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.