Trusts valid or not? Settled sums, record keeping

A recent case reminds us of the importance of the settled sum and proper trust records in ensuring the validity of a trust. The Victorian Civil and Administrative Tribunal (Tribunal) recently denied tax benefits that would otherwise be available to trusts by finding that the trusts did not in fact exist because the settled sum had not been paid and the documents had not been executed. The case is Aston (Aust) Property Pty Ltd v Commissioner of State Revenue (Taxation)[1].

 

Overview

The case of Aston reminds us that when you establish a trust, you need to comply with the formalities. Although the Establishment Kits, and associated documents, in Cleardocs document packages facilitate this, it is essential that the set processes are followed with care and precision.

The Tribunal had little empathy for the appellant's mistakes in setting up the respective trusts. Accordingly, failing to pay the settled sum or failing to show that the trust deed is complete and properly executed may:

  • result in the trust being invalid;
  • open the trustee to potential liability; and
  • create a barrier to the tax and other benefits that trusts are created to enjoy.

You can read the full case here. We discuss it below.

Process for establishing a trust ordered from Cleardocs

As set out in the documents included in the relevant Cleardocs trust packages:

  1. The Cleardocs Discretionary Trust is established when:
    • the settlor pays the settled sum to the trustee; and
    • the trustee consents to be the initial trustee of the trust.
  2. The Cleardocs Fixed Unit Trust is established when:
    • the initial unitholders jointly pay the settled sum of $10 to the trustee to establish the trust;
    • the initial unitholders pay for, and the trustee has issued to them, the number of fully and partly paid units in the trust; and
    • the trustee consents to be the initial trustee of the trust.
  3. The Cleardocs Non-fixed Unit Trust is established when the ordinary unitholders take the above steps in 2 and then immediately after the deed is executed:
    • the initial income unitholders each pay $1.00 to the trustee; and
    • the trustee issues one income unit to each initial income unitholder.
  4. The Cleardocs Hybrid Trust is established when:
    • the settlor pays the settled sum to the trustee;
    • the trustee consents to be the initial trustee of the trust; and
    • the trustee issues the initial units to the initial unitholders in consideration for the settled sum.

The decision in Aston is but one example of why it is so important to follow these steps – without exception.

The facts

In the case of Aston, Mr Nicholas Corcoris was a property investor. He purchased properties through trusts, the trustees of which were the appellant companies in this case. Mr Corcoris was a director and shareholder of most of these companies. He also prepared the trust deeds himself, without the help of professionals.

The issue and what the appellants argued

Mr Corcoris and other entities associated with him objected to assessments made by the Commissioner of State Revenue (Commissioner). They alleged the Commissioner wrongly assessed transfers of property on the basis that the Commissioner did not have regard to the fact that the properties were held in trust.

Mr Corcoris stated that all the trusts were created before the relevant property settlements in which the purchaser companies received the transfers of land in their capacity as trustees.

The decision

The Tribunal found in favour of the Commissioner. The Tribunal found that the 'trusts' Mr Corcoris created were 'nothing more than trust schedules, sometimes combined with trustee execution pages, which were designed to satisfy his bankers and the regulatory requirements of the Commonwealth authorities and the Commissioner of State Revenue'.

The Tribunal was sceptical about how Mr Corcoris created the trusts each time he purchased or transferred a property. Significantly, the Tribunal found that:

  1. for each trust, there was no evidence of the payment of a settled sum to establish the trust;
  2. Mr Corcoris could not point the Tribunal to the existence of any trust deeds. Instead, Mr Corcoris could only say that he believed that the terms of trusts could be incorporated by implication from the terms of a standard document which he had acquired from "Express Company Services" before 1994;
  3. there were a large number of errors and inconsistencies in the trust schedules, execution pages and associated minutes that were exhibited;
  4. the transactions were 'entered into' by companies that did not exist at the time; and
  5. because there were no trust deeds, there was no evidence of any undertakings by the trustee to hold the transferred property for the unitholders – therefore, each trust lacked certainty of intention, which is an essential element for any enforceable trust.

On the basis of the above, the Tribunal concluded that the trusts did not exist and the appellants were not entitled to any tax benefits that would have otherwise been available to the trustee companies in the purchase and transfer of the properties.

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[1] [2012] VCAT 48.