Matthew Burgess
Regularly View has recited the ‘read the deed’ mantra.
Last year’s decision in Advanced Holdings Pty Limited as trustee for The Demian Trust v Commissioner of Taxation [2020] FCA 1479 provided a stark example of a range of issues, centred on a purported change of trustee.
The key difficulties with the documentation before the court included:
Based on the factual matrix, the court concluded that the argued change of trusteeship was ineffective.
One of the consequences of the failed change of trusteeship was that the, purported, new trustee was unable to demonstrate that one of the assets it was owner of (being units in a unit trust) were in fact held on trust.
This meant that the potentially concessional tax treatment on distributions from the unit trust were instead taxed in the company in its own right.
A number of key issues were explored in more detail in the appeal decision of Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135, handed down last week.
While the appeal case essentially confirmed the original decision, a number of other key comments were made in relation to the way in which trusts are managed (at least for tax purposes), as set out below.
As a general rule, a court should give effect to the objective intention sought to be achieved where the words of an instrument allow that intention to be given effect, however the court cannot give effect to any intention which is not expressed or plainly implied in the language of the document, as to do otherwise would be to engage impermissibly in ‘gratuitous, groundless, fanciful implication’ (see Fell v Fell [1922] HCA 55).
To the extent of any ambiguity in the terms of a document, the court should construe the clause so that the operation of the trust is advanced (see Re Baden’s Deed Trust [1969] 2 Ch 388).
In the case here where a claimed ‘implied removal’ of a trustee lacked these essential words that pertained to what the court referred to as ‘a straightforward concept’ was held to be fundamental and prevented any favourable interpretation for the taxpayer. Any interpretation other than that demanded by the words of the document (ie an appointment, but no retirement, of trustee) meant the court would have needed to cross a line from simple construction into rectification.
Statutory provisions (such as under section 251A(6) of the Corporations Act, which provides that a minute of meeting properly recorded and signed is evidence of the proceeding to which it relates, unless the contrary is proved) do not mean such a minute is automatically conclusive evidence of happenings at a meeting unless the contrary is proved. Whether the contrary is proved must be judged on the whole of the evidence. If the evidence establishes that an event recorded in a minute did not occur, the fact of its recording in the minute has no effect (see Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287).
Thus, where there are other findings of fact firmly adverse to the quality of corporate management by a director, a court is not obliged to accept at face value and for all purposes, the existence and efficacy of challenged underlying transactions referred to in a company minute.
The court acknowledged that this reality may present a sobering bookkeeping reminder to directors of small companies. This said, it was also confirmed that the evidentiary rules established under the statutory provisions are not intended to circumvent the need to establish the efficacy of all the underlying transactions recorded in a company’s minutes in all cases. In this case, the underlying transactions were squarely in issue and their efficacy open to being doubted.
Finally, given there was evidence that the taxpayer was aware his accountant had prepared backdated documents and his wilful and reckless inattention to the correctness of the relevant tax returns, the court confirmed that the penalties imposed (of 75% of the tax shortfall amount, further increased by 20%) were appropriate. This conclusion was further reinforced by the fact that the taxpayer’s advisers also took steps to prevent or obstruct the Tax Office.
As explained regularly in this Bulletin, given the range of significantly adverse consequences that can result where a purported change to a trust is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.
Invariably, best practice dictates that the starting point must be to read the trust deed.
However, the ‘strategy’ of backdating documents (regardless of how described) will always be inappropriate.
This article is based on one that originally appeared in Thomson Reuters’ Weekly Tax Bulletin.
Matthew Burgess co-founded View in 2014, having been a partner and lawyer at one of Australia’s leading independent law firms for over 17 years. Matthew’s passion is helping clients to successfully achieve their goals. Matthew specialises in tax, estate and succession planning, providing strategic advice to business owners and high net worth individuals, and has been recognised in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates and in ‘Doyles’ either personally or as part of View since 2015 in relation to taxation. In 2017 he was also nominated as Tax Partner of the Year (Lawyers Weekly). While a significant focus of Matthew’s practice is on small to medium enterprises and private business owners, the growth in this area in recent years has meant that he also regularly works on transactions with listed companies. In part leveraging off the skills he has developed working in the SME market space, Matthew has been the catalyst in developing a number of innovative legal products for advisers and their clients. You can find Matthew on LinkedIn, via his personal site, or the View Legal website.