Trustees Beware: Recent cases remind us to exercise caution when varying a trust deed

The recent cases of Re Owies Family Trust [2020] VSC 716 (Owies) and Advanced Holdings Pty Ltd as trustee for The Demian Trust & Ors v FC of T [2020] FCA 1479 (Advanced Holdings) decided in late 2020, reminds professionals about the importance of exercising caution when varying a trust deed.

There are many factors a trustee must consider before they resolve to vary their trust deed and these cases provide guidance on what should and should not be done when effecting a variation. They also emphasise the importance of reading the terms of the trust deed before doing so.

So, what do I need to consider when varying a trust deed?

A trustee must ensure it's aware of its obligations before it varies a trust deed. The power to vary may require the trustee to obtain appointor (or another party's) consent or give prior notice to beneficiaries. For this reason, there is no 'one size fits all' variation process. Owies and Advanced Holdings tells us that the express parameters in the deed must be respected in order for a variation to be effective.

Other crucial considerations include what property the trust owns, and which jurisdiction's laws govern the trust. The reason this is so important is that some purported variations may actually amounts to a 'dutiable transaction',or the creation of a new trust altogether (commonly referred to as a 'resettlement'), meaning capital gains tax or transfer duty may be triggered.

Finally, the trustee must consider any future distributions it will want to make. This consideration is unique to each trust. For instance, a deed of variation to exclude foreign persons from benefitting or controlling the trust may not be appropriate if there are family members who are foreign residents, and they are persons to whom the trustee genuinely wishes to distribute to in future.

Owies

Owies involved a dispute between siblings over the control of their family trust (Trust).

The father, John Owies died. Later, the mother Eva Owies died. John, and then Eva, had filled the positions of Guardian of and Appointor of the Trust. They were survived by 3 children.

Paul and Deborah (Plaintiffs) brought an action against the trustee, JJE Nominees Pty Ltd, and their brother Michael, who was claiming to be the Guardian and the Appointor under the trust deed.

Michael argued he had become Guardian and Appointor by virtue of three separate variations. Michael was the driving force behind these variations, which sought to change the persons identified as Guardian and Appointor in the deed. The most significant variation amended the schedule to list Michael as the Guardian and Appointor.

What was the scope of the variation power in the trust deed in Owies?

Clause 20 of the Trust's deed stated:

"The Trustee for the time being may at any time and from time to time by deeds with the consent of the Guardian if alive revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund..."

The Court noted that this clause makes a clear distinction between revoking, adding to and varying 'trusts' and the power to declare new 'trust or powers'. Therefore, this clause did not empower the trustee to vary the schedule in the trust deed, as this is not a 'trust' (i.e. an obligation attaching to property).

Therefore the Court found that in attempting to vary the identity of Guardian and Appointor, the trustee had exceeded its power and as such, all three of the variations were invalid.

Advanced Holdings

The 2020 Federal Court decision of Advanced Holdings highlights the disastrous impact of failing to follow procedures for the removal/replacement of the trustee as set out in the deed.

The case concerned in what capacity Advanced Holdings held units in a unit trust. If Advanced Holdings held the units in its own right, rather than as corporate trustee, the income derived from those units would be taxed at the corporate tax rate and could not be distributed to the beneficiaries in the normal tax-efficient manner.

Advanced Holdings believed that it was the corporate trustee of the Demian Trust, a family discretionary trust. The Federal Court held that Advanced Holdings in fact had never been appointed trustee of the Demian Trust. Therefore instead of holding the units on trust for the family trust, Advanced Holdings in fact owned them both legally and beneficially in its own right.

What was the scope of the power of appointment in the trust deed in Advanced Holdings?

Clause 22 of the Demian Trust deed stated:

"the Principal may at any time by notice in writing to the Trustee remove from office any or all of the Trustees or Trustee for the time being of this Deed and may by Deed appoint a new Trustee in its or their place to be the Trustee hereof"

Mr Demian, was the 'Principal' of the Demian Trust at the relevant time when he wished to appoint Advanced Holdings as trustee of the trust.

Rather than do so by deed, he purported to do so by a written resolution. The resolution resolved to remove the incumbent trustee (which was Demian Holdings) and appoint Advanced Holdings as a replacement.

The Commissioner argued that:

• clause 22 of the Demian trust deed did not amount to a power to appoint an additional trustee or trustees, but merely contained a power to appoint a replacement trustee once the Principal had already exercised the power to remove an incumbent trustee; and
• Demian Holdings had not effectively resigned as trustee, because it had not given two months' notice of the resignation to the Principal (as required by clause 15 of the deed).

The Federal Court agreed. As such, Advanced Holdings had never actually become the trustee of the Demian Trust.

Whilst conditions such as trustee notice periods may seem unnecessary, especially in the context of tightly held family trusts - where, for instance, there is one named beneficiary who is also sole director of the corporate trustee - Advanced Holdings tells us that if it is in the deed, compliance with those provisions is essential.

More Cleardocs information on related topics

You can read earlier ClearLaw Articles on a range of topics, including the following topics which you may find relevant:

• Trusts holding residential land in NSW must amend their trust deed by 31 December 2020 or risk foreign surcharges applying;
• Discretionary trusts: recent developments in "foreign person" rules for duty and land tax purposes; and
• Testamentary trusts: Changes to taxing of distributions to minors.

Order related document packages

• Discretionary (Family) Trust Minutes & Resolutions
• Discretionary Trust - excluded beneficiaries
• Change of Trustee Discretionary Trust

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.