Application of Country Road Services Pty Ltd (in the matter of the Browne Family Trust) [2019] NSW SC779

The Trustee Act 1925 (NSW), similar to most Trust Acts in Australia, allows the trustee of a family trust to approach the Court for an order that the trustee has the necessary power to undertake an advantageous dealing in relation to the trust. There have been previous cases where when a party is faced with a restrictive trust deed, which needs amendment or the assistance of the Court in order to proceed optimally, particularly with respect to taxation, claimants relied on and approached the Court with some success and also notable failures.

In the case of Stein -v- Sybmore Holdings [2006] NSW SC1004, the new South Wales Supreme Court ordered that a family trust deed be amended to extend the vesting date until the year 2058. The Court thought it sensible to extend the vesting date of the trust, despite the express terms of the trust deed that the trust was to vest in 2007 because of the high capital gains tax (CGT) and potentially stamp duty costs of such vesting.  The Court did not consider this was tax avoidance or an abuse of process but instead the proper administration of the trust with the assistance of the Court.  This is evident in part of the judgment from Stein:

Another part of the context in which the trust deed needs to be understood is that there has been for decades a system of income taxation which a natural person is taxed on the basis whereby the first charge of income in a year is tax-free and successive charges are taxed at increasingly higher rates – thus directing income from a discretionary trust in any year to the potential beneficiary who has a marginal rate of tax below the top rate will lessen the overall tax paid by the family unit.  Maintaining flexibility to distribute both capital and income among members of Mr Stein’s family over generations provides one basis upon which I find the conferring of this power would be expedient.

As well, the minimisation of capital gains tax and stamp duty on the trust property provides a separate basis upon which conferring the power is expedient.[1]

Browne Family Trust

The Stein case gave great confidence to estate planning practitioners that where there was apparently an otherwise insolvable problem with a trust deed, the Supreme Court would take a practical, flexible and considered approach to assisting the applicants by varying the terms of the trust deed or making other orders. Whilst I would not say that such problems are common in trust deeds, they are common enough that as a practitioner you will see them cross your desk from time to time.

However, a later case began a new line of precedent down a different path. The case of Re Dion Investments [2] came to a quite different outcome with a reasonably similar query. In that case the Court decided that s.81 of the Trustee Act 1925 (on which Stein was decided) did not allow the Court to amend the terms of the trust, but only to confer a particular and limited power on the trustee to undertake a transaction which was “expedient” in the management or administration of trust property.

In that case the applicants explained to the Court that they had taxation advice which provided that the trust deed needed to be modernised to allow for the proper segregation of different types of income and capital through the management of income tax. The applicants also asked for a power to vary the terms of the trust.  This power is commonly written into modern trust deeds but was apparently not in the relevant deed.  The Court declined to vary the trust deed to give the trustee such power.

This case was followed in a recent Court of Appeal decision Cisera -v- Cisera Holdings [3]In this matter a family trust had a vesting date of 1 January 2024 and the applicants applied for an order that the vesting date be extended or that the trustees have power to extend the vesting date. Part of the reasoning for this was that there would likely be a significant CGT liability and that the assets of the trust would vest in particular beneficiaries who were not considered by the trustee to be the appropriate persons entitled to receive the trust fund.  A beneficiary gave evidence that the CGT would be in the order of $3.4M which would require the sale of other trust property in order to pay the tax. The Supreme Court declined the application and then the Court of Appeal dismissed the appeal.  In doing so the Court agreed with the primary Judge’s decision in concluding that an order to extend the trust would not be “expedient in the management or administration of the trust property“.

The Court said it had regard to the objectives of the trust and the settlor’s intentions from the terms of the trust deed and did not see that the order was going to be “expedient”.

The Court held that the meaning of the decision in Re Dion was that s.81 does not authorise the Court “to alter trusts on which trust property was held which would have been beneficial to the interest of the beneficiaries, or to the fulfilment of the trust purpose, but which were not concerned with the management or administration of the trust assets[4].

The Court noted that various judges in earlier cases had all commented that s.81 of the New South Wales Trustee Act could not be used as a substitute for a more broader power to vary trusts found in legislation in the United Kingdom and other Australian States (I infer that this is what the Court considered happened in Stein which it has since declined to follow).

Browne Family Trust

The applicants wished to make a distribution from the Browne Family Trust to the Browne Northwest Trust, another trust within their family group. The Browne Northwest Trust had carry forward losses of $1.2M.  Presumably a distribution would take advantage of those losses.

The trustee in fact passed a resolution on 30 June 2018 which anticipated that the Court would grant the orders sought. The resolution was described to be subject to the Court order.

The trust terms required the incoming capital gain for 2017/2018 financial year must be distributed to Diane Browne. The Court quoted from the earlier Chapman case[5]:

A variation of the terms of a trust including by way of conferral of some new power on the trustee is not something within the ordinary and natural province of a trustee. It is not something that is ‘expedient’ that a trustee should do; nor, fundamentally, is it something that is done ‘in management or administration of’ trust property. The trustee’s function is to take the trusts as it finds them and to administer them as they stand. The trustee is not concerned to question the terms of the trust or seek to improve them.  I venture to say that, even where the trust instrument itself gives the trustee a power of variation, exercise of the power is not something that occurs ‘in the management or administration of’ trust property. It occurs in order that the scheme of fiduciary administration of the property may somehow be reshaped.

You can see from this quote Courts are reluctant to vary trust deeds. This is because the law is that a trustee’s first duty is to uphold a trust not to seek to depart from its terms.  The settlor’s intentions are to be respected however so far this is possible.

The Court quoted an earlier case[6]:

What emerges is that the Court’s power under s.81 cannot be used to subvert the beneficial distribution in the trust instrument“.

This caused the Court of Appeal to determine that the desired distribution of income to the Browne Northwest Trust “would not be a dealing in the management and administration of the property of the Browne Family Trust[7] and therefore falls outside the jurisdiction of s.81 of the Trustee Act.

What about the Queensland situation?

The Browne case comes from New South Wales and is based on the New South Wales Trustee Act.

In Queensland s.95 of the Trusts Act 1973 gives power to the Court to authorise variations of trust. This section directly addresses the issue of changing the terms of a trust deed and not merely authorising or giving power for a particular transaction.  The legislation is more obliging for those wishing to vary a trust deed.

The case law in Queensland surrounding this section reflects the wider powers of the Court and gives, for an estate planner, better, more practical outcomes for an application to Court. We have previously reported on a case of the Arthur Brady Family Trust in 2015.

In that case the Queensland Supreme Court ordered that pursuant to s.94, the applicant was empowered to extend the vesting date of the trust. In that case, quite contrary to the reasoning of the New South Wales Courts, the Queensland Supreme Court was quite comfortable that a trust vesting date might be extended in order to avoid the tax and stamp duty consequences of vesting.

The proposed transaction would, in the view of all who are amongst the class of potential beneficiaries be in their best interest.  The alternative would be a substantial depletion of the assets held by each trustee“.

It is not just the air that is better in Queensland, it is also sections 94 and 95 of the Trusts Act 1973.

[1] At paragraphs 54 and 55

[2] Re Dion Investments Pty Ltd (2014) 87 NSW LR 753

[3] Cisera -v- Cisera Holdings Pty Ltd [2018] NSWCA286

[4] At paragraph 68

[5] Chapman -v- Chapman [1954] UKLH1

[6] Arakella -v- Paton (2004) 60NSWLR334

[7] At paragraph 85

Latest News

April 18, 2024

A housing trust’s modernisation requires Court approval

Background The Baxter Homes Trust (Trust), was a charitable trust established in Victoria by a deed executed in 1960. Its purpose was to provide aged inhabitants of Geelong Victoria or its neighbourhood with housing as administered by The Geelong and Western District Ladies Benevolent Association’ incorporated under the Hospitals and Charities Act 1890. The Trust A housing trust’s modernisation requires Court approval

Read Article

April 18, 2024

Draft Regulations for NPO Self-Review Assessment Return Released

We have previously written in bulletins about the forthcoming self-assessment tax review for non-profit profit organisations which have an Australian Business Number (ABN) but are not registered as charities with the ACNC – Be alert to being alarmed on viewing your club or society annual report this year and self-assessment by tax-exempt. The background is Draft Regulations for NPO Self-Review Assessment Return Released

Read Article

March 13, 2024

Last of the loopholes? Let’s hope so!

Background All Australian employers will be acutely aware that the Federal government has, since the last election, embarked on a fairly aggressive program of targeted changes to the nation’s industrial relations laws. So far, we’ve had changes aimed at supporting Australia’s jobs and economic recovery[1], gained more respect at work[2], we’ve secured our jobs and Last of the loopholes? Let’s hope so!

Read Article