $100,000 in the past financial year.

Determination

Power to terminate the trust must be found in the express terms of the trust (see Barrett J, as his Honour then was, in Re Gaydon [2001] NSWSC 473 (Re Gaydon) at [7]-[13]. In Re Gaydon (at [29]), and in Westfield QLD No 1 Pty Limited v Lend Lease Real Estate Investments Limited [2008] NSWSC 516 (at [45], [53], per Einstein J), it was noted that unless there is a power of termination which would be exercised according to its terms, it is the duty of the Court to uphold and protect trusts, not to destroy them; although where the terms of the trust envisage in certain circumstances the realisation of property, winding‑up of the trust's affairs and final payment to the beneficiaries, the Court will give effect to those winding‑up provisions.
Emphasis is placed by the trustees in the present case on the power of termination reserved by order 1(iv) of the Orders to which I have referred above. It is noted that the ordinary rules of construction as to the construction of contracts are applied in the interpretation of a court order reference being made to Lindsay J's decision in JKB Holdings Pty Limited v de la Vega [2013] NSWSC 501 at [87]; and that if an inter partes contract or agreement, has been entered into, and that has been given expression in the orders of the Court, this must be taken into account.
Mr Meek has opined (and I agree) that a plain reading of order 1(iv) indicates that, if Rosa were to seek to have transferred to her the interest in the Trust prior to her attaining the age of 21, there is a reservation of power in the Court to direct a transfer thus effecting a termination of the Trust.
On the assumption that - and I find that this is the case - order 1(iv) reserves to the Court a power to terminate the Trust upon an application (whether by Rosa herself or the trustees), Mr Meek has addressed the question as to what considerations ought guide the Court in the exercise of that power. Reference is made to the discussion by Ford and Lee of the advantages and disadvantages of a power of revocation or termination of trust (see Ford and Lee, The Law of Trusts (4th ed, 2001, Thomson Reuters) (The Law of Trusts) at [16.030]); where it is suggested that a power of revocation exercisable by trustees should be regarded as a power to terminate the trust by distribution of the assets among the beneficiaries for the reason that the duty of the trustees is to administer the trust and exercise any powers adjunct thereto solely for the benefit of the beneficiaries (see The Law of Trusts at [16.040]).
Mr Meek has submitted the following. First, that the terms of order 1(iv) do not refer to or require exceptional circumstances to exist as a basis or precondition for the exercise of the power, albeit that he accepts that it is not readily to be thought that the power might be exercised on very slight considerations of expediency. Second, that as a general proposition, what might guide the Court is some matter which is demonstrably in the interests of the beneficiary of the trust. Third, that there is authority at least in relation to s 81 of the Trustee Act that to the effect that the tax effective administration of the trust is a matter to which regard may properly be had in considering whether or not to exercise a discretion to permit an expedient transaction (referring to the decision of Stevenson J in Soo v Soo [2016] NSWSC 1666 at [6]). Fourth, that as a matter of principle, the Court is at liberty to take into account the time at which the trust would otherwise vest or terminate and the likely outworking of the trust during that period.
Mr Meek has noted that the position here (when considering whether a trust ought to be terminated now as distinct from at a later time when the fixed vesting date has arisen) is different from the consideration regarding termination of a trust which has a vesting date some decades away. It is noted from the terms of the orders that, initially, both Luna and Rosa would not have had direct access to property from the deceased's estate until they attained the age of 25 years, but that as part of the Orders Rosa was to become entitled to receive the property at 21 years of age. Rosa is now three years away from attaining that age. Reference is made to the evidence as to Rosa's maturity and to the effective completion of her secondary education and plans to undertake tertiary study. It is noted that she is the only beneficiary of the Trust and, accordingly, her circumstances, so far as beneficiaries are concerned, are the only circumstances to be taken into account.
I accept that if the trust administration continues as it is (which is likely given that both Rosa and Luna have expressed a desire to reside in the main asset of the Trust being the Bronte Property) then the Trust will continue to be a loss-making trust; and over the course of the following three years there will be a liability for land tax principally relating to the Bronte Property which will consume most of the cash resources of the Trust and potentially lead to the necessity for the sale of one of the Properties.
Mr Meek has posed certain considerations that might be raised as to whether there is good reason not to terminate the Trust, one of which is if it were to be considered that Rosa were insufficiently mature to handle significant property but it is submitted that in the circumstances (having regard to the evidence of the trustees and of her school principal) that should not be the conclusion that is reached.
In weighing the factors that inform whether it is appropriate to terminate the Trust or not, I accept that a main consideration is the fact that there would be an overriding benefit to the beneficiary, Rosa, and a collateral benefit to her sister as co‑owner, in precluding the imposition of what would otherwise be a tax impost of around $200,000 over the next three years. I accept the trustees' opinion that it is in Rosa's best interests in those circumstances, or to her benefit, that the Trust be terminated and that the assets transferred to Rosa. I accept Mr Meek's opinion that in all the circumstances there is a sufficient and reasonable basis to exercise the reserved power to terminate the Trust. In those circumstances, I have concluded that the trustees would be justified in transferring the trust property to Rosa on and effective from 30 December 2020.
For those reasons, I make orders in accordance with the short minutes of order which have been provided to me by the solicitor for the plaintiffs. Those orders include an order that the plaintiffs' costs be paid out of the assets of the Trust.

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. Decision last updated: 02 December 2020

JKB Holdings Pty Limited v de la Vega

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