Amendment of trust instruments
The notion of the trust estate, the relationship whereby the holder of property holds it on trust rather than for the holder’s own purposes and benefit, is a peculiarly English one, described by Maitland as ‘the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence.’1 It is a relationship whose origin lies in, and whose development has been shaped by, a tension between on the one hand the desires of settlors to control the destination of the settled assets, and on the other social (including fiscal) policies, as its evolution from the medieval use to the modern trust illustrates.2
More recently the shaping effect of prevailing social conditions and fiscal policies may be seen in the nature and purpose of the most common forms of settlements. In the nineteenth century, before the Married Women’s Property Acts, the marriage settlement protected the property of married women from the law concerning coverture. In the early twentieth century, the family settlement typically sought to escape the depredations of death duties. In the latter half of the twentieth century, the discretionary trust evolved in Australia from a vehicle for minimisation of death and estate duties into a principal mechanism of income tax planning.
The extension of the role of trustee from holder of family assets and protector from the imposition of death duties to a primary vehicle for income tax minimisation – leading to the ‘trading trust’ – has few parallels outside Australia. It has generated some unique Australian jurisprudence, concerning the rights of trustees to indemnity from trust assets for liabilities incurred in the conduct of trust businesses,3 as well as a belief in the authors of Australian tax legislation that ‘a trust’ is no more than a specialised version of a company, whereby income passes through the ‘entity’ without suffering company tax on the way. As will be seen, this misconception has had a pernicious effect not only on the language of the legislation but also on its administration.
The development and spread of the ‘trading trust’ has been relatively sudden. When the leading Australian text on trust law was written in 1958 the principles governing trusts were recognisably based on a quarter millennium of largely unvarying jurisprudence. The established role of trustees was to hold and manage settled property, not to engage in risky business activities; the power to apply trust assets to the conduct of a business was effectively confined to the rare case of a business formerly conducted by a testator. In the early 1970s, however, spurred by a combination of high rates of tax on private company income4 and accelerating inflation, Australian tax advisers promoted an extrapolation of trustee-conducted trading from the occasional inherited business to the ordinary family business, with corporate trustees providing at least the impression of limited liability, and this extension was – perhaps rather more by passive acceptance than by affirmative decision – acknowledged by the Courts and the legislature. Some of the consequences of the extension are yet to be worked out, satisfactorily or at all.5 Many of the settlements more recently pressed into service for income tax planning purposes had originally been established for estate planning purposes. The assets which had been vested in trustees so that they would be excluded from the dutiable estates of family members were used as the capital of businesses or investment funds, and the flexibility afforded by the discretionary power to appoint income permitted the distribution of business profits among family members and associated companies (and in some cases putative beneficiaries associated with vendors of tax planning schemes) in a manner which attracted the least burdensome tax liabilities. Unfortunately, the drafting of trust instruments prepared at a time when the incidence of death duty was uppermost in mind proved to be less than wholly apt for the use of the trust estates as a vehicle for income tax minimisation. In particular, provisions concerning the definition of the amount distributable as income, the mechanisms for distribution of income in such a fashion as to attract the desired income tax outcomes, the range of potential beneficiaries6 and the allocation of entitlements to income among beneficiaries have on occasion proved to be unsuitable for achievement of the desired income tax outcomes.
Moreover, although by far the majority of current trust estates7 have been established since the abolition of death duties, the tendency of advisers to stick to what is familiar and carries the endorsement of esteemed practitioner8 has meant that many of the newly established settlements are made on the terms of deeds adapted more to the object of estate planning than income tax planning.
This has led to an exploration of the circumstances in which the language of trust deeds may be ‘modernised’ and the range of beneficiaries extended. A solution available in earlier times – the transfer of the capital assets to a new settlement – is less attractive following the introduction of capital gains tax (CGT); rather, the emphasis has been on amendment of trust instruments.
There are, however, some significant impediments and traps in the way of the desired amendments. Some are discussed below; for reasons of practicality and space, the discussion is confined to amendments to trusts established and maintained in New South Wales, and to New South Wales legislation, although much of the discussion is applicable to other Australian jurisdictions.
Power of amendment
Although discussion of amendment of trust deeds often proceeds upon the premise that a power of amendment or variation is a distinct species of power, the term is descriptive, not normative, except in the case where it is conferred by statute. A power to amend the terms on which a trust is constituted is, if granted under those terms, no more than a particular and sometimes limited instance of a power of appointment (or in some special cases a power to revoke the trust). The law governing the power to amend the terms of the trust is, in nearly all respects, the same as that governing the creation and exercise of powers generally.
Much of course depends on the terms of the relevant power. Not all powers of appointment conferred in respect of settled property permit amendments to the terms of the trust which might be considered desirable: for example, a power to appoint income or corpus (e.g., a direction to hold for such objects as the donee may appoint) may not be wide enough to authorise a variation of administrative or investment powers, save by an appointment which amounts to a resettlement of the entire fund.9
Conversely, not all powers to amend the terms of a trust instrument allow amendment of the dispositive terms of the settlement: either expressly, or as a matter of construction in context, they may be limited to the managerial powers of the trustee and not extend to the entitlements of beneficiaries.10
Like all powers, a power to amend the terms of the trust is limited in scope by the terms of its grant, and must be exercised in accordance with those terms, both as to manner and as to extent. This extends to a limitation on the exercise of the power to the purpose for which it was granted; such a limitation will be implied if it is not expressly stated.
Where the amendment affects entitlements under the terms of the trust, the validity both of the power itself and of any particular exercise will be limited by the rules governing perpetuities and accumulations. Ordinarily, a power to amend the terms of a trust will be classified for perpetuity purposes as a special power, so that under the common law rule – which may well be applicable, since the applicability of perpetuities reform legislation is governed by the time of creation of the trust or power, not by the time of exercise – the power will only be valid if it must be exercised within the perpetuity period reckoned from the settlement of the fund, and an exercise of the power will only be valid if interests under it must vest within that period. In rare cases, the power of amendment will be so extensive as to amount to the grant to the donee of a general power of appointment, in which case the power will be valid if it may be exercised within the perpetuity period, and the validity of the exercise will be assessed as a disposition at the date of exercise. Such cases – for example, an unlimited power of revocation and resettlement reserved by a settlor – are however rare, because of their adverse fiscal consequences.
A power of amendment which affects entitlements will also be subject to the requirements of certainty applied to powers generally, considered in cases such as Re Gulbenkian’s Settlement Trusts11 and McPhail v Doulton.12 Thus an amendment substituting in a dispositive provision a class of objects too vaguely or widely described may be held to be invalidly made, if the power in the dispositive provision is one which the trustee is obliged rather than merely authorised to exercise.13
Construction of amendment powers
While the exercise of a power of amendment may not exceed the scope of its grant, the power should not be construed in a ‘narrow or unreal’ manner: it is the Court’s ‘cardinal duty to construe each provision according to its natural meaning, and in such a way to give it its most ample operation’.14 Rather, the instrument is to be read as a whole,15 and having regard to its context and purpose, to ascertain the scope of the amendment power.
In the case of instruments establishing trust funds for a clear and relatively limited purpose – the most common instances being superannuation funds and public investment funds – the power of amendment is likely to be read as not authorising an amendment which subverts or destroys the purpose or ‘substratum’ of the fund.16 In Re Dyer17 a trust to fund an orchestra proved insufficient for the purpose, and an amendment to allow support of musical societies was held valid as within the ‘original purpose of the gift’ and this was followed in relation to a family settlement in Re Ball’s Settlement Trusts,18 but as the Court of Appeal observed in Kearns v Hill,19 in the typical family discretionary trust there is no ‘substratum’ to be preserved beyond perhaps the provision of benefits to the (often very widely described) class of objects. Even in the case of a widely held property trust, no limiting substratum may be identified: in Cachia v Westpac Financial Services Ltd20 Hely J considered such a fund to have no substratum beyond its being ‘a property trust in which units are issued to the public’.
Requirement of writing
Modern derivatives of the Statute of Frauds21 require writing in two presently relevant circumstances: ‘no interest in land can be created or disposed of except by writing’ duly executed, and ‘a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing’, subject to the law concerning ‘the creation or operation of resulting, implied, or constructive trusts’. Much ingenuity has been expended in devising dispositions which do not offend these provisions yet do not attract the imposition of stamp duty.
It is sometimes argued that where the assets held by a trustee include land an amendment not in writing cannot be effective. Such arguments usually confuse the issue by concentrating on the land holding as the circumstance attracting the statutory disqualification, rather than considering the amendment. In a case where the sole trust asset is realty, and there are no material trustee liabilities, it may be accurate to say that a particular amendment effects a disposition of an interest in land: to amend a trust of Blackacre for A for life with remainder to B so that it is held for A for life with remainder to C may fairly be said to create a remainder interest in C, even if it does not dispose of B’s interest, and so to attract the operation of the statute. But the position is different where the trust is not so direct.
Even a ‘simple’ property unit trust – whereby investors jointly contribute the purchase price of a specific property – will ordinarily not involve the present vesting in unitholders of an estate in the land which is ‘disposed of’ by a variation to the instrument. Typically,22 the instrument governing such a trust will direct that while the ‘beneficial interest’ in the asset is in the unitholders, no unitholder may presently call for transfer, and the fund is to be liquidated and distributed among the unitholders at the termination date. In such a case, the unitholders have no ‘estate in land’ which is created or disposed of by issue, transfer or redemption of units or by variation of the deed: what they have is a future, contingent and defeasible interest in the assets of the fund as at the termination date, and a right to receive amounts on account of income in the meantime. When the unitholding right matures into a right to receive assets, the assets may no longer comprise land, and the present unitholders may not be the recipients of the distribution. Moreover, in the meantime, the trustee has an anterior right to apply the fund to meet trust liabilities.23
Mode of exercise
Where a power of amendment specifies the manner in which it is to be exercised, that manner must be complied with, and an attempted exercise of the power which does not meet the specification is ineffective. This is so even if the limitation appears arbitrary or unrelated to the purpose or effect of the amendment: ‘Whatever arbitrary terms the grantor of the power may impose upon the party executing it, or however absurd and unreasonable they may seem to be, they must be fulfilled; as if it were required that the instrument executing the power be witnessed by persons of a particular stature, or written on paper of a particular colour.'24 Arbitrary constraints are rare in current deeds, but others are not: for example, that the amendment be effected in writing, or by deed, or upon stipulated notice to a ‘protector’, or with specified consent.
If the requirement is that the amendment be consented to by a particular individual, without qualification,25 it has been held that the power does not survive the death of that person.26 If the consenting party is nominated in terms which identify him as the holder of an office – e.g. ‘the appointor’ – it will ordinarily be the successive holders of the office who must consent.
A requirement that the consent be given in advance cannot be waived, and a subsequent consent will not suffice. If all those who are potentially affected by the amendment join in the waiver, they may be estopped from later contesting the giving of consent.27 A nice question then arises as to whether a third party – ordinarily a fiscal authority – can assert that the requirement of consent is not met. The answer will depend on the circumstances in which the issue arises: for example, if the question is whether a beneficiary is entitled to income in consequence of the amendment, the beneficiary’s entitlement (as against the trustee and all other beneficiaries) will be fixed by the estoppel, and the revenue authority cannot contest that entitlement. But if the question is whether the amendment happened, because some fiscal consequence turns on the event of amendment, the fiscal authority is not bound by the estoppel and may contest the event of amendment.28
In the case of family trusts, the power of consent is ordinarily given to a named party in his personal capacity, and may be exercised for the personal advantage of that party or those whom he chooses to benefit.29 In other cases, however, the power may be given to a party holding it in a fiduciary capacity, in which case it must be exercised having regard to the fiduciary duties. The power of consent given in relation to a public investment fund, or a charitable fund, will ordinarily be of this character.
Powers given to an employer in relation to superannuation funds are not easily categorised: sometimes the employer is constrained to exercise them in such a way as to advance the interests of the members, or the purposes of the fund,30 but in other cases the employer may be able to use them to benefit itself.
Whether a constraint on the exercise of a power of amendment may be removed by exercise of the amendment power will depend on the proper construction of the instrument. There is a general principle that it is not permissible to do indirectly what is prohibited directly (expressed in the maxim quando aliquid prohibetur, prohibetur et omne per quod devenitur ad illud),31 but this applies where there is a prohibition, not where there is merely an absence of power. Whether the constraint amounts to a prohibition, so that the mode of exercise is entrenched, or is itself open to amendment, is to be determined having regard to the language of the clause and of the instrument as a whole.
An attempted exercise of an amendment power which goes beyond the scope of the power is ineffective, at least to the extent of the excess and possibly as to the entire exercise. The excess may be as to the terms of the amendment, as to the attempted manner of exercise, or as to constraints attempted to be imposed on the amendment.
Family discretionary trusts commonly contain a provision precluding any amendment having the effect of conferring a benefit on the settlor. Such provisions have their origin in fiscal considerations, and while the relevant legislation may have passed into history,32 the limitations ordinarily have not. While the prevalence of the ‘nominal donor settlement’ in Australia, where the donor is unrelated to the beneficiaries, has the result that this limitation is rarely relevant in relation to settlors, amendment clauses sometimes (from an ‘abundance of caution’) exclude amendments benefiting the ‘appointor’ or ‘protector’, who may be a party related to the family benefited. In such cases the amendment power cannot be exercised to make the fund available to the ‘appointor’, and the language employed will also ordinarily preclude amendment of the amendment power itself so as to overcome the exclusion.
Whether an excessive amendment can be partly saved by striking out the excessive part will depend on its language and effect. ‘Where there is a complete execution of a power and something added which is improper, the execution is good and the excess void; but where there is not a complete execution, or where the boundaries between the excess and the execution are not distinguishable, the whole appointment fails.’35
Fraud on the power of amendment
A power of amendment, like any other power, may only be exercised for the purpose for which it is given: the donee of the power ‘shall, at the time of exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view as to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power’.36 Fraud in this context does not necessarily import dishonest or immoral conduct, but only ‘a purpose, or… an intention, beyond the scope of or not justified by the instrument creating the power.’37 An amendment which breaches this constraint – for example, one undertaken with the purpose of securing that the benefit of the trust fund or part of it will enure to someone beyond the class of beneficiaries – will be ineffective.
The relevance of the distinction between an excessive and a fraudulent exercise of the power of amendment is that the former may be partly saved by severance of the excess, but the latter may not. ‘If, on the one hand, there is a genuine appointment to an object of the power, coupled with an attempt to impose on that appointment conditions or trusts in favour of persons who are not objects, then the appointment stands good free from the conditions. If, on the other hand, there is no genuine appointment to an object of the power, but the appointment actually made to that object is for purposes foreign to the power, then the whole appointment fails as being in substance an appointment unwarranted by the power, and that whether the real purposes of the appointment have or have not been communicated to the nominal appointee and assented to by him.’38 Since the power of amendment is one having effect only in equity39 an exercise tainted by fraud is wholly bad.40
Statutory powers of amendment
Where the instrument contains no power to amend the terms of a trust, there may nevertheless be a statutory power in the Court to effect a desired amendment. The power varies from State to State; for present purposes only sec 81 of the Trustee Act of NSW is considered, and under that provision the circumstances in which the power may be exercised are limited. Section 81(1) provides –
- Where in the management or administration of any property vested in trustees, any sale, ease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court:
- may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and
- may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.
In Re A S Sykes deceased41 Helsham J accepted that notwithstanding that the section speaks of transactions ‘in the management or administration of any property vested in trustees’, an order having the effect of an ‘adjustment of the respective rights of the beneficiaries’ might be made; but his Honour was of the view that a permitted alteration must be a necessary incident of dealing with some question of management or administration.42 However, a more expansive view of the scope of those powers has been taken: for example Rath J in Perpetual Trustee Co Ltd v Godsall took the approach that so long as the prime purpose of the proposal of the trustees was in the area of management or administration, the Court could make an order under sec 81, even though the beneficial interests of beneficiaries in the trust property would be affected. In that case, an order was made for the sale of a house in which a widowed life tenant was living, the purchase of a less expensive house and the establishment of a fund to compensate the remainderman.43
In Arakella Pty Ltd v Paton 44 Austin J summarised the authorities as revealing that ‘the Court’s power under s 81 cannot be used to subvert the beneficial disposition in the trust instrument, but if an order is made in the management or administration of trust property, it is permissible under the section to accommodate the beneficial interests to the new situation created by the order’. In Riddle v Riddle45 Williams J said that ‘The sole question is whether it is expedient in the interest of the trustproperty as a whole that such an order should be made’, and Dixon J46 said that ‘expediency means expediency in the interest of the beneficiaries’. To similar effect Farwell J in Re Craven’s Estate47 said:
‘It cannot mean that however expedient it may be for one beneficiary if it is inexpedient from the point of view of the other beneficiaries concerned the Court ought to sanction the transaction. In order that the matter may be one which is in the opinion of the Court expedient, it must be expedient for the trust as a whole.’
In Stein v Sybmore Holdings Pty Ltd48 Campbell J found that a postponement of the vesting date specified in a discretionary trust was within the power, but on the premise that to do so was ‘well within the scope of the purpose of the trust’. The Victorian legislation is wider in scope than that in New South Wales. Section 63A of the Trustee Act 1958 provides, materially, that ‘where property… is held on trusts… the Court may… by order approve… any arrangement… varying or revoking all or any of the trusts’. There is a belief abroad in the advisory community that the wider operation of the Victorian Act may be attracted in respect of a settlement of New South Wales property by locating part of the assets of the trust fund in Victoria, claiming the jurisdiction of the Victorian Court on the basis of the nexus of those assets with Victoria, and seeking approval of an ‘arrangement’ comprising an amendment of the trust instrument. Whether this belief is well founded is yet to be tested, and may be open to question: while the jurisdiction of the Victorian Court to alter the trusts so far as they affect the property in Victoria is not open to reasonable contest, whether the effect of the order extends to alter the trusts governing the property situate in New South Wales is not so clear – especially where the location of relatively insignificant trust assets in Victoria is manifestly a device seeking to invoke jurisdiction and the ‘proper law’ of the trusts of New South Wales would ordinarily be considered to be that of New South Wales.49
Where neither the instrument establishing the trust nor the statutory powers conferred on the Court are sufficient to permit an alteration in the destination of interests in trust property, it may nevertheless be possible to achieve the desired end by appointing the assets to be held on the trusts of a separate settlement under a power of advancement. Such a course was taken in Pilkington v IRCommrs,50 where it was held that a power of advancement was effectively invoked notwithstanding that under the recipient settlement persons other than the beneficiary whose advancement was relied on might also benefit.
A settlement which contains no power of amendment may also lack a sufficient power of advancement, but even in such a case the trustee may be able to transfer funds to a new settlement under the statutory power found in sec 44 of the Trustee Act and its interstate analogues, whereby up to half of the capital of a fund to which a beneficiary is absolutely or contingently entitled may be applied to the ‘advancement or benefit of such person in such manner as the trustee shall in the trustee’s absolute discretion think fit’. The power is neither unlimited nor unqualified but may nevertheless provide an avenue for extending the class of beneficiaries in whose favour the fund may be applied; although the limitations discussed above in the context of fraud on a power must be borne in mind in exercising the statutory power.
A resettlement under such powers should not be undertaken without a careful consideration of its fiscal consequences. The exercise of the power will usually involve a transfer of assets which may comprise dutiable property, and may involve a declaration of trust over the advanced assets, in either case attracting a liability to stamp duty; although in particular circumstances the advancement may be able to be effected without incurring the duty liability. The exercise may also give rise to a CGT event affecting the assets advanced, which may – again according to the circumstances – result in a deemed capital gain and liability to income tax. It is a trustee’s duty not to incur such fiscal liabilities needlessly.51
Fiscal consequences of amendments
An amendment to a trust instrument potentially attracts liability to stamp duty and to income tax by reason of a CGT event. Ordinarily, no consideration is given in connection with the making of the amendment, so that neither GST nor income tax (outside the CGT provisions) liability arises from the amendment itself. While the consequences of the amendment may affect liability in respect of future tax income, the possibilities in this regard are so multitudinous as to make comment on them in this paper impractical.
There has been much debate, and some litigation, concerning the duty and CGT consequences of amendments to trust instruments. Much of this debate fails to have regard to the warning, reiterated in CPT Custodian Pty Ltd v C of SR,52 that it is the language of the statute, not preconceived notions concerning ‘settlement’ or ‘resettlement’, that determines the liability to tax. As the Court there said, the task ultimately is one of statutory construction and of application of the statute properly construed to the instant facts, including the terms of the trust instrument and the amendment: ‘In taking those steps, a priori assumptions as to the nature of [“resettlements”] under the general law and principles of equity would not assist and would be apt to mislead’.
Stamp Duty considerations
An amendment to a trust instrument will only be liable to duty under Chapter 2 of the New South Wales Duties Act 1997 if it involves a ‘dutiable transaction’. The expression ‘dutiable transaction’ is defined in sec 8(1) to include, relevantly, any of a transfer of dutiable property, an agreement for the sale or transfer of dutiable property, and a declaration of trust over dutiable property.
The expression ‘transfer’ is defined in sec 8(3) to include an assignment, an exchange and a buyback of shares. A ‘transfer’ is a bilateral transaction which involves the passing of an existing right or interest in property from one person to another and not the creation and vesting of new rights.53 The expression ‘assignment’ has a similar meaning.54 Ordinarily an amendment will not be a ‘transfer’ because, even if the variation to the trust instrument involves the vesting of new equitable rights in a beneficiary, it will not involve the passing of existing rights from one beneficiary to another, nor will it constitute an agreement for the sale or transfer of dutiable property.
A ‘declaration of trust’ is defined in sec 8(3) to mean ‘any declaration ... that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons... mentioned in the declaration’. An instrument of amendment going no further than stipulating the amendments made will not meet this criterion, but an instrument embellished by the addition of words such as that ‘the trustee declares that the property will be held on the trusts as so amended’ will do so. Such unnecessary flourishes form the basis for a significant part of the claims on indemnity policies of solicitors and accountants.
For what it is worth, the foregoing view accords with that expressed by the New South Wales Office of State Revenue (OSR) in Ruling DUT017.
Where the assets of the trust fund are land in New South Wales, the trust fund may be a ‘landholder’ such that the provisions of Chapter 4 of the Act are potentially relevant. Only a private company, or a unit trust scheme (wholesale or private), may be a landholder, so that the issue does not arise in relation to family discretionary trusts or superannuation funds.
Whether in the case of a trust fund which is a landholder the operation of the Chapter is attracted will depend on the effect of the amendment and whether there is an acquisition within the definition of ‘acquire’ in sec 151, namely, a beneficiary ‘obtains an interest, or the [beneficiary’s] interest increases, in the [unit trust] landholder regardless of how it is obtained or increased’. Interest for this purpose is a right to a distribution on winding up. The view taken by the OSR is that only the immediate right to distribution, and not to indirect beneficial rights, is to be taken into account in this regard: Ruling DUT028, paragraph 19, where however the ‘legal ownership’ of a right to a distribution is spoken of, suggesting that the comment is directed to shareholders rather than beneficiaries.
The argument which was advanced (and rejected) in C of SR v Buckle,55 that an amendment to the terms of a trust deed was a ‘resettlement’ of the fund and so a conveyance of all its assets, cannot be maintained under the Duties Act.
Capital Gains Tax
Only one of the CGT Events specified in Part 3-1 of the Income Tax Assessment Act 1997 comprises an amendment or a resettlement of a trust estate: CGT Event E3, ‘a trust (that is not a unit trust) over a CGT asset is converted into a unit trust’. Putting aside the difficulty that ‘unit trust’ is an undefined term with no normative meaning in law,56 the occasions on which a trust instrument is amended to ‘convert [it] into a unit trust’ will be few indeed, and may be supposed to be undertaken in full knowledge of the operation of Event E3. Such events are not the subject of the present discussion.
The only arguably relevant provisions are those defining Events A1 and E1, respectively ‘a change of ownership … from you to another entity’ in respect of a CGT asset57 and ‘you create a trust over a CGT asset by declaration of trust or settlement.’58 While an amendment attracting Event A1 is possible – an amendment altering a declaration that a particular asset is held on trust absolutely for A such that it is held on trust absolutely for B – it is neither a likely means of achieving a desired end nor the type of amendment with which we are here concerned. An amendment altering the specification of a class of beneficiaries or objects, or altering the events upon which entitlement is contingent, does not amount to a ‘change of ownership’ for Event A1 purposes. Nor does such an amendment – or any exercise of a power conferred by the trust instrument – amount to creating a new trust for Event E1 purposes.
The Commissioner of Taxation has taken a different view, published in a document entitled Creation of a new trust – Statement of Principles 2001 (the ‘Principles’ statement), in which the Commissioner suggests that a ‘change to a trust’ can have the result that ‘one trust estate comes to an end to be replaced by another’, with possible consequences including realisation of assets by the ‘ending’ trust and disposal by the beneficiaries of their interests in the trust. The Commissioner observes that ‘for convenience these situations are sometimes referred to as “resettlements”, although resettlements in the technical sense may be only one way in which such terminations occur.’ This observation reflects an acknowledgement that the word ‘resettlement’ does not appear in the Act.
The ‘Principles statement’ has given rise to a substantial ‘quasi-jurisprudence’, expressed in a body of private rulings and ‘interpretative decisions’, as well as numerous professional writings – which has sprouted like a weed patch amid the fields of tax practice. Despite the apparent endorsement of the statement in this material, the view expressed by the Commissioner, and fervently adhered to by the members of his office, can only be described as wrong.
Although the Income Tax Assessment Acts describe a ‘trust’ as an ‘entity’, in law and for the purposes of the Acts a trust estate is neither a thing nor a legal personality; rather, and accurately, a trust is a relationship among trustee, beneficiaries or objects, and trust property. The only thing is the trust property, and the only personality which can deal with trust assets is the trustee. But neither a change in the trust property nor a change in the trustee will of itself bring to an end the trust estate; equity fixes the new trustee with the obligations of the old, and impresses on new trust property the claims of beneficiaries on the old property. Upon an amendment of the terms in the manner presently under consideration, neither an Event A1 nor an Event E1 occurs.
The notion underlying the ‘Principles’ statement was advanced by the Commissioner in proceedings selected as a test case, F C of T v Commercial Nominees of Australia Ltd.59 In that case the terms of a deed governing the rights of beneficiaries in a superannuation fund the trustee of which had sustained losses available for future deduction were substantially amended, and the trustee appointed (by admitting as members) new beneficiaries. The Commissioner argued that the fund claiming a deduction for the losses was not that which had incurred them. This claim was rejected, by the Administrative Appeals Tribunal, the Full Federal Court and the High Court. The Federal Court summarised the correct analysis in these terms –
 Thus, in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.
 So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the ‘taxpayer’ for the purposes of section 278 and sections 79E (3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.
The distinctions sought to be advanced by the Commissioner in the ‘Principles statement’ as a basis for disregarding the decisions of the Federal and High Courts – that the High Court ‘confined its reasons for judgement to superannuation entities’ and the Federal Court judgment is ‘of limited, if any, precedential value’ – are, with respect, specious. The ‘superannuation entity’ was a trust estate.
Regrettably, infestations of the field of tax law such as is found in the ‘Principles statement’ are difficult to control. Carefully protected from judicial defoliant by a substitution of practice for precedent and the costs of litigation, and nurtured by a fear of the consequences of transgressing administrative guidelines, they flourish for years, immune to expostulations such as the foregoing. No different outcome is likely in the present case, despite such learned analyses as that of Professor John Glover.60
- 1. Maitland, Selected Essays (1936).
- 2. The medieval development of the use was spurred by desires to escape the feudal obligations attached to land, and limited by the Statute of Uses 1535; the jurisprudence by which the Chancellor enforced the use evolved into the law of trusts in the century following the Statute. See the Introduction to Jacobs, Law of Trusts in NSW (Law Book Co., 1958).
- 3. Some of this jurisprudence has been less than pellucid: see the discussion of Re Enhill Pty Ltd  1 VR 561 in In re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 105.
- 4. In addition to a company tax rate of 47.5 per cent, half of after-tax business income derived by private companies was required to be distributed to shareholders and taxed in their hands at rates up to 66 per cent, or if not so distributed was subjected to a penalty tax rate of 50 per cent (with the balance being subjected to further tax on eventual distribution).
- 5. One unexamined issue is the underlying disjunction between trust accounting and business accounting, which were developed for quite different purposes and on quite different bases. There is a widespread assumption, not grounded on any rigorous analysis, that business accounting may appropriately be applied to the determination of entitlements under settlements. That however is a question for another day.
- 6. Many of the older forms of deed provided only for distribution of income and capital among family members one or two generations removed from that of the settlor; the funds are now conducted for the benefit of the second, third and fourth generations.
- 7. According to Australian Tax Statistics 2006-7 (Australian Taxation Office, ISSN 0300-2551, March 2009, p 70), there were in that year some 450,000 discretionary trust estates for which tax returns were lodged.
- 8. Relatively recent experience reveals that deeds settled by a leader of the tax bar, Mr Deane QC, continue still to be used as precedents to establish new settlements.
- 9. Compare, for example, Re Rank’s Settlement  1 WLR 1242 (wide enough) with Re Falconer’s Trusts  1 Ch 410 (not wide enough).
- 10. For example, a power to amend the ‘rules’ or ‘regulations’ of a pension scheme may not be wide enough to permit an amendment of the trust deed which governs the scheme, and vice versa Aitken v Christy Hunt plc  PLR 1.
- 11.  AC 508.
- 12.  AC 424; see the speech of Lord Wilberforce at 453.
- 13. The distinction is sometimes in the literature said to be that between a trust power and a mere power, the latter being one where the instrument provides for the disposition of the fund if the power is not exercised.
- 14. Kearns v Hill (1990) 21 NSWLR 107, 109.
- 15. See, for example, Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115. CLR 353, 385; Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402, 411.
- 16. Lock v Westpac Banking Corporation (1991) 25 NSWLR 593.
- 17.  VLR 273.
- 18.  1 WLR 899, 904.
- 19. (1990) 21 NSWLR 107.
- 20. (2000) 170 ALR 65, 83.
- 21. In NSW, sec 23C of the Conveyancing Act 1919.
- 22. See, for example, the terms of the trust examined in CPT Custodian Pty Ltd v C of SR (2005) 224 CLR 98.
- 23. Hence in CPT Custodian the statutory criterion for liability to land tax – ‘entitled to any land for any estate of freehold in possession’ – was not met: ‘Until satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was.’
- 24. Rutland v Doe d. Wythe (1843) 10 Cl & Fin. 419, 425.
- 25. Obviously if the requirement is for consent of the person if alive it is the limitation, not the power, which does not survive his death. More difficult is the case where consent is required of a person ‘during his life’ or ‘while alive’: the lifetime may qualify the power of amendment rather than the requirement of consent.
- 26. Farwell on Powers, 3rd edn (1916), pp. 161-162; Atwaters v Birt (1601) Cro. Eliz. 856; Danne v Annas and Johnson (1561) 2 Dyer 219a.
- 27. See the discussion of similar issues in the judgment of Hill J in Davis v FC of T (2000) 171 ALR 654.
- 28. See, for example, Reef & Rainforest Travel Pty Ltd v Commissioner of Stamp Duties  1 Qd R 683. where a subsequent deed ‘rescinding’ an assessed deed ‘ab initio’ was held not to affect the incidence of stamp duty on the original deed.
- 29. Typically to the head of the family for whose benefit the fund is established.
- 30. See, for example, Re Courage Group’s Pension Schemes  1 W.L.R. 495.
- 31. See, for example, Caltex Oil (Aust) Pty Ltd v Best (1990) 170 CLR 516 at 522-3.
- 32. The principal reason for the exclusion was the risk of inclusion of the fund assets in the settlor’s dutiable estate, Stamp Duties Act 1920 sec 102(2)(c),(d), Estate Duties Assessment Act sec 8(4). The operation of sec 102(1)(a) of the Income Tax Assessment Act 1936 was also seen as a risk factor.
- 33. For example, a trustee’s purported exercise of an amendment power to substitute such provisions as the appointor may specify.
- 34. For example, an amendment of the dispositive power such as to impose an obligation on the substituted beneficiaries as to the manner in which they may deal with the assets given to them may be in excess of power.
- 35. Farwell on Powers, 3rd edn, 1916, at 343, and cases there cited.
- 36. Duke of Portland v Topham (1864) 11 HL Cas 32, 54.
- 37. Vatcher v Paull  AC 372, 378.
- 38. Re Holland  2 Ch 595, 601; Re Burton  Ch 82, 99.
- 39. In contrast to powers to appoint the legal estate in land, subsisting in England before 1925, where subsequent ratification could defeat the equity to set aside the appointment.
- 40. Conceivably several amendments made by one instrument could be separated and only one held bad.
- 41.  1 NSWLR 597.
- 42. This was the view taken in In Re Downshire Settled Estates  1 Ch 218, 224 and Chapman v Chapman  AC 429, 465; and a like view was taken in Perpetual Trustee Co Ltd v Godsall  2 NSWLR 785, 795.
- 43. Similar views were taken by Young J in Tickle v Tickle (1987) 10 NSWLR 581, 584 and in an unreported matter of Re Cosaf Pty Ltd (18 December 1992).
- 44. (2004) 60 NSWLR 334.
- 45. (1952) 85 CLR 202, 220.
- 46. (1952) 85 CLR 202, 214.
- 47.  Ch 431, 436.
- 48. (2006) 64 ATR 325. See also Trust Company Fiduciary Services Ltd v Challenger Managed Investments Ltd  NSWSC 1155, where Rein J, in the course of approving an amendment allowing a substitution of securities held by the trustee, reviewed the authorities on sec 81.
- 49. See the discussion of the location of an interest in a trust fund in Perpetual Trustee Co Ltd v C of SD (NSW)  2 NSWLR 472 (Shallard’s case). An alternative device, whereby a Victorian company is appointed as trustee of the fund, may face similar difficulties: it is one thing if all the assets of the fund are vested in the new trustee and a material part of them are relocated to Victoria, but quite another if the new trustee is appointed but title to the NSW assets is left in the name of the former (NSW) trustee. The costs of effecting a transfer of assets often leads to ‘shortcuts’, whereby the former trustee is treated as a nominee for the new trustee.
- 50.  AC 612.
- 51. Indeed it may be the trustee’s duty to frame transactions in such a way as to minimise fiscal outgoings: Bayer v Balkin (1995) 31 ATR 295, 305.
- 52. (2005) 224 CLR 98, [14-15].
- 53. See Coles Myer Ltd v C of SR  4 VR 728 at 740-741; Acorn Computers Ltd v MCS Computer Systems Pty Ltd (1984) 6 FCR 277 at 281-282.
- 54. See Ord Forrest Pty Ltd v FC of T (1974) 130 CLR 124 at 143.
- 55. (1998) 192 CLR 226.
- 56. As was observed by the Court in CPT Custodian Pty Ltd v C of SR (2005) 224 CLR 98, .
- 57. Section 104-10(2).
- 58. Section 104-55(1).
- 59. (1999) 167 ALR 147, affirmed by the High Court on slightly different grounds in (2001) 179 ALR 655.
- 60. ‘Resettlements: Revenue Consequences of varying Discretionary Trusts’(2005) 79 ALJ 620.