To the letter: the Court’s approach when interpreting trust deeds

A recent decision in the Federal Court of Australia shows the importance of properly considering the particular wording used in a trust deed when exercising a power under it, and the adverse consequences that may flow if the rules of a trust are not followed to the letter.

 

This is something to keep in mind currently, as many rush to amend their trust deeds to exclude foreign persons as beneficiaries in order to avoid a land tax surcharge before the 31 December deadline.

The decision

The decision was Advance Holdings Pty Limited atf The Demian Trust v Commissioner of Taxation [2020] FCA 1479. One of the issues in the case was the Appointor's power to appoint a trustee, with the Court taking a strict approach as to the wording used in the trust deed.

The relevant clause was:

"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"

The Appointor tried to use this power to appoint a company called Advanced Holdings to act as an additional trustee of the trust, however the Court took the view that the power in the trust deed "requires one or more trustees to be removed and, that having happened, permits one or more trustees to be appointed".

As no trustee was removed before Advanced Holdings was appointed as an additional trustee, the Court found that Advanced Holdings was never validly appointed as a trustee. On this basis, assets that were believed to be transferred to and held by Advanced Holdings as trustee of the trust were deemed to actually be held by Advanced Holdings in its own right and, as a result, income derived from the assets was assessable to Advanced Holdings as the taxpayer. The ability to distribute the income between the beneficiaries of the trust was lost, resulting in adverse tax consequences.

An example of a recent trust deed we worked on

In a recent matter we worked on, a client asked us to amend a trust deed to exclude foreign persons as beneficiaries of the trust.

The relevant amendment clause in the trust deed was:

"The Trustee may at any time by deed vary any provision of this Deed."

We took the view that this power allowed the trustee to vary a provision already contained in the trust deed, but did not allow the trustee to add or remove a provision. As we were required to add a clause defining "foreign persons" as well as a clause excluding those foreign persons as beneficiaries of the trust, we first amended the amendment power to state that:

"The Trustee may at any time by deed vary any provision vary, revoke or add to the provisions of this Deed."

Only once the amendment power was varied did we proceed to add the relevant clauses required to exclude foreign persons as beneficiaries of the trust.

Key takeaway

Ultimately, the Advanced Holdings decision shows that the Court will take a strict approach when interpreting a trust deed, and highlights the need to seek expert advice as to the particular wording of a trust deed when exercising a power under it. This is particularly important in relation to significant trust decisions, such as removing and appointing trustees or amending a trust deed.

The Private Clients group at McCabe Curwood specialise in advising clients in relation to discretionary trusts, such as amendments to exclude foreign persons as beneficiaries to avoid paying the foreign person land tax surcharge.

We are here if you would like to discuss your trusts or any other concerns, so please feel free to contact one of the solicitors in our Private Clients group. Alternatively, you can email Terry McCabe, the Principal of the group, directly at terry.mccabe@mccabecurwood.com.au.  

Contributors

Tal Prigan Lawyer
Jacob Goodwin Law Clerk