CGT Event E5
66 In the 2007 income year, CGT event E5 was in the following terms:
104-75 Beneficiary becoming entitled to a trust asset: CGT event E5
(1) CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).
Note: Division 128 deals with the effect of death.
(2) The time of the event is when the beneficiary becomes absolutely entitled to the asset.
Trustee makes a capital gain or loss
(3) The trustee makes a capital gain if the *market value of the asset (at the time of the event) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset's *reduced cost base.
Exception for Trustee
(4) A *capital gain or *capital loss the trustee makes is disregarded if it *acquired the asset before 20 September 1985.
Note: There is also an exception for employee share trusts: see section 130-90.
Beneficiary makes a capital gain or loss
(4) The beneficiary makes a capital gain if the *market value of the asset (at the time of the event) is more than the *cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset.
(5) The beneficiary makes a capital loss if that market value is less than the *reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset.
Exceptions for beneficiary
(6) A *capital gain or *capital loss the beneficiary makes is disregarded if the beneficiary:
(a) *acquired the *CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or
(b) acquired it before 20 September 1985.
Expenditure can include giving property: see section 103-5.
Note: There is also an exception for employee share trusts: see section 130-90.
67 The Commissioner's reliance on CGT event E5 is by way of further alternative in the event that CGT event E1 did not happen. Again, it is not necessary to consider it in the face of my conclusion that CGT event E1 did happen in the 2007 income year in respect of 902 shares in Burrup Holdings. However, the issue of whether or not CGT event E5 happened in consequence of the 13 March 2007 resolution was the subject of comprehensive argument from both parties and, in deference to those arguments should this matter go further, I set out below my views.
68 The term "absolutely entitled" is not defined in the ITAA 1997; nor is the expression "absolutely entitled to a CGT asset of a trust … as against the trustee". In Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242, Lindgren J at [61] accepted the Commissioner's submission that, taking into account relevant extrinsic material; English authorities such as Stephenson v Barclays Bank Trust Company Ltd [1975] 1 WLR 882; and what Gummow J (when his Honour was a judge of this Court) had to say about a "bare" trust when distinguishing between "active" and "passive" trusts in Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281, "the expression 'absolutely entitled to the asset as against the trustee' in subs (5) of 104-55 and s 104-60 of the Act is intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust properly as the beneficiary directs".
69 In my view, and the parties did not submit otherwise, his Honour's description is equally apt to describe the expression in s 104-75(1), "absolutely entitled to a CGT asset of a trust … as against the trustee". So described, the question to be determined may be framed: whether the 13 March 2007 resolution resulted in Mr and Mrs Oswal having a vested, indefeasible and absolute entitlement to the shares in Burrup Holdings then vested in the trustee such that they are entitled to require the trustee to deal with those shares as they direct.
70 As it was in respect of CGT event E1, it was at the forefront of the applicants' argument in respect of CGT event E5 that no new trust was created in respect of the shares in Burrup Holdings as a result of the 13 March 2007 resolution; all that was established was a separate fund of those shares of a kind contemplated by cl 12.1 of the Burrup Trust Deed; a "Beneficiary's Fund" within cl 12.2 and therefore subject to the Trustee's powers and rights of indemnity conferred by cll 19 to 26 of the Burrup Trust Deed in respect of the Burrup Trust Fund. For reasons I have already detailed at [22] to [37] and [42] to [61] above, I reject that analysis. The 13 March 2007 resolution did create a new trust over the shares in Burrup Holdings vested in the trustee, at the time of the resolution, for the absolute benefit of Mr and Mrs Oswal; and any separate fund thereby established was not a separate fund for the purposes of cl 12.1, nor a "Beneficiary's Fund" within the terms of cl 12.2 of the Burrup Trust Deed. It is in the face of that conclusion as to the effect of the 13 March 2007 resolution in the context of the terms of the Burrup Trust Deed that the question as framed in [69] above falls to be determined, namely, whether, in consequence of the resolution, Mr and Mrs Oswal were not only absolutely entitled to the Burrup Holdings shares, but indefeasibly entitled to them and, as well, entitled to require the trustee to deal with them as they directed. If both limbs of that question are answered in the affirmative in consequence of the 13 March 2007 resolution, then CGT event E5 happened in the 2007 income year.
71 The applicants advanced two reasons as to why the question so framed should be answered in the negative. The first assailed the nature of Mr and Mrs Oswal's interest as being indefeasible, by reference to what was said by Lindgren J in Kafataris at [65] concerning the existence of a power, reposed in the trustee, to sell the "Property". His Honour, relevantly said:
The Trustees had power to sell the Property, as they did only six days after the Trusts were established. Even if Helen had an interest in the half interest the subject of Helen's Trust as at 28 June 2002, the Trustees' power of sale would have made it a defeasible interest: see Kent v SS "Maria Luisa" (No 2) (2003) 130 FCR 12 at [71]. It would cease to be defeasible only when the half interest ceased to be part of Helen's Fund and subject to the Trustees' power of sale.
72 There can be no doubt that the exercise by a trustee of a power of sale, either expressed in the instrument creating the trust or conferred by statute, of an asset vested in the trustee for the absolute benefit of a beneficiary would defeat that beneficiary's interest in the asset (albeit giving rise to an equivalent interest in the proceeds of sale). In that sense, the beneficiary's interest in the asset is defeasible, as referred to by his Honour by reference to what was said by Tamberlin and Hely JJ in Kent v SS "Maria Luisa" (No 2) at [71], even though, until the power is exercised, the beneficiary's entitlement to call for a transfer of, or a dealing with, the asset exists.
73 On the other hand, having regard to my conclusion that the 13 March 2007 resolution created a new trust over the Burrup Holdings shares separate and distinct from the trusts upon which the balance of the corpus of the Burrup Trust Fund continued to be held, and not just a separate fund, a "Beneficiary's Fund" for the purposes of cl 12 of the Burrup Trust Deed, the powers vested in the Trustee to deal with the Burrup Trust Fund conferred by cl 19 of the Burrup Trust Deed no longer applied to the Burrup Holdings shares the subject of the resolution. This would include the power of disposal conferred by cl 19.3 of the Burrup Trust Deed, which relevantly provides:
The Trustee may … dispose of, property, an interest in property, or rights in relation to property, whether real or personal, whether or not income producing, and whether as a tenant in common or a joint tenant.
The references to "property" in this clause have to be read and understood by reference to the provisions of cl 19.1 which provides:
The Trustee may deal with the Fund, and in any manner, and exercise the powers given by this clause, for the purpose or benefit of the Trust as if the Trustee were the beneficial owner of the Fund.
In my view, the power of disposal conferred by cl 19.3, when read and understood in this context, does not extend to the Burrup Holdings shares the subject of the 13 March 2007 resolution.
74 That, however, is not the end for the first reason relied on by the applicants. Clause 18 of the Burrup Trust Deed provides:
18 STATUTORY POWERS
Unless inconsistent with this Document, the powers conferred on the Trustee by law are in augmentation of the Trustee's Powers under this Document.
75 Section 28(1) of the Trustee's Act 1962 (WA) expressly indicates that a power of sale can co-exist with beneficiaries that are already absolutely entitled to the trust property. It provides:
Where the instrument creating a trust to sell property or a power to sell property does not expressly limit the duration of the trust or power, then, notwithstanding any lapse of time or that all the beneficiaries are absolutely entitled to the property in fee simple or full ownership in possession and are not under any disability the trustee may sell the property; but in all other respects the authority conferred by this section is subject to any restrictions to which the trust or power created by the instrument is subject.
(Emphasis added.)
76 The Trustee would be entitled to rely on this statutory power of sale to sell the Burrup Holdings shares notwithstanding that the new trust created over them by the 13 March 2007 resolution was for the absolute benefit of Mr and Mrs Oswal. In this sense, their interests in the shares while absolute were defeasible. It follows that on the test adopted by Lindgren J in Kafataris and embraced by both parties in this case, Mr and Mrs Oswal were not absolutely entitled to the Burrup Holdings shares, the subject of the 13 March 2007 resolution, as against the Trustee; it further follows that CGT event E5 did not happen in the 2007 income year.
77 Whilst it is not strictly necessary to consider the second reason advanced by the applicants for their contention that the question framed in [70] above should be answered in the negative, I propose to do so, more or less for the same reasons given in [67] above. The second reason advanced relates to the Trustee's right to be indemnified out of the Burrup Trust Fund in respect of liabilities and expenses properly incurred as trustee of the Burrup Trust Fund prior to the 13 March 2007 resolution. The applicants contended that despite the 13 March 2007 resolution, the shares in Burrup Holdings continue to be available to satisfy the Trustee's right of indemnity or, strictly so called, the Trustee's right to reimbursement or exoneration, for liabilities properly incurred in the administration of the Burrup Trust Fund; the Trustee cannot, say the applicants, be compelled to surrender the Burrup Holdings shares until the claims for such liabilities have been satisfied. It follows, according to the applicants, that Mr and Mrs Oswal are not absolutely entitled to the shares in Burrup Holdings as against the Trustee.
78 Buckle confirmed that a trustee's right to reimbursement and exoneration confers on the trustee, to that extent, a proprietary interest in the trust property; that the trustee cannot be compelled to surrender the trust property to the beneficiaries until the trustee's claim has been satisfied; that the trustee's right to exoneration or recoupment takes priority over the rights in or in reference to the assets of beneficiaries; and that the entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them.
79 At [47]-[50] the Court relevantly said:
47 The entitlement of a trustee who has borrowed moneys for application to trust purposes has been described as follows [Scott on Trusts, 4th ed (1988), vol 3a, s246. See also the discussion by Dixon J in Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335]:
"Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person in the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration."
In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied [Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; Re Exhall Coal Co Ltd (1866) 35 Beav 449 at 452-453 [55 ER 970 at 971]; Scott on Trusts, 4th ed (1988), vol 3a, s244.1]. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust [Pettit, Equity and the Law of Trusts, 8th ed (1997), pp 458-459]. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority [Dodds v Tuke (1884) 25 Ch D 617].
48 Until the right to reimbursement or exoneration has been satisfied, "it is impossible to say what the trust fund is" [Dodds v Tuke at 619]. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the "property" to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them [Kemtron Industries at 587]. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not "trust assets" or "trust property" in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries [Octavo Investments at 370].
49 The entitlement to reimbursement and exoneration was identified by Lindley LJ as "the price paid by cestuis que trust for the gratuitous and onerous services of trustees" [In re Beddoe [1893] 1 Ch 547 at 558]. The right of the trustee has been described as a first charge upon the assets vested in the trustee [Staniar v Evans (1886) 34 Ch D 470 at 477], as one upon the "trust assets" [Octavo Investments at 367. See also Re Exhall Coal Co Ltd at 452-453 (55 ER 970 at 971)], and as conferring upon the trustee an "interest in the trust property [which] amounts to a proprietary interest" [Octavo Investments at 370].
50 However, the starting point in the class of case under consideration is that the assets held by the trustee are "no longer property held solely in the interests of the beneficiaries of the trust" [Octavo Investments at 370]. The term "trust assets" may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not "encumbered" by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment "takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation" [Vacuum Oil at 335]. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the "trust assets" which may be enforced in the same way as any other equitable charge [see Hewett v Court (1983) 149 CLR 639 at 663]. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them…
80 In Kemtron Industries, McPherson J (with whom Andrews SPJ agreed) said (at 587) it was not correct to say, as was submitted on behalf of the Queensland Commissioner of Stamp Duties -
that the trustee's lien at all times attaches to all of the assets. That would have the consequence that the trustee could, as against the beneficiaries, insist upon retaining all the assets in the exercise of his right of indemnity even though the liability in respect of which that right was exercised was trivial in amount. Such a conclusion would be surprising particularly where, for example, the assets consisted entirely of cash and the liabilities were fixed and their amount capable of precise and immediate determination in money.
81 But what his Honour there said is not this case. While the evidence of the assets and liabilities of the Trustee of the Burrup Trust as at the beginning and end of the 2007 income year was not a model of clarity, and was limited to balance sheets and trial balances at the beginning and end of that year without the benefit of contemporaneous asset valuations, it is clear from the evidence that the liabilities were not "trivial in amount", but were, even on the Commissioner's reckoning (which excluded a balance sheet liability of $75 million to the ANZ Bank), in excess of $300 million; that the liabilities were not "fixed" but growing with interest accruals; that the assets did not consist "entirely of cash" but were diverse in nature; that the book value of those assets approximated the amount of the liabilities and, if it exceeded them, only by a marginal amount. Moreover, there had been no quarantining of assets with respect to particular liabilities nor provisioning by way of reserves to meet such liabilities whether in the financial accounts of the Burrup Trust or otherwise. In these circumstances, it could not seriously be suggested, nor was it, that the Trustee's lien in respect of its right of indemnity did not attach to all of the assets of the Burrup Trust Fund. The difficult question under this head is whether it also extended to attach to the shares in Burrup Holdings following the 13 March 2007 resolution.
82 I have already rejected the underlying basis of the applicants' principal contention under this head, namely, that, in consequence of the 13 March 2007 resolution, the Trustee's lien for its right of indemnity in respect of liabilities properly incurred as trustee extended to the shares in Burrup Holdings by reason of the interaction of cll 12.1, 12.2 and 25 of the Burrup Trust Deed.
83 The issue here must be determined essentially by reference to the intention of the Trustee in exercising the power of appointment, such intention to be drawn or discerned from all the circumstances of the exercise of the power including, in particular, the manner of its exercise.
84 The Commissioner contended that in making the 13 March 2007 resolution appointing for the absolute benefit of Mr and Mrs Oswal that part of the corpus of the Burrup Trust represented by the Burrup Holding shares and declaring that henceforth the corpus so appointed and income or accretion of capital therefrom be held for their absolute benefit, without any reservation in respect of the right of indemnity, Mr Oswal as trustee acted inconsistently with the continued existence of (i) any right of exoneration or recoupment enforceable against those shares, or (ii) any beneficial interest on the part of the trustee in those shares commensurate with such a right.
85 In this regard, reliance was placed on cases involving an instrument or transaction which operated in such a way that a power cannot thereafter be exercised without interfering with the operation of the earlier instrument or transaction. Thus, it was submitted, if there be an appointment of the whole of a fund in favour of one person, this operates to destroy an unexercised power to appoint the fund to another: Inland Revenue Commissioner v Cookson [1977] 2 All ER 331 at 335 (Stamp LJ with whom Scarman LJ and Show LJ agreed). This depends upon the identification of words having that effect or conduct which shows by necessary implication an intention to do so: Cookson at 335.
86 Reference was also made to cases involving a dealing with the trust estate by the donee of a power which is inconsistent with the further exercise of the power so as to put an end to it: accordingly, an exercise of a power of appointment without reserving a power of revocation produces the consequence that there has been a release of any power to make a future appointment in favour of another: Foakes v Jackson [1900] 1 Ch 807 at 810-811 (Farwell J); In re Hancock [1896] 2 Ch 173 at 183 (Lindley LJ).
87 I do not find these cases particularly helpful to the issue at hand.
88 Had there been an outright transfer of the shares to Mr and Mrs Oswal in their individual capacities in consequence of the resolution, one may more readily discern an intention on the part of the Trustee to release or abandon any right of indemnity that attached to the shares as part of the Burrup Trust prior to the resolution. For example, in Burns v Leda Holdings Pty Ltd, Dowsett J proceeded on the basis that the transfer or distribution by a trustee to the beneficiaries of the entirety of the trust funds, without any reservation in respect of the right to indemnity, operated as a release or waiver of the trustee's right of indemnity.
89 This is consistent with the following proposition from Underhill and Hayton: Law Relating to Trusts and Trustees (18th ed, LexisNexis, 2010) at [81.34] (citations omitted):
Where a trustee exercises discretionary powers of appointment or discretionary trusts and appoints an asset in favour of an object, whether the asset will be released not only from the equitable interests of (default) beneficiaries designated in the trust instrument but also from the equitable interest commensurate with any right of indemnity of a trustee must be a matter of intention to be gathered from the circumstances. In the ordinary case where the trustee distributes funds to an object knowing that the object is intending to change his position in reliance on them (eg by spending them on living expenses etc.) it is implicit - if not made explicit - that the distribution is of assets freed and discharged from the trusts affecting them, unless otherwise stipulated.
(Emphasis added.)
90 But this is not the ordinary case, nor does it have any resemblance to the facts which came before the Court in Burns v Leda Holdings. Here the appointment is exercised by declaration of trust by the Trustee of the Fund over shares in a company, not by a distribution of funds to an object knowing that the object is intending to change its position in reliance on them. The shares remain vested in the Trustee and under his administration albeit on a new trust. Moreover, while I am of the view that the Trustee's right of indemnity does not attach to the Burrup Holdings shares by virtue of the interaction of cll 12, 12.2 and 25, those provisions clearly indicate an intention that assets, other than assets of the Fund, such as assets representing the capital of a Beneficiary's Fund to which the beneficiary in question is absolutely entitled, are assets to which the Trustee's lien in respect of the Trustee's right of indemnity attaches.
91 I have no doubt that a Court faced with the prospect that the assets of the Fund may not be sufficient to satisfy and discharge all liabilities properly incurred by the Trustee in the administration of the Burrup Trust, would not allow the Trustee to defeat the claims of creditors by repudiating an entitlement to be indemnified out of the shares in Burrup Holdings on the ground that the appointment worked a release, abandonment or waiver of that right.
92 For these reasons, I am of the view that the Trustee's lien in respect of its right of indemnity continues to attach to the shares in Burrup Holdings subsequent to the making of the 13 March 2007 resolution; for that reason Mr and Mrs Oswal did not become, in consequence of the resolution, absolutely entitled to those shares as against the Trustee; and therefore that CGT event E5 did not happen in the 2007 income year.