Walker v Romano [2002] NSWSC 1026 | Case summary

Supreme Court of NSW|2002-10-31|Before: Barrett J, Mr J

Background 1 The plaintiffs are the trustees of a settlement known as the G Romano Family Trust created by a deed apparently made on 31 October 1981 between William Norman Douglas Michie of Sydney, solicitor, and Giacomo Giuseppe Romano, who was the original trustee. The plaintiffs became the trustees in succession to G G Romano by order made by the court in 2000 when G G Romano had, through advanced age and infirmity, come to lack the requisite capacity. The plaintiffs seek, by summons filed on 11 October 2001: "An order or direction that the plaintiffs, as trustees of the G Romano Family Trust, should distribute the moneys held by them as such trustees in such way or upon such terms as the Court thinks appropriate." 2 It was made clear by Mr C R C Newlinds of counsel, who appeared for the plaintiffs, that they intended to apply for the opinion, advice or direction of the court on the extent of the interests of beneficiaries in the trust assets as they presently stand. The plaintiffs did not, however, adopt the course generally taken by trustees seeking judicial advice of placing undisputed facts before the court and seeking its guidance by reference to those facts. Rather, beneficiaries or potential beneficiaries were named as defendants in the plaintiffs' summons and the proceedings became, in substance, a contest between the first defendant and the second defendant, both of whom are within the class of persons described as beneficiaries, as to certain factual matters and as to the course the trustees should take. No real part was played in the proceedings by the trustees as plaintiffs. 3 It may be said at once that no answer can be given to the question the plaintiffs pose without the court engaging in a process of finding facts. It may also be said that the evidence was meagre. G G Romano is no longer living. He died in June 2001. Much of the evidence about relevant contemporary dealings and events - indeed, the vast bulk - came directly or indirectly from a solicitor and an accountant. The solicitor, Mr Shehadie, is the principal of the firm Michie Shehadie & Co of which the settlor, Mr Michie, was a member when the deed was executed. Mr Michie prepared the trust deed. He retired some years ago and has since died. The accountant, Mr Thomas, attended to G G Romano's tax affairs for a considerable period and was involved in the establishment of the trust. 4 Mr Shehadie and Mr Thomas had not necessarily made all the investigations that it was possible to make into relevant matters of record. Mr Shehadie was re-called on the second day of the hearing to be examined about investigations he had made overnight. He said, among other things, that he had found some old computer discs which might contain relevant trust account entries but that he had not been able to find a computer which could read these old discs. Mr Thomas, when asked whether there were any withholding tax deduction forms in addition to those which became exhibit 1D3, said that other forms existed or had existed, that they were either in his Fairfield office or had been destroyed and that he had made no attempt to find any other forms. 5 Were this a case in which rights and duties were to be determined in ordinary adversarial proceedings, a party would, as it were, have to live with its failure or inability to adduce relevant evidence and the court would decide between the competing contentions by reference to such evidence as the parties to the controversy put before it. Here, however, the position is different. The court is asked to advise the trustees in such a way that, if they follow the advice, they are protected against the eventuality that, by so doing, they have failed to discharge their duty in relation to the relevant matter. The absence of potentially relevant evidence in this kind of case has a different connotation. The family 6 When the trust deed was executed, G G Romano had two sons, Edward (to whom I shall refer as "E A Romano") and John ("J J Romano"). G G Romano died in June 2001. J J Romano pre-deceased his father, having died in 1995 leaving surviving a wife, Jeanette Romano (the second defendant), and two children, all of whom are living. E A Romano is living. He is the first defendant and gave evidence, in the course of which he referred to his wife. The evidence does not seem to indicate whether he has children and for present purposes nothing turns on that. The trust deed 7 I turn to the trust instrument which is, as I have said, a deed which appears to have been made on 31 October 1981. I say "appears" because the copy in evidence contains "31 October 1981" in typewritten form in the place reserved for the date of the deed, but shows that the typewritten words have been ruled through and "30 November 1990" has been added in handwriting above. That is not the only apparent alteration. There is another to which I shall come in due course. 8 I have referred to the fact that the deed purports to be made between Mr Michie and G G Romano. It is to be noted, however, that it is signed by G G Romano alone. In the end, I think that nothing really turns on the absence of execution by Mr Michie. His only involvement is stated in the recitals which refer to his desire to make provision for the benefit of certain persons and to his having already paid to the original trustee (that is, G G Romano) the sum of $10.00 to be held on the trusts of the deed. The operative provisions are confined to matters binding upon the trustee and, although the deed is expressed to be made inter partes, it is, in my view, sufficient that it is executed by Mr Romano who, by his unilateral execution, undertook the trusts and subjected himself to the covenants expressed to bind the trustee. 9 Turning to the content of the trust deed, I observe at once that it is what might be generally regarded as a standard discretionary trust deed, although not well drawn and giving rise to some anomalies. There is created by the deed a fund ("the trust fund") consisting of the initial sum settled by the settlor on the trustee, being the sum of $10, together with all moneys, investments and property afterwards vested in the trustee upon the trusts of the deed or otherwise accruing to the trustee upon those trusts, and accumulations of income directed by the deed to be made. 10 Clauses 2 and 3 deal with the income of the trust fund. Clause 2 is in the following terms: "Until the vesting day the trustee shall stand possessed of the trust fund UPON TRUST as to the income thereof for the beneficiaries PROVIDED ALWAYS subject to Clause 3 the trustee may in each accounting period until the vesting day pay, apply or set aside the whole or such part (if any) as the trustee thinks fit of the nett income of the trust fund of that accounting period to or for the benefit of or for all of such one or more exclusive of the other or others of the beneficiaries in such proportion and in such manner as the trustee thinks fit." 11 Clause 3 deals with a special situation, namely: "Where only one person has been appointed as trustee and the trustee is also a beneficiary."

In that case there is a limit to the extent to which the trustee may apply or set aside net income to his own benefit. Subject to that, however: "the trustee may in each accounting period until the vesting day pay apply or set aside the whole or such part (if any) of the nett income of the trust fund of that accounting period as the trustee thinks fit to or for the benefit of or for all or such one or more exclusive of the others or other of the beneficiaries in such proportion and in such manner as the trustee thinks fit." 12 To the extent that clause 3 purports to allow application of income for the benefit of a sole trustee, it conflicts with clause 11 which, as will be seen, operates notwithstanding "anything hereinbefore expressed or implied". Overlooking obvious wording and typographical anomalies, clause 3, to the extent that the opening restriction either does not apply or is not exceeded (or, in light of clause 11, is inoperative), makes the same provision in relation to income as clause 2. 13 The concepts of payment, applying and setting aside employed in clauses 2 and 3 are elaborated by clause 4: "The payment application or setting aside of any part of the income of the trust fund in accordance with either Clause 2 or Clause 3 hereof to or for the benefit of any beneficiary may be effected by a resolution of the trustee that a sum our [sic] of or portion of the nett income of the trust fund for the accounting period or a sum out of or portion of the nett income as defined in Section 95 of the Income Tax Assessment Act of the trust fund for the accounting period be allocated to such beneficiary or otherwise dealt with for the benefit of such beneficiary. The resolution made in accordance with this Clause (Clause 4) shall be recorded in writing [sic] Minutes and such Minutes shall be signed by the trustee and kept with the accounts and records of the trust fund. Once such a resolution has been made it shall be irrevocable with respect to the income of the accounting period to which it relates." 14 I quote also clause 5: "Notwithstanding anything contained in Clauses 2 & 3 hereof the trustee may in its absolute discretion before the expiration of any accounting period prior to the vesting day resolve to accumulate all or any part of the income of such period and such resolution shall in the same manner prescribed for the resolution in Clause 4 of this deed be in writing and be irrevocable." 15 It is also pertinent to quote clause 7: "(a) The exercise of the trustee's discretion under either Clause 2 or 3 hereof shall be subject in all respects to the Rule of Law known as the Rule against [sic] of this trust fund shall be paid or be capable of being paid by the trustee to the trustees of any other trust unless the persons entitled to the capital thereof must necessarily attain vested interests therein on or before the original vesting day fixed by this deed and this deed and Clauses 2 & 3 shall be construed accordingly. (b) Should the Trustee not exercise his discretion in accordance with Clauses 2 to 7 hereof then the nett income or that part thereof of the Trust shall be paid to, retained for or applied for the beneficiaries nominated in Class 'C' in Item 5 of the Schedule hereto." 16 The provisions with respect to the corpus or capital of the fund are contained in clause 8: "The Trustee shall subject to Clauses 2, 3 and 7 hereof stand possessed of the trust fund until the vesting day in trust as to income and capital to pay and transfer the same in the absolute discretion of the trustee to all of the beneficiaries as are then living or in respect of which if they are corporations no petition has been lodged not [sic] resolution passed for their winding up or to such one or more of them to the exclusions [sic] of the other or others and in such shares and proportions as the trustee in his absolute discretion may determine on or within a period of fourteen (14) days before the vesting day and in default of any such determination as aforesaid shall stand possessed of the trust fund for such of the persons enumerated in item 5 of the Schedule hereto as shall then be living and/or such of the corporations (if any) enumerated in such Item against which no petition has been lodged nor resolution passed for their winding up and if more than one as tenants in common in equal shares." 17 The whole of the foregoing appears to be qualified by clause 11: "Notwithstanding anything to the contrary hereinbefore expressed or implied no discretion or power by this settlement conferred on any person or on the trustee shall be exercised and no provisions of this settlement shall operate so as to be capable of conferring any benefit on the settlor or any trustee (other than remuneration in accordance with Clause 10 hereof). 18 Clause 10(o) empowers the trustee to employ agents in the execution of the trusts, making it clear that such an agent may "do any act required to be done in connection with the administration of the trusts hereby declared including the receipt and payment of money". Clause 10(s) confers on the trustee a broadly expressed power to raise or borrow money, making it clear also that money raised or borrowed may be invested "in any manner". 19 The term "the beneficiary" is defined by the deed as follows: " 'the beneficiary' means any one or more of the persons and/or companies and/or institutions named in Item 5 of the Schedule hereto."

Item 5 in the schedule to the deed, in its typewritten form, reads as follows: "All the children of Giacomo Giuseppe Romano, all the grandchildren of Giacomo Giuseppe Romano and all the spouses of the children of Giacomo Giuseppe Romano."

Inserted above this in handwriting is "Giacomo Giuseppe Romana [sic] &". The alterations to the trust deed 20 I have already referred to the two apparent alterations to the deed: crossing out of the typewritten "31 October 1981" in the space for the deed's date and addition above in handwriting of "30 November 1990" and insertion of the handwritten "Giacomo Giuseppe Romana &" before the list of beneficiaries. 21 If the original deed has been altered, it is, on one view, void according to the rule in Pigot's case (1614) 11 Co Rep 26b (compare Blackstone's Commentaries, Book II, Ch 20, p.308). Today, however, that supposed rule can probably be regarded as no longer applicable except perhaps in case of fraud: Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259; Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238; Farrow Mortgage Services v Slade & Nelson (1996) 38 NSWLR 636. In any event, I have seen only a photocopy of the deed. I have not viewed the original. I therefore cannot say whether the alterations appear in the original. Particularly since it appears to be common ground that the deed was executed on the date appearing in typewriting (31 October 1981) and nothing seems to turn on the apparent addition at the beginning of the list of beneficiaries (which, in any event, could not co-exist with clause 11, at least while G G Romano remained trustee), I proceed on the basis that neither apparent alteration exists and that the deed is valid. The corpus 22 The original corpus held upon the trusts declared by the deed was the sum of $10.00 settled by Mr Michie. The earliest information about the receipt of further funds into the trust is contained in a letter of 12 September 1984 from Mr Michie to G G Romano which should be set out in full: "We confirm that we are at present holding on behalf of various members of the Romano family a total sum of $68,000 and a sum of $483.04 being interest earned to the end of June. In accordance with your instructions in the past, interest when accumulated to $1,000 has been reinvested as principal. The original amounts invested in 1982 by E.A. Romano and family total $11,000 and by the G. Romano family $30,000 and later, $11,000, making a total of $41,000 by the G. Romano family and a total principal for both families of $52,000. In accordance with your later instructions, interest was combined and lodged with the G. Romano family trust and subsequently in accordance with your instructions, all interest was credited to the E.A. Romano family trust. In short, according to our books, we are holding principal of $52,000 in toto and to 30th June, $16,483.04 for interest. Unless you advise us to the contrary, we will continue to credit all interest to the E.A. Romano family trust although we would point out to you that at this stage, the accumulated interest almost equals the original principal sum." 23 Further information is contained in a letter of 17 December 1985 from Mr Michie to Mr Thomas with which was enclosed a copy of the letter of 12 September 1984: "We act for Mr. G. Romano of 341 Blaxland Road, Ryde and who has instructed us to engage your services in relation to advising and lodging any appropriate returns applicable to moneys paid to us for investment. We have current in our trust account records sheets R7A1, R7A2, R7A3, R7A4, R7A5, R7A7 headed G. Romano Family Trust and R.9A 1-6 inclusive headed E.A. Romano re Investment and photocopies of these sheets are attached. R7A commenced on the 3rd November, 1981 with a deposit of $20,000 in cash from G. Romano with instructions for its investment and for interest earned to be accumulated by re-investment. The money has been invested with interest in Partnership Pacific, A.M.L. Finance Corporation, Elders Finance and private short term trustee mortgages from time to time. Some of the moneys remain in private mortgages and in Partnership Pacific and we attach photocopy of our Partnership Pacific Investment trust sheets and also our private mortgage sheet. Some time after deposit of the money, we were instructed by G. Romano that interest earned should be credited to the E.A. Romano re Investment account and this was done. In March, 1982 we were handed by Mr. G. Romano $11,000 in cash and informed that it was to be invested on behalf of E.A. Romano, his son who was overseas. This amount was invested first of all in A.M.L. Finance Corporation and then in Elders Finance and has subsequently been invested in those companies and Partnership Pacific Ltd. And in private trustee mortgage and there remains at the moment a balance in trust as shown on sheet R9A6. We also attach hereto a photocopy of a letter of the 12 September 1984 to Mr. G. Romano which sets out what the writer understood to be the financial position and our instructions as at that date. Mr. Edward A. Romano is and has been for some years resident and domiciled abroad and as far as we are aware he still resides at "The Arches", Woodholm, Manchester, Massachusetts, U.S.A.. We attach correspondence between Mr. Romano and the Customs Department and ourselves which sets out the residential position covering the period during which we have had money invested. Our present instructions are that all income from both accounts is to be credited to Mr. E.A. Romano and any appropriate tax returns and/or withholding tax returns are to be lodged accordingly. Having regard to the period of time that we have held the funds we would ask that you let us have a letter setting out the principal sum now held by us on behalf of each account and the accumulated interest thereon up to and including the last date of receipt of interest." 24 I interpolate here that, on Mr Thomas's evidence, this letter of 17 December 1985 was not his first introduction to G G Romano and the trust. He deposed to having attended to G G Romano's tax affairs for 20 years (which must have been a period up to either 2001 when G G Romano died or late 1999 when he came to lack capacity); also that he had advised on and been involved in the establishment of the trust in 1981. It seems clear, therefore, that Mr Thomas acted for G G Romano at the time the trust deed was prepared by Mr Michie and executed by G G Romano. 25 Mr Thomas wrote to Mr Michie on 17 January 1986 as follows: "We refer to your letter dated 17 December, 1985 and set out hereunder a summary of funds held:

G. Romano Family Trust E. Romano Total Received - 3.11.81 20,000.00 20,000.00 20,000.00 - 20. 1.82 10,000.00 10,000.00 - 25. 3.82 11,000.00 11,000.00 - 25.10.82 11,000.00 11,000.00 Interest earned 21,675.01 7,651.95 29,326.96 Transfers (17,212.41) 17,212.41 --- Paid to G. Romano (462.60 ) --________ (462.60 ) Funds 3.12.85 $ 45,000 .00 $ 35,864.36 $ 80,864.36

Represented by:- Partnership Pacific 15,000.00 35,000.00 50,000.00 Michie Shehadie & Co Trust Account 864.36 864.36 Mortgage-Linway 30,000.00 ________ 30,000.00 $ 45,000.00 $ 35,864.36 $ 80,864.36 As all the income is to be credited to E.A. Romano, a non-resident, the interest earned is subject to withholding tax at the rate of 10%. The tax is required to be paid monthly by the 21st day of the following month. The penalty for late payment is 20 per cent per annum (prior to 14/2/83 10 per cent per annum). The withholding tax unpaid (to 3.12.85) is $2,932.69 and this amount is subject to penalties for late payment. Should you require us to lodge the necessary remittance forms please provide us with a cheque, in the amount of $2,932.69, in favour of the 'Deputy Commissioner of Taxation'. Should you require any further information or explanations do not hesitate to contact us." 26 On 20 January, 1986 Mr Michie wrote to G G Romano as follows: "In accordance with your instructions we have had our accountants James C. Hayward & Co. summarise sums invested by your family and accordingly we received from you on the 3rd November, 1981 for investment $20,000, on the 20th January, 1982 $10,000 from E. Romano, on the 25th March 1982 $11,000 and on the 25th October 1982 from you $11,000. As at the end of 1985 there had been earned on the amounts invested by you $21,675.01 and on the moneys invested by E. Romano $7,651.95 being a total interest earned of $29,326.96 and pursuant to your instructions all income earned on money invested by your family trust was credited to E. Romano with that amount being $17,212.41 being part of the interest of $21,675.01 referred to above. On the 21st January, 1982 and the 21st March, 1982 there was paid or credited to you $462.60 from the above interest earned and accordingly at the end of 1985 we had invested or held on your family's behalf $80,864.36 and in our books on behalf of the family trust $45,000 and on behalf of E. Romano $35,864.36. We are advised by our accountants that the income credited to E.A. Romano is not liable for income tax on the basis that he is and has been a non-resident of Australia in Australia but is subject to withholding tax at the rate of 10%. Such tax is required to be [sic] monthly by the 21st of the month following receipt of income and other penalties for late payment. We are advised by our accountants that the unpaid tax until the end of 1985 amounting to $2,932.69 without penalties. We have instructed our accountants to prepare the necessary returns and unless we hear from you to the contrary we propose drawing a cheque in favour of the Deputy Commissioner of Taxation in the above amount of $2,932.69 and upon representations trust that any penalties will be waived or substantially reduced. We might add that we are not advising as to the taxation position of E.A. Romano in the country for which he is now resident. Would you please let us know whether you require any further details or information and would you please immediately telephone the writer if you should disagree in any way with the lodgment of the withholding tax returns and the payment of the tax due." 27 The following may be deduced from these letters:

G G Romano "deposited" $20,000 on 3 November 1981. This was paid into the solicitors' trust account and recorded in the trust ledger account "G Romano Family Trust".

At some time after 3 November 1981, G G Romano instructed the solicitors who were attending to trust investments that "interest earned" should be credited to "the E A Romano re Investment" ledger account and this was done.

In January and October 1982, sums of $10,000 and $11,000 were received by the solicitors on account of the G. Romano Family Trust. These were received by the solicitors for "investment" and, as confirmed by Mr Thomas's letter of 17 January 1986, were dealt with under "G. Romano Family Trust".

In March 1982, G G Romano handed $11,000 to the solicitors with instructions that it was to be "invested on behalf of E A Romano", which sum was deposited with finance companies and recorded in the solicitors' trust ledger account "E A Romano re Investment". 28 On several recorded occasions, G G Romano sent cheques to Mr Michie under cover of letters referring to the trust. On 21 October 1987, he sent two cheques, one for $5,000 and the other for $3,000, and asked or directed Mr Michie "to invest same into G. Romano Family Trust A/c". On 11 March 1988, he sent cheques totalling $4,000 with a corresponding instruction. A cheque for $5,000 was sent on 3 April 1989 with an instruction "to invest same into G. Romano Family Trust A/c 'Pacific Partnership'" (obviously a reference to Partnership Pacific Limited, a money market operator with which Mr Michie was in the habit of placing funds for investment). An identical instruction was given on 14 June 1989 in relation to an accompanying cheque for $10,000. A letter of 2 November 1989 accompanying a cheque for $10,000 directed investment "into G. Romano Family Trust A/c". An identical direction was given on 20 February 1990 in respect of cheques for $16,000. A letter of 25 June 1991 with respect to $5,000 said, "Please be good enough to credit it to my Family Trust A/c". A letter of 16 August 1991 instructed that a cheque for $5,000 be invested "into G. Romano family trust a/c". 29 With one exception, these letters evinced an intention to "invest into" the family trust "account". In two cases, there was an added reference to Partnership Pacific. The exception is the letter of 25 June 1991 which instructed the solicitors "to credit my Family Trust A/c". 30 A letter of 28 April 1988 from Mr Michie to G G Romano acknowledges receipt of a cheque from Friends Provident Life for $9,244.14 which "in accordance with your request we have invested … in Partnership Pacific Ltd with the other funds held in relation to the Romano Family Trust". 31 Annexure A to Mr Thomas's affidavit of 17 June 2002, being a summary of funds with Michie Shehadie & Co, identifies both the amounts in G G Romano's several letters and that in Mr Michie's letter, along with a number of others, as "received from G. G. Romano". It should be inferred that all these funds were sent by G G Romano to the solicitors on the same basis as was stated in the several extant letters. 32 The question here is whether, on each occasion on which he sent such a letter and an accompanying cheque (or otherwise arranged for funds to be sent to the solicitors), Mr Romano should be taken to have acknowledged, as trustee, that the relevant sum was (or was to be), by its transmission to the solicitors, vested in him as trustee on the trusts of the deed so as to become, in terms of the definition of "the Trust Fund" in clause 1(b), part of that fund. 33 The alternative possibility was raised in the evidence of the accountant, Mr Thomas. There is in evidence a balance sheet of the trust as at 30 June 2000 prepared by Mr Thomas. It shows "trust settlement" of $10.00. The sole item under "liabilities" is designated "Loan at call - Giacomo Romano" and is in the sum of $137,405.46. When this liability is deducted from total assets of $748,053.40 (being cash in the solicitors' trust account, cash in a bank account and receivables secured by mortgage), there remain net assets of $610,647.94 which are said to be represented by the "trust settlement" of $10.00 and a net balance of $610,637.94 designated "Edward Romano". 34 Mr Thomas made it clear in cross-examination that he had, in preparing the balance sheet, treated as loans all of the sums "invested" by G G Romano, with the result that the corpus of the trust remained throughout the initial $10.00 settled by Mr Michie in 1981. In the course of cross-examination, Mr Thomas was taken to a number of instances in the documentary evidence of moneys being paid out of the funds held by the solicitors for the trust for purposes related to G G Romano's own separate affairs. There was reference to a payment of land tax, a payment to G G Romano's housekeeper and payments to a strata plan body corporate and two local government councils apparently in respect of properties owned by him. There were some of "numerous payments" referred to by Mr Thomas, being payments out of the funds held by the solicitors for G G Romano's benefit. There was also a payment of some $60,000 to the Guardianship Tribunal when G G Romano became unable to attend to his affairs. The following cross-examination occurred: "Q. And do you understand that debit to the capital account to represent some form of distribution made by Mr Giacomo Romano to himself from the Trust Account? A. No, I said it is a, I see it as a repayment of his loan account. Q. What loan account are you talking about? A. The money that he has lent the trust. Q. Where is there any evidence that he has ever lent the trust money? A. All these amounts going in that you have deemed to be capital. Q. When you say I've deem [sic] them? A. This summary is deemed to be capital. Q. Isn't that prepared on the basis of information you provided? A. No, I never said it was ever capital, I don't think. If you ever look in my summaries I just said it was moneys received from G Romano. Q. Well is there a document anywhere that permits us to ascribe a character to any of the sums deposited into the G Romano Family Trust account? A. No. Q. Have you seen a series of handwritten documents provided by Mr Romano to his solicitors, for example, 'Herewith cheque for $5,000. Please invest in G Romano Trust Account' or similar? A. No. Q. You are not aware of a loan agreement between Mr Romano and the G Romano Family Trust, are you? A. No. Q. You were never told by Mr G Romano that he made loans to the G Romano Family Trust, were you? A. No. Q. There's no evidence that you can point to which suggests that any contributions made by Mr G Romano to the G Romano Family Trust were in the nature of loans by him to it, is there? A. No. Q. And there is no apportionment or reconciliation of income earned by any such loan in his favour as opposed to income earned by the G Romano Family Trust as income for its own purposes, is there? A. No." 35 Referring specifically to the balance sheet as at 30 June 2000 prepared by him, Mr Thomas was cross-examined as follows: "Q. Do you see under the heading Liabilities, 'loan at call Giacomo Romano'? A. Yes. Q. You are the author of that entry? A. Correct. Q. On the basis what you have already told us, where did you, on the basis of what information did you form the view that there was a loan by Mr Romano to the trust? A. I was always of the opinion that all the moneys paid to the trust by Mr Romano were loans and not capital. Q. What was the basis of that opinion? A. Probably the advice I gave him when I set up the trust. Q. And I think you have agreed that loan is not documented? A. Correct. Q. And you do not in your affidavits depose to any such advice to Mr Romano, do you? A. No. Q. Nor do you depose in any of your affidavits to instructions from him or advice from him that he made loans to the trust? A. No. Q. Mr Giacomo Romano appears to have used the G Romano Family Trust from time to time as his own bank account, does he not? A. A difficult question to answer. If you, what, I presume, if you call it withdrawing money from his loan account, yes. Q. Well you keep talking about his loan account. I want to suggest to you there never was a loan account to your knowledge Mr Thomas, what do you say about that? A. I disagree. Q. What documents are you able to point to to suggest that payments made to him were not distributions made to him pursuant to an exercise of his discretion as the trustee to make such payments as opposed to loans? A. I've no evidence to that effect. Q. So if one assumes for the moment that there was no loan in existence? A. Yes. Q. And that the payments in and payments out under the Capital heading are, in fact, items of capital strictly so-called? A. Yes. Q. Mr Romano Senior was using this G Romano Family Trust account as his own bank account, wasn't he? A. Again I think you are loosely using the word 'bank account'. Q. Well, he was paying into and drawing out of its funds for his own purposes? A. Correct. Q. On the second page you see there is a heading 'balances per balance sheet' 137,000-odd? A. Second page of what are you referring to? Q. Of the transaction summary that I earlier took you to. A. What page was that? Oh, okay. Q. Page 16. A. Say that again? Q. Do you see about midway down the page there's 'balances per balance sheet' $137,405? A. Yes. Q. Do you know what that balance refers to? A. It's the loan account balance, the amount that I'm saying is the loan account on the balance sheet. Q. When was the first time you ever used the description in relation to any of Mr Romano's affairs involving the Romano Family Trust Loan Account? A. When I prepared that balance sheet. Q. And that was prepared in when, 2000 for the earlier proceedings? A. Some time after 2000. I'm not sure exactly when, be some time after June 2000. Q. Did you receive instructions from anybody to treat those moneys as a loan and not as capital? A. No." 36 Another aspect of the evidence that I consider pertinent to the nature of the funds "invested" from time to time by G G Romano is the general activities undertaken in relation to the trust assets. Evidence of this was given by Mr Shehadie. It is clear that, from inception, the assets of the trust were invested exclusively in interest bearing investments and that the solicitors arranged all such investments. Much of the money was lent on mortgage. As and when interest was received, it was taken into the solicitors' trust account. As balances accumulated there, they were placed on deposit with money market operators (such as Partnership Pacific Limited) pending longer-term investment. The reference in two of G G Romano's letters to "Pacific Partnership" may be taken as a direction (or wish) that the funds in question be placed by the solicitors with Partnership Pacific Limited for the account of the G Romano Family Trust. 37 The evidence as to G G Romano's intentions when he sent the several cheques and covering letters to the solicitors is sparse. The directions to "invest same into G. Romano Family Trust A/c" or , in one case, to "credit my Family Trust A/c" say little more than that the funds were being earmarked for what G G Romano thought of as the family trust "account". The use of the word "account" cannot be ignored. It suggests that G G Romano may have regarded the destination of the moneys as a particular account with the solicitors, being an account through which they invested G G Romano's funds at interest for the benefit of his family. 38 This possibility, coupled with Mr Thomas's evidence, causes me to conclude, on the balance of probabilities, that the several sums sent by Mr Romano for investment "into" the family trust "account" were regarded by him as remaining his money, although deployed through the trust to produce income for the family beneficiaries. Mr Thomas testified to G G Romano's having received funds back from the solicitors on several occasions to meet personal financial needs. The solicitors who, after all, had drawn the trust deed, apparently did not, on any such occasion, say that the funds concerned formed part of the corpus of the trust and were therefore required to be retained pursuant to clause 8 until the vesting day. Nor does it appear that such payments out for G G Romano's benefit were made in accordance with the trust deed provisions for the distribution of income, even if he had been a beneficiary (which, according to the original typewritten form, he was not). Finally, it might be expected that the solicitors would have been aware of clause 11 of the trust deed which precluded the deriving of any "benefit" by the trustee, other than clause 10 remuneration. This should have caused them to issue some appropriate warning had G G Romano attempted to appropriate any income to himself or, at least, to have canvassed with him the appropriate way of reconciling the apparent conflict between clause 3 and clause 11 - in addition to alerting him to the reality that income could not be distributed to a non-beneficiary. Since all moneys were under the control of the solicitors, they would have been aware had application in contravention of the trust deed been attempted. These factors are consistent with the various "investments" by G G Romano having the character of loans. 39 Finally, Mr Thomas testified that he was "always of the opinion that all the money paid to the trust by Mr Romano were loans and not capital", his basis for that opinion being: "Probably the advice I gave him when I set up the trust." 40 Mr Thomas conceded that he could point to no document to confirm the nature of the several deposits as loans. But the advice he "probably" gave Mr Romano was that, as and when he committed further funds to the trust, he should do so by way of loan. As I shall explain when I come to deal with income, the establishment of the trust seemed, clearly enough, to be motivated by tax minimisation considerations. The aim was to direct income away from G G Romano. To achieve that, there was no need for large amounts of capital to be tied up until the fortieth anniversary of the execution of the deed or the earlier death of the last to die of the descendants of King George V living at 31 October 1981 (that being the "vesting day" referred to in clause 8). The objective could be achieved much more flexibly through loans. 41 The solicitors' trust account was the vehicle through which all funds generated by the lending activities involving mortgages and money market companies passed. G G Romano, by his several letters, regarded the solicitors as the parties capable of "depositing into" the family "trust account". The solicitors also held the investments with money market operators and in mortgages. In a real sense, therefore, the solicitors played a custodian role for G G Romano as trustee. The several remittances of his personal funds to the solicitors with instructions to "invest into" or to "credit" the family "trust account" were thus, in his mind, payments to the party holding the trust assets as custodian consistently with the several indications, already mentioned, that G G Romano intended to enter into loan transactions. Particularly in light of the interposed custodian role of the solicitors, I do not consider any problem to arise from the apparent making of loans by G G Romano to himself as trustee (and see Rowley Holmes & Co v Barber [1977] 1 WLR 371; Gulland v Federal Commissioner of Taxation (1983) 72 FLR 362). 42 The evidence does not disclose any intention as to the period of such loans or as to the payment of interest. They must therefore be presumed to have been advanced free of interest and payable on demand. The corpus of the trust is therefore confined to the sum of $10.00 settled by Mr Michie. Income 43 Clauses 2 and 3 of the trust deed work on the basis that income may, in each accounting period until the vesting day, be paid, applied or set aside by the trustee to or for the benefit of such one or more of the beneficiaries as the trustee thinks fit. This discretion resides with the trustee. Clause 4 specifies ways in which payment, application or setting aside may be effected. It does not, however, purport to prescribe the only ways. 44 Clause 5 empowers the trustee to resolve to accumulate the whole or part of the income of a period. Clause 13 says that, to the extent that the discretion to pay or apply income to or for the benefit of beneficiaries and the discretion to accumulate are not exercised, income shall be "paid to" retained for or applied for the beneficiaries nominated in Class 'C' of Item 5 of the schedule. Item 5 contains no "Class 'C'" but does contain a description of a class or persons. The only sensible meaning that can be given to clause 7, as I read it, is that, in the absence of exercise by the trustee, in respect of particular income, of both the power to pay, apply or set aside for beneficiaries and the power to accumulate, the income is to remain in the trustee's hands to be dealt with ultimately in accordance with clause 8 on the "vesting day". 45 One thing at least is clear. No beneficiary can assert an entitlement to particular income except by reference to some positive act of (or on behalf of) the trustee allocating that income to that beneficiary. In the present proceedings, the only beneficiary who has been identified as the possible object of such allocation is E A Romano, one of the sons of G G Romano and therefore a person within the deed's definition of "beneficiary". 46 An annual process or procedure has been identified as possibly amounting to allocation of income to E A Romano. It involves the payment of non-resident withholding tax in respect of the income of the trust. The process or procedure, and the intention of G G Romano that it be ongoing, are referred to in the letter of 12 September 1984 set out above and must now be examined. 47 Mr Thomas deposed to having given G G Romano advice that income tax on the annual income of the trust could be avoided if the income was allocated to a non-resident. Withholding tax would be payable instead, and this would be levied at a lower flat rate. This is confirmed by passages in the cross-examination and re-examination of Mr Thomas as follows: "HARRISON: Q. In preparing that balance sheet you've operated on the assumption that all interest earned on the G Romano Family Trust was payable to Ed Romano, have you not? A. I haven't assumed that. That's what the withholding tax returns have showed since the inception of the trust. Q. That's what the withholding trust tax returns have shown, I agree. But you don't have an instruction independently prior to having prepared those returns that the income from the G Romano Family Trust was beneficially owned by Ed Romano, do you? A. I have no written evidence, no. Q. To your knowledge was the manner in which the accounts of the G Romano Family Trust were operated a method by which Mr G Romano could limit the tax on the G Romano Family Trust from rates payable on income in the normal course to rates payable at withholding tax rates? A. Yes."

And later: "Q. You said you had no written evidence that Ed Romano was entitled to the income from the Trust? A. Correct. Q. Had you had discussions with any person relating to the manner in which the trust income was to be distributed? A. Well, the trust was created on - under my instructions as a means of minimising income tax for the Romano Family and Mr Romano was made aware at the time that by distributing income to a person it means that money is their money, not his. Q. And that was the tenure [scil. tenor] of the advice that you gave to him, that is to --? A. From memory, yes, from memory. Q. And did he, after you gave that advice, give you any instructions as to what should happen with the income from the Family Trust? A. No, I was instructed by Mr Michie that the income was being distributed to Ed Romano and I was to prepare withholding tax returns." 48 This is supplemented by evidence of Mr Shehadie who said, at paragraph 11 of his affidavit of 10 December 2001: "Giacomo Romano rang me concerning the trust at least once each year and said words to the effect of, 'Distribute all the income earned on monies invested in the G Romano Family Trust to Edward Romano'. These conversations generally occurred around the time that Fred Thomas or a representative from his office was preparing the income tax returns for Giacomo Romano. Giacomo Romano also regularly telephoned my office to discuss the investment of funds in the G Romano Family Trust." 49 I quote also from Mr Shehadie's cross-examination: "Q. When Mr Giacomo Romano gave you the instructions to distribute all the income from the G Romano Family Trust to Edward Romano, what did you say to comply with those instructions? A. Simply make sure that the amount of income earned was communicated to Mr Thomas who then advised us of the amount of non-resident withholding tax to be paid and to draw a cheque for that. Q. And in each of and every year from 1989 until the date you swore this affidavit, did you write to Mr Thomas to that effect or to his predecessor? A. To Mr Thomas? Q. Yes? A. Well I think the procedure would be that my book-keeper would either provide Mr Thomas with a copy of a ledger or a figure that represented the gross amount of interest earned in the relevant period." 50 In the light of this evidence, it seems to me clear, on the balance of probabilities, that G G Romano put in place a system or standing order, to be implemented by his solicitors and accountants, as his agents, as and when occasion demanded, by means of which all income of the trust was allocated by G G Romano, through the intermediation of those agents, to E A Romano at six monthly intervals and the necessary withholding tax filings and payments were on each occasion made on behalf of G G Romano as trustee. The trust deed allows the trustee to act through agents in the administration of the trust (clause 10(o)) and there is no reason why agents' acts, performed periodically in accordance with the system or standing order to which I have referred, should not have had effect as acts on each occasion of G G Romano as trustee. The evidence shows that allocation occurred from inception of the trust (in the sense that all income from inception became the subject of allocations) and that the first payment of withholding tax, together with interest and penalties, covered allocations in respect of which earlier remittances of tax should have been made. The system or standing order remained in place until the incapacity of G G Romano intervened in December 1999. 51 It may safely be inferred from the evidence of Mr Thomas that G G Romano caused the trust to be established because of the income splitting or income tax reduction possibilities it presented. G G Romano was aware that Australian tax at the lowest rate achievable would be ensured by allocation of all income, period by period, to his non-resident son, E A Romano. It is consistent with that awareness and a desire to minimise tax to the maximum extent that G G Romano should have established the system or standing order to which I have referred. 52 Reference should now be made to a document executed by G G Romano on 26 June 1991 headed "G. Romano Family Trust - Statement of Intention of Trustee". The document was prepared by Mr Shehadie. It reads: "It is my desire that on the winding up of the G. Romano Family Trust that an account be taken of all the assets of the said trust and of all the income distributed to and set aside for any beneficiary so that the total assets of the said trust including all income set aside or distributed during the period of the trust be distributed equally between my sons JOHN JAMES ROMANO and EDWARD ALFRED ROMANO and in order that my intention be put into effect I direct that after the account has been taken of the assets and income of the said trust, that the trust be wound up and in the event that: (a) the total of all amounts set aside to my son EDWARD ALFRED ROMANO as a beneficiary of the G. Romano Family Trust dated 31 October, 1981 (hereinafter referred to as 'the Trust') is greater than the total of all amounts set aside to my son JOHN JAMES ROMANO as beneficiary of the Trust I DIRECT THAT a payment be made to my son JOHN JAMES ROMANO of the sum the equivalent to the difference between the total of all amounts set aside for my son EDWARD ALFRED ROMANO pursuant to the Trust less the total amounts set aside for my son JOHN JAMES ROMANO pursuant to the Trust and that such payment be made out of the Trust. (b) the total amount set aside to my son JOHN JAMES ROMANO as a beneficiary of the Trust is greater than the total amounts set aside to my son EDWARD ALFRED ROMANO as a beneficiary of the Trust I DIRECT THAT a payment be made to my son EDWARD ALFRED ROMANO of the sum the equivalent to the difference between the total amounts set aside for my son JOHN JAMES ROMANO pursuant to the Trust less the total amounts set aside for my son EDWARD ALFRED ROMANO pursuant to the Trust and that such payment be made out of the Trust." 53 I mention this only to say that it has no direct bearing on the question of how income has in the past been allocated. The document expresses a "desire" of G G Romano to be carried into effect "on the winding up of the G Romano Family Trust". The reference to "winding up" must, I think, be a reference to the arrival of the "vesting day", upon which clause 8 will operate. For present purposes, the document is relevant only because it demonstrates that G G Romano was prepared, in June 1991, to recognise the possibility that, by the time "winding up" occurred, one son may have participated in distributions of income to an extent greater than the other. This is consistent with a pattern of annual behaviour benefiting one son only. The solicitors' trust account records 54 Much time was spent on examination of relevant ledger cards and, later, computer print outs relating to the trust account of Michie Shehadie & Co. Attempts were made to piece things together, entry by entry. This was hampered by three things: first, incompleteness of the records; second, the fact that there had, clearly enough, been a separate ledger account maintained for E A Romano which, at its inception, concerned the separate sum of $11,000 lodged in March 1982 with the firm for investment for E A Romano alone; and, third, the fact that the two accounts were later combined into one. 55 It seems to me that all that really need be said about the trust account entries, incomplete as they are, is that they do nothing to call in question the inferences I have drawn in relation to either the status of the several sums forwarded by G G Romano to the solicitors for "depositing into" or crediting to the family "trust account" or the system or standing order with respect to income put in place by G G Romano as from the inception of the trust. Conclusions 56 In the light of the above findings, the appropriate outcome is that the court should give its opinion, advice and direction to the trustees of the trust created by the deed of 31 October 1981 that they are justified in dealing with the trust assets on the footing that (a) all sums deposited to the credit of the Michie Shehadie & Co trust account by means of remittances by G G Romano (and identified in the documents from time to time prepared by Mr Thomas as deposited for the purposes of the trust) were advanced by G G Romano by way of loan free of interest and payable on demand to be made by G G Romano or his legal personal representative; and (b) all income of the trust derived in periods up to and including the period ended 30 June 1999 was, in terms of the said deed, applied and set aside for E A Romano, with income so applied and set aside having borne (and thereby been reduced by) the non-resident withholding tax in respect thereof and any interest and penalties applicable to such tax; and (c) income of the trust derived in periods after the period ended 30 June 1999 and until the present trustees assumed office has not been paid, applied or set aside to or for the benefit of any beneficiary. 57 It may be that the parties would prefer these generally stated conclusions to be expressed in a particular way. I therefore direct that agreed short minutes be filed by delivery to my Associate within seven days from today and, in default of agreement, that the short minutes for which the respective parties contend be so filed within fourteen days from today. If there is agreement on costs, that should be covered in any agreed short minutes; otherwise the respective short minutes should be accompanied by brief written submissions on costs. I shall then proceed to make orders. **********

Last Modified: 11/04/2002 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.

CITATION : Walker v Romano [2002] NSWSC 1026 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 5023/01 HEARING DATE(S) : 27/08/02, 28/08/02 JUDGMENT DATE : 31 October 2002

Walker v Romano

At a glance

Court

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Before

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Judgment (12 paragraphs)

Parties

Cases Cited (5)

Cited By (1)