Cecil Investments Pty limited

1. [1]

   Trustees regularly approach the Court for advice under s.63 and or relief under s.81 of the Trustee Act 1925 (NSW) (“Trustee Act”). This is such an application.

2. [2]

   For the purposes of the s.63 application the questions for advice are to be found in prayers 2 to 4 of the summons.

3. [3]

   For the purposes of the application under s.81 the relief sought is contained in prayer 5 of the summons.

4. [4]

   The reason for the application is because of amendments to the Land Tax Act 1956 (NSW) (“Land Tax Act”) and the Duties Act 1997 (NSW) (“Duties Tax Act”) which imposes surcharges to the extent that a “foreign person” may be (not necessarily is) a beneficiary of the trust where the trust holds residential property.

5. [5]

   I should note that this proceeding was listed before the Court on 17 December last, but it could not be heard due to a conflict on the part of the Court with proceedings that needed urgently to be heard in closed court. The proceedings were adjourned on the Court’s own motion.

6. [6]

   I heard the matter on 3 February 2021 and subsequently made orders on 17 February, indicating that I would later give reasons. These are they.

The Land Tax Act

1. [7]

   Sections 5D(1)-(5) of the Land Tax Act are as follows:

2. [8]

   The term “foreign person” for the purposes of the Land Tax Act is defined in section s.104J of the Duties Act as “…A person who is a foreign person within the meaning of the Foreign Acquisition and Takeovers Act 1975 of the Commonwealth, as modified by this section …”

3. [9]

   Importantly, surcharge land tax is not charged if no beneficiary (including a potential beneficiary) is (or can potentially be) a “foreign person”.

4. [10]

   The Summons in prayers 2 to 4 pose the following questions for advice pursuant to s.63 of the Trustee Act:

5. [11]

   The power of the court to give advice pursuant to s.63 of the Trustee Act has been definitively examined in Macedonian Orthodox Church St Petka Incorporated v His Eminence Petar the Diocese of Australia and New Zealand (2008) 237 CLR 66:

6. [12]

   Before coming to the questions posed it is necessary briefly to set out some facts.

7. [13]

   The relevant Deed of trust with which the Court is here concerned is in the form of a discretionary family trust. The Deed arises in the Voigt family. The settlor was Boris Semionov, the father of Xenia who then married Hans Voigt. Sylvia and Julia have children of their own, Mr Semionov had another child Alex who lives in Queensland. He has three children James, David and Tamara.

8. [14]

   Clause 1(d) of the Deed defines beneficiaries. Clause 2 deals with the distribution of income, and clause 3 makes irrevocable any decision of the Trustee under clause 2 in respect of income. Clause 4 deals with the distribution of capital and income of the Trust on the vesting day. Clause 5 deals with investments, 6 sets out the various powers of the Trustee and importantly clause 11 deals with the power to vary the trust and clause 20 provides that the Trustee may release or revoke any power or powers conferred on him or them and upon the exercise of any release and revocation pursuant to that clause the powers so released and revoked should be absolutely and irrevocably determined.

9. [15]

   The term income is not defined, but clause 2 permits income to be distributed at the Trustee’s discretion referable to a fiscal year. That term, I agreed with the submission made, should be given its trust law meaning such that capital would not prima facie form part of income: See Commissioner of Taxation v Bamford (2010) 240 CLR 481 at 505.

10. [16]

    There is no provision for default beneficiaries of income. That has the consequence that even though the Trustee has a discretion to distribute income referrable in one fiscal year at a later point of time because there is no default beneficiary as to income it would, I accept, be taxed in the hands of the Trustee at the highest marginal rate as a result of ss.99 and 99A Income Tax Assessment Act 1969 (Cth).

11. [17]

    In addition, it seems as if it has been submitted that the undistributed income would simply continue to accumulate. It would be by reason of clause 2 that it does not become part of the capital of the trust. I accept the submission that the trustee could not under the deed re characterise capital as income.

12. [18]

    Clause 11 of the Deed provides a power to vary the terms of the Deed. Although this clause purports to give the Trustee “absolute and unfettered” discretion to vary the trust there are important provisos.

13. [19]

    Three months’ notice of a proposed variation has to be given and certain powers are exempted from variation, (clause 1(c), 2, 3 and 4). Certain amendments have already been made in 2006 and 2018. By the 2018 amendment an additional clause 22 was added that permitted the Trustee to exclude from the class of beneficiary anyone who may benefit under the Deed whatever class of beneficiary they might be. And clause 22 is irrevocable.

14. [20]

    I accept that the power to vary the Deed would be interpreted liberally but subject to the provisos, importantly the amendment made in 2018 about adding or removing beneficiaries.

The Questions

1. [21]

   Notwithstanding the power to exclude under clauses 4 and 22 I agree with the submissions that those clauses deal with the release and revocation of powers and not trusts.

2. [22]

   It does seem to me that the power to vary in clause 11 is limited. That is there may be a taker in default of appointment pursuant to clause 4 that may be a “foreign person” who cannot be excluded from benefitting under clause 11. I agree that clause 11 cannot be used to totally extinguish the entitlements of the takers in default referred to in clause 4 who may in the future be defined as foreign persons for the purposes of the Land Tax Act/or Duties Act.

3. [23]

   This question asks whether the Trustee is justified in disclaiming and or surrendering its powers to appoint income and or capital to any beneficiary of the trust estate whilst the beneficiary is a “foreign person” as defined in the Land Tax and Duties Act.

4. [24]

   As already made clear clauses 11 and 22 of the Deed gives the trustee power to revoke powers but limitations with respect to altering trusts. For certain purposes s.28 of the Conveyancing Act 1919 (NSW) (“Conveyancing Act”) to release or contract not to exercise a power, by deed disclaim a power, unless the instrument by which the power is given unless a contrary intention is contained in that instrument. As clause 20 of the Deed grants the Trustee the power to revoke other powers s.28 does not apply.

5. [25]

   However, in any event both clause 20 and s.28 refers to powers and not trusts therefore even if a person is a “foreign person” as defined a release of the powers does not mean the trusts could be released. It follows that the Trustee cannot disclaim the trusts pursuant to clause 20 of the deed.

6. [26]

   Prayer 4 of the summons raises the question whether the 2018 deed is valid.

7. [27]

   Prayer 4 of the Summons poses the question as to whether the 2018 Deed is valid. Indeed as the argument was ultimately developed the question of validity concerns two Deeds made in 2018. A separate question also arises as to the status of a 2006 Deed.

8. [28]

   In short it has been submitted the two Deeds both executed on 29 June 2018 are of no effect. The first is the Deed of Amendment for the Voigt Family Trust and the second is the Deed of Exclusion, Voigt Family Trust.

9. [29]

   It is submitted that both Deeds which are interrelated (the Deed of Exclusion is predicated upon the Deed of Amendment being effective) breach the limitation of the power of variation in clause 11 of the Trust Deed being that any variation cannot affect clause 4 of the Trust Deed. The takers-in-default of appointment cannot be affected via any amendment, either of which could theoretically occur pursuant to the Deed of Amendment and therefore the Deed of Exclusion.

10. [30]

    Clause 1.1 of the Deed of Amendment sought to insert a new clause 22 of the Trust Deed, being an irrevocable power to exclude beneficiaries, and in particular, provides as follows:

11. [31]

    Clause 2 of the Deed of Exclusion then purports by reason of the new clause 22 to provide that certain people (being “foreign persons”) cannot be beneficiaries, cl.2.1(a).

12. [32]

    However, there might be that some people who might meet the criteria to be excluded as beneficiaries as provided for in the Deed of Exclusion but who may also be default beneficiaries of entitlements under clause 4 of the Trust Deed. That is by reason of clause 11 which expressly excludes clause 4 from the variation power. There may also be a conflict between the power to exclude in clause 22 which was introduced by the Deed of Amendment and the entitlements under clause 4 of the Trust Deed.

13. [33]

    It is therefore submitted that by reason of the above, the Deed of Amendment and consequently the Deed of Exclusion may offend the terms of clause 11 of the Trust Deed. It would follow that neither Deed should be held to be of any effect. I consider those submissions to be correct.

Section 81

1. [34]

   Pursuant to prayer 5 of the Summons the trustee seeks an order under s.81 of the Trustee Act permitting the Trustee to release all of the trusts and powers (referable to the trust estate) such that any beneficiary of the trust estate that is a “foreign person” as defined in the land Tax or Duties Acts is not a beneficiary whilst they are a “foreign person”.

2. [35]

   As a result of amendments to the Duties Act, Land Tax Act, and the Land Tax Management Act 1956 (NSW) by reason of the State Revenue Legislation Further Amendment Act 2020 (NSW) which provides for exemptions from refunds of surcharge purchase and surcharge land tax payable in respect of residential land by the trustee of a discretionary trust, if the trust prevents a foreign person from being a beneficiary of the trust. In the present case that liability imposed if the “amendments” are not made will annually be 2% of the taxable value of the land (which is residential property) held subject to the Trust estate.

3. [36]

   Section 81(1) of the Trustee Act provides as follows:

4. [37]

   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—

5. [38]

   (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

6. [39]

   (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. [emphasis added]

7. [40]

   Relevantly, for current purposes, s.81(1) of the Trustee Act provides as follows:

8. [41]

   Section 81(2) of the Trustee Act provides as follows:

9. [42]

   That is, s.81(2) of the Trustee Act provides (and amongst other things) that the power conferred on the Court (pursuant to s.81(1) of the Trustee Act):

10. [43]

    There are two decisions of the Court of Appeal which comprehensively deal with s.81 of which I am bound, Re Dion Investments Pty Ltd (2014) 87 NSWLR 753; [2014] NSWCA 367 (“Re Dion (2014)”) and Cisera v Cisera Holdings Pty Ltd (2018) 98 NSWLR 747; [2018] NSWCA 286 (“Cisera”).

11. [44]

    It is important to observe that the Court of Appeal in Cisera reconsidered Re Dion (2014) and approved Barrett JA’s analysis. I should also note I looked at a very similar issue myself in Re Dion Investments Pty Ltd [2020] NSWSC 1661 (“Re Dion (2020)”).

12. [45]

    It is salutary to re-state the various propositions articulated by Barrett JA in Re Dion (2014):

13. [46]

    Accordingly before an order can be made pursuant to s.81 three criteria must be satisfied. As I noted in Re Dion (2020) at [35], ‘there needs to be a “proposed dealing”, being a “sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction”. The dealing must be in the Court’s opinion “expedient”. And the dealing must be incapable of being effected because of an absence of power’.

14. [47]

    As I have already observed here there is a power in the Deed for the release of powers but that provision does not allow for a release of trusts.

15. [48]

    Here I am satisfied that the relevant dealing is a “surrender” and or “release” as is understood in the legislation.

16. [49]

    The relief involves the Trustee seeking a “direct” abstention of doing an act, being the alteration of the trusts and powers such that a “foreign person” will not be able to benefit from the Trust Estate. An abstention from doing an act is specifically provided for in s.81(2) of the Trustee Act. I am also of the view that the “release” or “surrender” are contemplated by s.81(1) in that what is sought is a “direct” contemplated by s.81(1) in that what is sought is a “direct” surrender/release of the trusts and powers being dealings specifically provided in s.81(1).

17. [50]

    The whole point of the application is to enable a conferral of a release or surrender of any powers and trusts which may benefit a “foreign person” and thereby cause the Trustee to be subject to land tax or purchase duty.

18. [51]

    As Barrett JA pointed out in Re Dion (2014), powers can only be conferred by the Court upon a Trustee in order to undertake a particular dealing or a dealing of a particular kind and done as though the power has been inserted into the trust instrument as an overriding power. The conferral of a specific new power is by order of the Court and not by way of an amendment of the trust instrument.

19. [52]

    If the Court is satisfied that there is an absence of power and subject to the need for expediency (s.81(1)) the order of the Court should not be refused because it affects the interests of beneficiaries that is because the Court is concerned primarily with whether the order is expedient in the “management and administration of any property vested in trustees”. Adjustment of beneficiaries is specifically contemplated as a possible and direct consequence of an order under s.81 and thus varying beneficial rights.

20. [53]

    There is no doubt s.81 should not be the subject to implied limitations and should be widely construed.

21. [54]

    The evidence indicates that the “proposed transaction” will have the benefits of reducing the annual land tax charge on the Trustee with respect to residential property held subject to the Trust Estate; see Hunt affidavit at [47].

22. [55]

    There have been a number of cases where it is has been held tax savings or advantages form a basis of expediency in the management and administration of trust property. For example:

23. [56]

    In this case the tax advantages arise upon the surrender or release being approved by the Court. I am satisfied the relief sought in the application is expedient in the relevant sense given the tax savings. The express purpose of permitting the orders sought is so as to allow the surrender and or release of the trusts and powers contained in the terms of the Trust Estate so as to ensure that no beneficiary that is a “foreign person” can benefit under the terms of that Trust Estate.

24. [57]

    I would grant the relief sought in prayers 4 and 5 of the Summons.