Budumu Pty Ltd (ACN 001 216 397)

[2021] NSWSC 522

Supreme Court

New South Wales

Medium Neutral Citation:

Budumu Pty Ltd (ACN 001 216 397) [2021] NSWSC 522

Hearing dates:

3 February 2021

Date of orders:

19 April 2021

Decision date:

12 May 2021

Jurisdiction:

Equity - Expedition List

Before:

Sackar J

Decision:

See paras [21], [23], [27]-[28]

Catchwords:

EQUITY — Trusts and trustees — Judicial advice — Variation of trusts — Whether trustee can exercise power to exclude

Legislation Cited:

Conveyancing Act 1919 (NSW)

Duties Act 1997 (NSW)

Land Tax Act 1956 (NSW)

Land Tax Management Act 1956 (NSW)

State Revenue Legislation Further Amendment Act 2020 (NSW)

Trustee Act 1925 (NSW)

Cases Cited:

Casibond Pty Ltd [2021] NSWSC 320

Cecil Investments Pty Limited [2021] NSWSC 211

Re Dion Investments Pty Ltd [2014] NSWCA 367

Re Dion Investments Pty Ltd [2020] NSWSC 1661

Category:

Principal judgment

Parties:

Budumu Pty Ltd in its capacity as trustee of the George Hardi Family Trust

Representation:

Counsel:
D Barlin (plaintiff)

Solicitors:
Stacks Champion (plaintiff)

File Number(s):

2020/353667

Judgment – Judicial Advice

1. This is an application by the Plaintiff, acting as trustee (“the Trustee”) of the George Hardi Family Trust (“the Trust Estate”), asking the Court for advice under s.63 and or relief under s.81 of the Trustee Act 1925 (NSW) (“Trustee Act”).

2. For the purposes of the s.63 application, the questions for advice are contained in prayers 2 and 3 of the summons.

3. For the purposes of the s.81 application, the relief sought is contained in prayer 4 of the summons.

4. The reason for 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 impose 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. On 19 April 2021, having heard the evidence and submissions, I made the orders requested. I indicated I would subsequently publish my reasons. These are they.

The Land Tax Act

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

(1) The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust.

(2) If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A.

(3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied—

(a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement),

(b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).

Note—

Under the transitional arrangements for this section in Schedule 2 to the Principal Act, the no amendment requirement does not apply to a trust that satisfies the no foreign beneficiary requirement immediately before the commencement of this section.

(4) A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.

Note—

A potential beneficiary is not limited to persons named in the trust instrument and extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the discretions of the trust.

(5) For the removal of doubt, a person is not a potential beneficiary of a discretionary trust if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person.

7. 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 …”

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

The terms of the Trust Estate

9. The terms of the Trust Estate are contained in a trust deed dated 11 April 1974 (“the Trust Deed”) and made as between Leo Hardi (as settlor) and the Trustee (as trustee).

10. Clause 2 of the Trust Deed contains the trusts with respect to income. Clause 4 of the Trust Deed contains the trusts for capital.

11. Clause 2 of the Trust Deed provides that:

Until the Vesting Day the trustee shall stand possessed of the trust fund UPON TRUST as to the income thereof for the beneficiaries, or any one or more of them exclusive of the other or others of them in such shares and proportions as the trustee in its absolute discretion may from year to year determine.

12. Clause 4 of the Trust Deed provides as follows:

The Trustee shall stand possessed of the trust fund on the vesting day in trust as to income and capital for such of the beneficiaries as are then living, or any one or more of them exclusive of the other or others in such shares and proportions as the trustee in its absolute discretion may determine in or within a period of 14 days before the vesting day and in default of any such determination as aforesaid shall stand possessed of the trust fund for such of the children of George Hardi and Anne Marie Hardi as shall then be living, and if more than one as tenants in common in equal shares PROVIDED that should any of the children of George Hardi and Anne Marie Hardi have died before the vesting day leaving a child or children him or her surviving such child or children shall take, if more than one as tenants in common in equal shares, the share of which their parent would have taken if living at the vesting day.

13. Further, paragraph 6(c) of the Trust Deed gives the Trustee the power to pay or apply the capital for the “…maintenance, education, advancement or benefit…” of a beneficiary.

14. The objects of the power to appoint income (per cl.2) and the power to appoint capital (under cl.4 and paragraph 6(c)) are the “beneficiaries”. That term is defined in paragraph 1(d) of the Trust Deed as follows:

“the beneficiaries” will be George Hardi of 145 Dover Road, Dover Heights, Anne Marie Hardi of the same address, his wife, their children and grandchildren, or any trustee whether discretionary or otherwise in which the beneficiaries or possible beneficiaries include any of the persons previously mentioned in this sub-clause.

15. Clause 7 of the Trust Deed prohibits (amongst others) the Trustee from benefiting, and relevant provides as follows:

Notwithstanding anything to the contrary hereinbefore expressed or implied no discretion or power by this settlement conferred on any person or on the trustee shall be exercised and no provisions of this settlement shall operate so as to confer or be capable of conferring any benefit on… (other than remuneration in accordance with Clause 9 hereof) the trustee…

16. Clause 11 of the Trust Deed contains a power to vary, as follows:

At any time during the life of the said George Hardi and his wife Anne Marie Hardi and prior to the termination of the trusts hereby declared the trustee may from time to time in its absolute unfettered discretion notwithstanding anything to the contrary herein contained but provided that three months notice of its intention to vary the trusts as hereinafter provided shall first have been given to the said George Hardi and his wife Anne Marie Hardi by deed vary the trusts or provisions hereof in any manner whatsoever provided that any variation of the objects shall be in favour of all or any one or more of the following, namely, any relative by blood of the said George Hardi and his wife Anne Marie Hardi or any charitable object SUBJECT ALWAYS to no share or benefit from or interest in or under the George Hardi Family Trust at any time being any way acquired by or passing to the settlor, its executors or administrators or the trustee, its successors in office or the person paying money or transferring property at less than full value (and his executor or administrators) referred to in Clause 7 hereof, consequent upon or pursuant to any such variation aforesaid.

The questions

17. The Summons in prayers 2 and 3 pose the following questions for advice pursuant to s.63 of the Trustee Act:

1. Whether the Trustee has the power to vary the terms of the Trust Estate?

2. Whether the Trustee is not 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 that term is defined for the purposes of the Land Tax Act and the Duties Act?

18. I examined similar issues in Re Dion Investments Pty Ltd [2020] NSWSC 1661 (“Re Dion [2020]”) and I gave advice on related questions recently in Cecil Investments Pty Limited [2021] NSWSC 211 (“Cecil”) and Casibond Pty Ltd [2021] NSWSC 320 (“Casibond”) and refer to those judgments to answer the current questions.

19. Based on my previous findings in Cecil and Casibond and for the same reasons there, I answer the questions put to me here as follows.

Question 1

20. As observed by Barrett JA (with whom Beazley P and Gleeson JA agreed) in Re Dion Investments Pty Ltd [2014] NSWCA 367 (“Re Dion [2014]”), without more, a settlor and original trustee cannot vary the terms of a trust that has been created (at [42] in Re Dion [2014]). There are only four ways that a settled trust can be varied:

1. where there is a reserved power to amend ([45] in Re Dion [2014]);

2. with the unanimous consent of beneficiaries if all are in being, sui juris and absolutely entitled ([46] in Re Dion [2014]);

3. legislation ([46] in Re Dion [2014]); and

4. limited power of the Court to sanction the departure from the terms of a trust ([47] in Re Dion [2014]).

21. I accept the Plaintiff’s submissions that the Trustee does not have the power to vary the Trust Deed, and that the power to vary contained in cl.11 of the Trust Deed expired upon the death of George and Anne Marie Hardi.

Question 2

22. Whether or not the Trustee can disclaim, release or surrender any powers depends upon the application of s.28 of the Conveyancing Act 1919 (NSW) (“Conveyancing Act”). The question is therefore whether the powers contained in the Trust Deed, being the powers to appoint income and or capital, are powers which are coupled with a duty.

23. The answer to prayer 3 of the Summons is that the Trustee cannot disclaim and or surrender its powers to appoint income and or capital to any beneficiary of the Trust Estate while the beneficiary is a “foreign person” under the Land Tax Act and the Duties Act.

Section 81

24. The relief sought (at prayer 4 of the Summons) under s.81 of the Trustee Act was an order permitting the Trustee to release all of the trusts and powers (referrable to the Trust Estate) such that any beneficiary of the Trust Estate that is a “foreign person” as that term is defined in the Duties Act and the Land Tax Act is not a beneficiary whilst they are a “foreign person”.

25. This relief is pursued due to the effect of the State Revenue Legislation Further Amendment Act 2020 (NSW) (“the Amending Act”) on the Duties Act, Land Tax Act and the Land Tax Management Act 1956 (NSW). The Amending Act provides for exemptions from refunds of surcharge purchaser duty 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. Here, that would result in an estimated annual liability of (at this stage) 2% of the taxable value of the land (which is residential property) held subject to the Trust Estate. In particular, there will be a charge of approximately $180,200 with respect to the land tax years from 2017 to 2020, and at this stage an annual charge of $44,740 for each subsequent year.

26. Relief is also sought in the absence of a reserve power to vary the terms of the Trust Estate as contained in the Trust Deed, and because s.28 of the Conveyancing Act cannot be used to disclaim the trusts contained in clause 4 of the Trust Deed.

27. For the same reasons as in Re Dion [2020], Cecil Investments and Casibond, I would therefore grant the relief sought in prayer 4 of the Summons under s.81 of the Trustee Act.

28. I have made orders in this matter to the above effect.

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Decision last updated: 12 May 2021