CGT Event E1: Federal Court confirms breadth of meaning of creation of trust ‘by declaration or settlement’

Kafataris v Deputy Commissioner of Taxation [2015] FCA 874

The taxpayers, husband and wife, jointly owned property and returned rental income from it. On 2 July 2007 a company controlled by the taxpayers offered to acquire the property from them and give them a promissory note of $9 million in exchange for the transfer. The taxpayers accepted the offer. On the same day, the company resolved to issue to the taxpayers 9 million shares at a price of $1 each.

The taxpayers contended that CGT event A1, but not CGT event E1, happened in respect of the change in beneficial ownership of the property because the change occurred pursuant to a constructive trust set up in favour of the company. They said that, because the constructive trust arose by operation of law and not by declaration or settlement within the meaning of s 104-55(1) of the ITAA 1997, CGT event E1 did not happen.

The constructive trust, the taxpayers contended, arose upon the mutual exchange of promises: [21]. The contention relied upon Halloran v Minister Administering National Partks and Wildlife Act (2007) 229 CLR 545. But the Court found the facts in Halloran were distinguishable – it involved a failed transaction. In Halloran the creation of a constructive trust arose in the context of a mistaken belief that the transferor was the absolute owner in fee simple of the property it purported to sell in consideration for units in a trust: [23]. The interest so conveyed was no more than an equitable interest: [23].

The taxpayers had deliberately created an equitable interest in the property by the express terms on which they accepted the offer from their company: [23]–[24]. The declaration of trust met the statutory formality requirement that it be proved by some writing: [25]. The word ‘declaration’ in s 104-55 took its ordinary meaning: Oswal v Commissioner of Taxation [2013] FCA 745 at [40]–[41]. It was sufficient to establish the ‘declaration’ of a trust that the trust was created by the holder of the undivided legal interest in property, using words or actions which sufficiently evidenced an intention to create the trust over the property: Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6.

Separately, the Court found that the trust was created by ‘settlement’: [31]. A trust was created by ‘settlement’ by vesting property subject to a trust for the benefit of others: [31], citing Taras Nominees Pty Ltd v Commissioner of Taxation (2015) 228 FCR 418 (see above).

Further, the Court rejected the submission that the property was held subject to a bare trust. Under the usually accepted meaning of a bare trust, a trustee holds property without any interest other than as association with the office and legal title as trustee, and without any duty or further duty to perform except to convey the property on demand to the beneficiary. As the property was leased, the taxpayers could not say they had no active duty to perform in respect of the property: [34].

In light of the conclusion that an express trust was created by declaration or settlement, the CGT event more specific to the case was E1.

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