What is the appropriate governing law jurisdiction for my Trust Deed?

It is commonplace in nearly all trust deeds for there to be a clause which identifies the relevant State or Territory laws which apply to the trust, and the Courts which have jurisdiction (be it exclusive or non-exclusive) to hear a dispute or make orders on the administration of the trust. Accordingly, when establishing a new trust, due consideration should be given to the choice of jurisdiction and the governing law which applies under the trust deed.

There is no clear-cut answer as to which State or Territory’s laws should apply to a particular trust. However, the Courts have provided helpful commentary on the relevant factors which need to be taken into account when making the decision. This choice needs to be considered carefully, as Courts hold the power to overrule the choice of governing law provided in a trust deed and nominate a more appropriate jurisdiction’s laws instead, which may have adverse consequences for the trust.

This article will revisit a common issue which arises when establishing a trust and will provide a summary of the key commentary provided by the Courts which helps answer the question: what State or Territory’s laws should apply to a particular trust? Further, this article highlights the importance of ensuring this decision is made with due thought and not with ulterior motives (such as seeking favourable duty or tax outcomes) and provides an overview of circumstances in which a trust’s governing law can be changed.

What State or Territory's laws should apply to a particular trust?  

The default position taken by the Courts is that the proper law of the trust governs the administration of the trust, its validity, interpretation and effect.[1] As such, in the first instance a Court will apply the laws expressly set out in the trust deed.

If the trust deed is silent on this point, then the proper law is the law which the trust has its closest and most real connection to.[2] The case of Ballard v Attorney-General (Vic)[3]detailed the following considerations which are relevant to working out what is the trust's 'closest and most real connection'; those are:

• the place of administration of the trust;
• the place where the assets of the trust are situated;
• the place of business or residence of the trustees; and
• the objects or purposes of the trust and the places where they are to be fulfilled.[4]

The Courts have not confirmed that any greater weighting should be attributed to a particular factor, and, accordingly, each consideration should be assessed equally when undertaking the 'closest and most real connection' test. 

What is clear in light of the above factors is that the governing law of the trust should not be chosen primarily to attempt to produce a favourable tax outcome, for example, by choosing a State or Territory where no duty is required to be paid on establishment of the trust. Actions such as this are contrary to the 'closest and most real connection' test set out in Ballard and risk being dealt with unfavourably by Courts, as well as the relevant State Revenue Office if it is discovered that a trust has avoided paying taxes.

Can you change the governing law jurisdiction of a trust?

As a general rule, changing the governing law of the trust should only be considered for a legitimate purpose. This may be, by way of example, when the closest and most real connection of the trust has changed since first being established.

In most cases, changing the governing law of a trust can be achieved the same way any other variation to trust's deed is made. Generally speaking, so long as the variation to the trust deed is valid and in accordance with the terms of the deed, then the governing law jurisdiction of the trust can be changed.

However, the trustee (or person responsible for effecting the variation to the terms of the trust deed) should obtain legal advice before executing a change of this nature. Changing the laws which govern the trust carries risk of 'resettlement' and may, in turn, result in adverse financial or tax consequences for the trust. We have dealt with the issue of resettlement of a trust in previous articles, which can be accessed here.

More information from Maddocks

For more information on what governing law should be chosen to a future trust establishment, or which Court should have jurisdiction to hear a dispute or make orders on the administration of a trust, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Tax & Structuring team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

• Incapacity of SMSF Members - The Benefits of an Enduring Power of Attorney
• Reminder for SMSF Trustees: Be aware of Legal Requirements for Accessing Superannuation Early
• Making 'Cents' of Division 7A Loan Agreements

Order related document packages

• Trusts Documents
• Superannuation (SMSF) Documents
• Company Documents

[1] In the Estate of Webb; Webb v Rogers (1992) 57 SASR 193.

[2] Perpetual Executors & Trustees Association of Australia Ltd v Roberts [1970] VR 732 cited in Ballard v Attorney-General (Vic) [2010] VSC 525, [22].

[3] [2010] VSC 525.

[4] Ballard v Attorney-General (Vic) [2010] VSC 525, [22].