Monthly Archives: August 2015

Resulting trust invoked in tax debt recovery proceedings

In Deputy Commissioner of Taxation v Vasiliades [2015] FCA 412 the DCT invoked the equitable remedy of a resulting trust in aid of the recovery a very large tax debt.  The DCT successfully obtained a declaration that proceeds of sale of the debtor’s matrimonial home – which had been legally owned by his wife – were the subject of a resulting trust in favour of the debtor.

The DCT sought orders to recover from the respondent, Mr Vasiliades, a debt in excess of $30 m.  Orders for default judgment and summary judgment were entered against Mr Vasiliades, who did not file a defence as ordered or appear before the Court either at a directions hearing or the hearing of the Deputy Commissioner’s application for judgment.

The DCT also sought a declaration that Mr Vasiliades’ wife held the proceeds of sale of a Toorak property on resulting or presumed trust for him.  The Deputy Commissioner’s case was set out in pleadings that were not defended and were therefore taken to be admitted.  Further, the facts relied on were contained in affidavits sworn by Mr and Mrs Vasiliades in an earlier stage of the proceeding.

The facts were that Mr Vasiliades had signed the contract to acquire the land in his own name and/or for a nominee.  He had nominated his wife as the purchaser.  The two had taken out joint finance to fund the purchase and later to demolish the then existing dwelling and build a new home.  Both Mr and Mrs Vasiliades gave evidence that they were married and the property was the family home.  Mr Vasiliades made the finance payments.  Funds from a joint finance facility were transferred to accounts (including offshore accounts) in the name of Mr Vasiliades.

The facts established a presumed or resulting trust in the proceeds of sale of the property for the benefit of Mr Vasiliades: [15].  The legal ownership of the property by Mrs Vasiliades was for the benefit of both her and her husband jointly.  Both were contributors to the purchase using joint loan funds.  The Court declared that Mr Vasiliades had an equitable interest in the net proceeds of sale to the extent of a one-half share, and that Mrs Vasiliades held that sum for or on account of Mr Vasiliades.


AAT again doubts taxpayers’ rights to object against ECT determinations

Hope and Commissioner of Taxation [2014] AATA 877

In Re McMennemin and Commissioner of Taxation [2010] AATA 573, the Administrative Appeals Tribunal found that it did not have jurisdiction to review a decision of the Commissioner under s 292-465 ITAA 1997 (discussed here).  The Commissioner appealed, and in Commissioner of Taxation v Administrative Appeals Tribunal [2011] FCAFC 37, a Full Court of the Federal Court upheld the Tribunal’s decision.  The Full Court said the absence of an express provision that the taxpayer could object against a decision under s 292-465 meant that no objection rights existed and no review was available in the Tribunal.

To provide taxpayers with objection rights, an amending Act was passed (before the hearing of the appeal to the Full Federal Court) inserting sub-section 292-465(9) as follows:

(9)      To avoid doubt:

(a)      you may object under section 292-245 against an *excess contributions tax assessment made in relation to you on the ground that you are dissatisfied with a determination that you applied for under this section; and

(b)      for the purposes of paragraph (e) of Schedule 1 to the [ADJR Act] the making of a determination under this section is a decision forming part of the process of making an assessment of tax under this Act.

It is therefore surprising that in Hope and Commissioner of Taxation [2014] AATA 877, the Tribunal again expressed doubt about taxpayers’ rights to object against a decision of the Commissioner under s 292-465.

The Tribunal’s decision turned in part upon the language of s 292-465(1), which provided that on the taxpayer’s application, ‘the Commissioner may make a written determination’ to disregard or re-allocate all or part of the taxpayer’s contributions.  The Tribunal suggested (at [36]) that since the grounds for the objection provided for in s 292-465(8)(a) were dissatisfaction with a determination, there may be no right of objection in the case of a negative decision by the Commissioner, because there would be no ‘determination’ to disregard or re-allocate – only an absence of a determination.

The Tribunal’s reasons pick up an ambiguity in the language of s 292-465.  The concept of a ‘determination’ might be thought to refer to the process of decision-making or the product of that process, or both.  With respect, the permissive construction is to be preferred.  It would seem a perverse outcome if a taxpayer who had failed in their application under s 292-465 had no objection rights whilst a taxpayer who had succeeded in part could object if they remained dissatisfied.  The result suggested by the Tribunal’s dicta would give s 292-465 a construction which frustrates the obvious intent of the amending provisions, namely to confer objection rights upon taxpayers.

Superannuation: exercise of the Commissioner’s discretion to disregard or re-allocate excess contributions

Since 2010, the Administrative Appeals Tribunal has been called upon in numerous cases to review the exercise by the Commissioner of the discretion in s 292-465 ITAA 1997 to disregard excess contributions or reallocate them to other income years. 

That the Commissioner’s decision has been upheld in the majority of cases indicates the narrowness of the mandatory considerations which govern the discretion.  The applicant must establish first, that there are special circumstances; and second, that it would be consistent with the object of Division 292 for the Commissioner to make the determination in their favour.  Showing ‘special circumstances’ requires the taxpayer to point to matters so exceptional that the ordinary rule (ie that contributions exceeding the statutory caps are taxed) should not apply.  The requirement that a determination be consistent with the object of Division 292 narrows the scope of the discretion even further.  The object of Division 292 is to ensure contributions are made gradually over a person’s life: 292-5.  By implication, the object involves the prevention or deterrence of sudden or excessive contributions.

The following is a discussion of some recent cases in respect of this discretionary power.

Thompson and Commissioner of Taxation [2014] AATA 339

The so-called ‘bring forward’ rule permits persons under 65 to contribute up to three times their applicable non-concessional contributions caps in ‘year one’: s 292-85(3) and (4).  In years two and three there is a commensurate reduction in their non-concessional contributions caps.

Thompson’s case is an example of a taxpayer triggering the ‘bring forward’ rule in one year and then failing to recognise the reduction in the caps applicable to them in the two subsequent years.  The objective foreseeability of excess contributions if the cap is exceeded in the two subsequent years makes it unlikely that the criteria for the exercise of the discretion will be satisfied.

Advisers should take care to check their clients have not already triggered the ‘bring forward’ rule before recommending a particular contribution strategy.

Commissioner of Taxation v Dowling [2014] FCA 252

This was an appeal by the Commissioner from a decision of the Administrative Appeals Tribunal.  The case concerned the ‘bring forward’ rule and the effect of two substantial contributions, made in different years.

In the 2009 year, following advice from Centrelink and another adviser, and with the apparent purpose of Mr Dowling gaining an entitlement to an age pension, Mr Dowling withdrew the entire balance from his superannuation account – approximately $293,000 – and contributed most of that amount to Mrs Dowling’s superannuation account in the same fund.  This triggered the operation of the ‘bring forward’ rule in respect of Mrs Dowling.  It affected her contributions caps for the two subsequent years.

In the 2011 year, Mrs Dowling implemented a strategy of withdrawing approximately $241,000 from her superannuation account and re-contributing $200,000 of that sum as a non-concessional contribution.  She did not seek professional advice in respect of this strategy but relied upon media reports about its benefits in respect of succession planning.

As to what was meant by ‘special circumstances’, the Tribunal found it suggested circumstances resulting in an outcome that is ‘unreasonable, unjust or inappropriate’, and which take events outside of the ‘usual or ordinary case’: [49].  It found Mrs Dowling had demonstrated special circumstances in respect of the first contribution because:

  • Mr and Mrs Dowling had altered their position following advice from the Centrelink and a financial adviser associated with their superannuation fund: [51];
  • they would not otherwise have made the 2009 year contributions: [52];
  • Mrs Dowling had been affected but had not primarily acted to advance her own position: [53];
  • Mr and Mrs Dowling had obtained advice in respect of the first contribution and had diligently sought to verify Centrelink’s advice: [55];
  • the two transactions did not involve contributing any ‘new money’ to the couple’s superannuation accounts, but merely a re-arrangement of their existing funds: [61];
  • being retirees, as distinct from employed persons, they should not be taken to have ‘day to day insight’ about the operation of Division 292, and they had limited wealth in the context of a superannuation system designed to encourage individuals to provide for their own retirement: [62].

It found that there were no special circumstances in respect of the second contribution.

However the Tribunal determined to exercise the power to disregard a ‘notional excess contribution’ in respect of the first contribution for the purposes of excess contributions tax: [70].  The consequence of its analysis was to relieve the taxpayer from her excess contribution tax liability for the second contribution; [92].

The Court found this was a wrong approach.  The discretion to disregard or reallocate contributions was to be exercised for a particular financial year: [93].  Due to the operation of the ‘bring forward’ rule, it was the second contribution that had triggered a liability to excess contributions tax: [95].  The real question for the Tribunal was to consider whether the circumstances attending the second contribution were such as to authorise an exercise of the discretion in respect of that year.  Those circumstances might include the circumstances of the first contribution.  However, the power conferred by s 292-465 to disregard or reallocate contributions, did not authorise the alteration of a person’s excess contributions in one year (in this case, the first year) based on a consideration of the circumstances attending contributions for a different year; [98].

There was a second error in the Tribunal’s approach in that the matters relied upon as constituting ‘special circumstances’ were merely the implementation of an arrangement to gain entitlement for Mr Dowling to the age pension which was prudential or sensible from the perspective of the Dowlings’ circumstances; [104].  Further, the facts that there were no ‘new’ contributions and that they made arrangements conditioned and informed by their own particular domestic circumstances did not constitute ‘special circumstances’: [108].

There was a third error in the Tribunal’s approach to the question whether to exercise the discretion would be consistent with the objects of Division 292.  The contribution of a lump sum from Mr Dowling’s superannuation account to the account of Mrs Dowling did not satisfy the object of Mrs Dowling’s superannuation benefits representing contributions made gradually over her lifetime: [115].

The statutory question whether excess contributions were ‘reasonably foreseeable’ needed to be answered at the time of the relevant contributions.  It was ‘perfectly obvious’ that the second contribution would give rise to excess contributions once the ‘bring forward’ rule was triggered: [123].  The question whether special circumstances attended the second contribution was informed by the circumstances of the first contribution in the sense that the first contribution had the effect of fixing the excess contributions cap for the second year (by operation of the ‘bring forward’ rule): [124].

The appeal was allowed and the case remitted to the Tribunal to be reheard and determined according to law.

What are the limits of a court’s powers to amend the terms of a trust?

The Trustee Acts of Queensland (s 94(1)) and New South Wales (s 81(1)) permit the Supreme Courts of those states to authorise ‘transactions’ ‘in the management or administration of any property vested in trustees’ if they are in the opinion of the court ‘expedient’ (NSW) or ‘in the best interests of [interested parties]’ (Qld).

A question which has arisen not infrequently is whether the power to authorise transactions permits the courts to authorise amendments to the terms of the trust itself.  In September and October 2014, the Queensland Supreme Court and New South Wales Court of Appeal arrived at opposite conclusions on that question.

The cases, Re Dion Investments Pty Ltd (2014) 87 NSWLR 753 and Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244, are summarised below.

Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244

The trustees of two discretionary trusts applied to the Supreme Court of Queensland to amend the vesting date of two discretionary trusts by extending the time for vesting.  The trusts had considerable real property assets and the vesting of the trusts would trigger CGT events and liability to stamp duty: [18]. There were substantial unpaid present entitlements which would become payable on the vesting date: [18].

Section 94(1) of the Trusts Act 1973 (Qld) provided that the Supreme Court could by order authorise ‘any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, retention, expenditure or other transaction‘ (emphasis added) expedient in the management or administration of any property vested in a trustee’, consistent with the best interests of the trust’s beneficiaries and other interested persons, and where the transaction could not be achieved under the trust instrument.

A question of construction arose.  Did s 94(1) authorise the Court to enable alterations to the terms of the trust itself, or only dealings in the property comprising the trust estate?  Specifically, was the alteration of the vesting date a ‘transaction’ within the meaning of s 94(1)?  Having regard to the tax context, the very purpose of the relief sought was to avoid the need to deal with the trust property on the vesting date: [28].

There was authority that an alteration to a trust deed was a ‘transaction’: Stein v Sybmore Holdings [2006] NSWSC 1004; Re Philips New Zealand Ltd [1997] 1 NZLR 93; Bowmil Nominees Pty Ltd [2004] NSWSC 161; James N Kirby Foundation v Attorney General (NSW) (2004) 213 ALR 366.

But the contrary view had also recently been expressed: Re Dion Investments Pty Ltd [2013] NSWSC 1941.  In Dion Investments, Young AJ followed a line of English authorities which found the power to authorise transactions was limited to transactions involving trust property and did not extend to the creation or alteration of equitable interests in trust property (eg, through alterations to the trust).

The Court concluded the amendment of the vesting date could fairly be characterised as a ‘transaction’.

What is most interesting is the Court’s conclusion that it would be appropriate to amend the trust’s vesting date despite the choice of vesting date implicit in the date specified in the trust instrument, because it was able to discern that the settlor would have wanted the trust objects to continue to enjoy the taxation advantages offered by the family discretionary trust.

The Court observed that there was a tension between the order being sought and the apparent intention of the settlor to fix a certain vesting date: [43].  But the Court adopted a view that it was permissible to discern whether a particular dealing would depart from the ‘spirit of the settlor’s intention’ from ‘the terms of the trust deed and the sort of context of social institutions and laws within which it was made’: at [43], citing Stein [2006] NSWSC 1004 at [53].  The type of trust might determine whether such a departure was permissible.  Trusts such as family discretionary trusts were made in a

well-understood context of law (often tax law) which the trusts are clearly intended to take advantage of- it is often not difficult to conclude that keeping advantages of that type is within the spirit of the settlor’s intentions, or if that context of law were to change, it might be possible to conclude that it was within the spirit of the settlor’s intention the trust should accommodate itself to whatever the new law was.

The Court authorised the applicants to amend the trust deeds to establish a vesting date 80 years from the settlement date.

Re Dion Investments Pty Ltd (2014) 87 NSWLR 753

Dion Investments Pty Ltd was trustee of a trust settled in the 1970s.  The trustee had received advice that the certain provisions should be added to the trust deed to allow ‘tax concessions available within the Australian tax system to be accessed as intended’: [20].  These included provisions:

(a)        ‘to adopt a system of accounting based on a “year” from 1 July to the next 30 June;

(b)        to pay or allocate to any beneficiary any amount of capital gains even if there is no other amount of income in a particular year;

(c)        to decide what is income and what is capital for a particular year; and

(d)        to maintain multiple income accounts, to credit each income receipt to one or more of the income accounts, to credit any capital gain (that is, a part of capital receipts treated as assessable income for tax purposes) to one or more of the income accounts and to credit and debit certain other items to the income accounts,

together with a comprehensive power to revoke add to or vary all or any of the trusts, terms and conditions of the deed and to declare, revoke and vary new trusts concerning the trust fund or any part of it, subject to provisos against infringement of the rule against perpetuities and interference with amounts’: [107].

Section 81(1) of the Trustee Act 1925 (NSW) was as follows:

81 Advantageous dealings

(1)      Where in the management or administration of any property vested in trustees, any sale, lease, 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:

(a)           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

(b)           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.

The primary judge (Young AJ) had found that s 81(1) did not give the court power to vary the trusts: once a person had given property on trust then the trust was unalterable subject to any power of alteration in the trust deed itself.

The Court of Appeal agreed with the primary judge’s reasons.  Section 81(1) did not allow it to confer upon the trustee the desired power to vary the terms of the trust in future (or otherwise to vary the terms of the trust).

The trust was an express trust created by deed which defined with particularity the trusts to which the trust estate was subject and the powers of the trustee: [40].  According to principle, the equitable interest created in the beneficiaries by the establishment of a trust is unalterable, even by the settlor (subject to express reservation of powers): [41]-[43].  The variation of a trust instrument is in truth the alteration of the terms pursuant to which trust property is held under the trusts created or evidenced by the instrument: [44].

The non-statutory powers of a court to vary trusts were limited to:

  • the power in Saunders v Vautier (1841) 4 Beav 115 (which may be used to create varied trusts but can thereby cause resettlement on new trusts rather than variation of pre-existing trusts: CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 at [44];
  • a very limited power to sanction departure from the terms of a trust in circumstances of emergency: In re Tollemache [1903] 1 Ch 457.

Section 81 was permissive, and the word ‘transaction’ (introduced by ‘any’) was of wide import, but it did not authorise a court power to confer ‘every conceivable power’ on a trustee: [87].  However, it was conditioned by the requirement that the transaction be ‘expedient’: [92].  The variation of the terms of a trust was not something that it is expedient that a trustee should do, nor was it something done ‘in the management or administration of’ trust property: [94].

Having regard to the principles of trust law and the limited scope of a court’s common law powers to depart from the precise directions of a settlor, it was not conceivable that a parliament would confer powers allowing a court to vary trust terms other than by express language of necessary intent: [98].

Further, the effect of orders under s 81(1) (and presumably its equivalents) is to vary the terms of the trust directly (to supplement and override the terms of the trust as evidenced in the instrument).  The orders should not be a purported grant of authority to amend the trust instrument so that it provides for the new powers: [97].

However the Court of Appeal was prepared to order that the trustee had power:

  • to deal separately with the income of years ending on 30 June;
  • to distinguish income from corpus (including in ways permitting the segregation of income from capital by reference to particularly defined concepts in tax legislation); and
  • to maintain accounts in respect of beneficiaries [110].

as these acts would be ‘transactions’ and it concluded that they would be ‘expedient’ in the management and administration of trust property.