The plaintiff, Mrs Julie Yim Ying Soo, is the widow of the late Mr James Chum Wing Soo. Mr Soo died on 17 March 2010 leaving a will dated 9 January 2009. By the will, Mr Soo appointed Mrs Soo as his executrix and the trustee of a testamentary trust created by the will ("the Trust").
Mrs Soo is the "Primary Beneficiary" under the Trust.
The defendants, who are the four adult children of Mr and Mrs Soo, are "Specified Beneficiaries" under the Trust. They have entered a submitting appearance in the proceedings.
Mrs Soo, as trustee, seeks advice pursuant to s 63 of the Trustee Act 1925 (NSW) ("the Act") as to whether, by reason of cl 15.17 of the will, she has power to amend the terms of the Trust and orders, pursuant to s 81(1) of the Act conferring additional powers for the purpose of managing and administering the Trust property.
Soo v Soo [2016] NSWSC 1666 | Case summary | Zoe
Those powers are sought because Mrs Soo wishes to ensure that distributions made by her, as trustee, to the beneficiaries, are tax effective.
As Mr Barlin, who appeared for Mrs Soo, pointed out, 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) [1974] 1 NSWLR 597 per Helsham J (as his Honour then was) at 602; Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 per Campbell J (as his Honour then was) at [53] and [55] and Barry v Borlas Pty Ltd [2012] NSWSC 831 per White J at [22]-[23].
For the reasons that follow, I am prepared to give Mrs Soo the advice she seeks concerning cl 15.17.
I decline to make any order pursuant to s 81(1) of the Act for the reason that, in my opinion, Mrs Soo would be justified in construing the relevant provisions of the Trust in a manner that will accommodate her concerns about the tax effective conduct of the Trust. I propose to give her advice accordingly.
[3]
Amending the terms of the Trust
Clause 15.17 of the will provides:
"To the extent permitted by law, and subject to this clause, the Trustee may amend the terms of the trust".
In view of the conclusion to which I have come that Mrs Soo would be justified in construing the terms of the Trust to enable her to conduct it in a manner she desires, it is not necessary for me to decide whether this clause is effective to allow Mrs Soo, as trustee, to amend the Trust.
However, as Mr Barlin has made careful submissions on the topic, I will express my opinion, albeit briefly.
On the face of it, cl 15.17 does give Mrs Soo, as trustee, power to amend the Trust.
However, it only does so "to the extent permitted by law".
New South Wales law does not permit an amendment of a trust; Re Dion Investments Pty Ltd [2013] NSWSC 1941 at [48]-[49]; Re Dion Investments Pty Ltd (2014) 87 NSWLR 753; NSWCA 367 at [48].
That gives rise to the question of the proper law of the will, being that with which the will is "most closely connected" (Art 7 of the Trusts (Hague Convention) Act 1991 (Cth); see M Davies, A S Bell and P L G Brereton, Nygh's Conflict of Laws in Australia, (9th ed 2014, LexisNexis Butterworths) at [37.28]).
I accept Mr Barlin's submission that the law with which the will is most closely connected is that of NSW.
The will is silent on the question. But Mr Soo resided in and was domiciled in NSW. Probate of the will was granted by this Court. The principal asset of the estate comprises shares in a company that owns real estate in NSW. Mrs Soo resides in NSW as do each of the four children (Art 8 of the Trusts (Hague Convention) Act).
In those circumstances, I am satisfied that the proper law of the will is NSW.
That being so, I accept Mr Barlin's submission that the words "to the extent permitted by law" in cl 15.17 should be read as words of limitation and that, as the law of NSW does not permit a trustee to amend a trust, the effect is to render cl 15.17 nugatory.
I therefore advise Mrs Soo, as trustee, that she would be justified in concluding that cl 15.17 of the will does not confer on her power to amend the Trust, whether to confer additional powers on her as trustee, or at all.
[4]
When must "net income" be allocated pursuant to cl 15.5 of the will?
Mrs Soo seeks an order pursuant to s 81(1) of the Act that, as trustee, she be conferred with:
"a. [T]he power to pay, allocate or apply the whole or any part of the net income of the Trust pursuant to clause 15.5 on or before 30 June of every year ('Year of Income')."
Clause 15.5 is, relevantly, in the following terms:
"15.5 The Trustee shall allocate or accumulate the net income or the Unreserved Capital of the Beneficiary Controlled Testamentary Trust as follows:
a) the net income or Unreserved Capital (or any category of the net income or Unreserved Capital) of the trust in each year may be:
i) paid, allocated to or applied for the benefit of such of the beneficiaries that the Trustee in its absolute discretion selects from time to time; or
ii) (in the case of the net income) may be accumulated as an addition to the Unreserved Capital of the trust;
...
(c) where the Trustee fails to exercise its discretionary powers with respect to any income in any given year, such income shall be deemed to be accumulated."
This clause allows Mrs Soo, as trustee, to allocate the "net income" or "Unreserved Capital" of the Trust "in each year".
The difficulty that Mrs Soo sees as arising is that the term "year" is not defined in the will.
Mrs Soo wishes to ensure that the term "year" matches with the regime for the taxation of trusts contained in Div 6 of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act").
In my opinion, as the will does not define the expression "each year", it is open to Mrs Soo, as trustee, to allocate income and capital under cl 15.5 each calendar year, or each financial year, depending on her assessment of the best interests of the Trust.
It is certainly open, in my opinion, to Mrs Soo to construe the expression "each year" to mean "each financial year" or "each year ending 30 June".
I propose to give Mrs Soo advice that she would be justified in so construing cl 15.5.
In those circumstances it is not necessary to make any order under s 81 of the Act.
[5]
What is "net income" and "Unreserved Capital"?
Following the decision of the High Court in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation (2010) 240 CLR 481; HCA 10 and the enactment of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 (Cth), Mrs Soo, as trustee, wishes to stream distributions of any capital gains and or franked dividends to particular beneficiaries of the Trust.
Clause 15.5 of the Trust refers to the allocation or accumulation of "net income" and "Unreserved Capital".
The will defines "Unreserved Capital" (as capital not previously allocated or vested in a beneficiary) but does not define "net income".
Mrs Soo is concerned as to whether she has power to determine that "net income" for the purposes of cl 15.5 is "net income" calculated in accordance with s 97(1)(a)(i) of the 1936 Act so as to ensure distributions can be streamed as set out at [30].
For that reason, Mrs Soo also seeks an order under s 81(1) of the Act that she be given:
"b. [T]he power to determine whether amounts derived, accrued or received or deemed by the Income Tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 1997 (Cth), to have been derived, accrued or received by the Trust during a Year of Income are income, capital or 'net income' as that term is defined in section 95 of the Income Tax Assessment Act 1936 (Cth), notwithstanding the character of those amounts at general law."
In my opinion the answer lies in cl 19.1(m) of the will which provides that Mrs Soo, as trustee, has the power to:
"[C]alculate net income in accordance with taxation, accounting or other definitions or concepts".
In my opinion, on its proper construction, this clause gives Mrs Soo, as trustee, power to determine whether "net income" should be calculated in accordance with taxation concepts, or otherwise than in accordance with taxation concepts.
Accordingly, I propose to give Mrs Soo advice that she would be justified in so construing cl 19.1(m).
Mr Barlin informed me that, were such advice to be given, it would not be necessary for Mrs Soo to seek the powers referred to at [34] (or a further power concerning accumulation of income).
A further concern that Mrs Soo has as to the streaming of franked distributions of capital gains and dividends is her power to maintain separate accounts so as to ensure that it can be demonstrated that particular beneficiaries are "specifically entitled" to such distributions for the purposes of ss 115-228 and 207-58 of the Income Tax Assessment Act 1997 (Cth).
Accordingly, Mrs Soo seeks an order under s 81 of the Act as follows:
"d. [I]n relation to each beneficiary, the power to maintain such account or accounts as the Trustee thinks fit and may credit to any such account the whole or part of an amount paid or applied pursuant to clause 15.5 of the Trust in respect of the beneficiary. For the avoidance of doubt, the Trustee may pay, apply or otherwise allocate to any beneficiary particular categories of Trust property including (but not limited to);
(i) any 'franked distribution' (as defined in the Income Tax Assessment Act 1997 (Cth)); and
(ii) any 'capital gain' (as defined in the Income Tax Assessment Act 1997 (Cth))."
Again, I do not think it necessary to make such an order, assuming it were appropriate to do so (especially one tailored so precisely to the terms of the legislation referred to).
Clause 19.1(n) of the will gives Mrs Soo as trustee power to:
"[S]eparately record, identify, pay, allocate, apply or accumulate any income, right, credit, rebate or capital and to do so by reference to any categories, source, class or other means of identification."
In my opinion, on its proper construction, that power confers upon Mrs Soo, as trustee, power to maintain such accounts as she thinks fit and to credit any such account with any amount allocated pursuant to cl 15.5 to any beneficiary.
Further, in my opinion, the wording of cl 15.5 permits Mrs Soo, as trustee, to pay, apply, allocate or otherwise distribute net income and Unreserved Capital to the beneficiaries in such a manner as she thinks fit.
Mr Barlin informed me that were I to give Mrs Soo advice to this effect pursuant to s 63, it would allay her concerns as to the streaming of franked distributions and capital gains and render unnecessary any order under s 81(1) of the Act.
[6]
Conclusion
In those circumstances, pursuant to s 63 of the Act I advise Julie Yim Ying Soo, as trustee of the Trust, that she is justified in construing the Trust created in the will of the late James Chum Wing Soo of 9 January 2009 as follows:
1. cl 15.17 does not give the trustee power to amend the terms of the Trust;
2. the expression "each year" in cl 15.5 means "each financial year";
3. the power in cl 19.1(m) includes a power to determine whether "net income" should be calculated in accordance with taxation concepts, or otherwise than in accordance with taxation concepts;
4. the power in cl 19.1(n) includes the power to maintain such accounts as the trustee thinks fit and to credit any such account with any amount allocated pursuant to cl 15.5 to any beneficiary; and
5. cl 15.5 enables the trustee to pay, apply, allocate or otherwise distribute net income and Unreserved Capital to the beneficiaries of the Trust in such a manner as she thinks fit.
I propose to order that the costs of the plaintiff and the defendants be paid out of the income and or capital of the Trust on an indemnity basis and otherwise dismiss the summons.
I invite Mrs Soo's legal representatives to bring in short minutes to give effect to these reasons.
[7]
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Decision last updated: 25 November 2016