Franke and Repatriation Commission (Veterans’ entitlements)
[2015] AATA 733
•21 September 2015
Franke and Repatriation Commission (Veterans’ entitlements) [2015] AATA 733 (21 September 2015)
Division
VETERANS' APPEALS DIVISION
File Number(s)
2015/0955
2015/0956
Re
Horst Franke
Linden Franke
APPLICANT
And
Repatriation Commission
RESPONDENT
DECISION
Tribunal Dr Gordon Hughes, Member
Date 21 September 2015 Place Melbourne The Tribunal affirms the decision under review
...........[sgd].............................................................
Dr Gordon Hughes, Member
VETERANS’ AFFAIRS – Whether a trust is a "controlled private trust" – whether applicants were "attributable stakeholders" – whether purported variation of the trust deed is legally effective – decision affirmed
Legislation
Veterans' Entitlements Act 1986 sections 52ZZB, 52ZZH, 52ZZJ
Cases
Jenkins v Ellett [2007] QSC 154
Secondary Materials
Veterans' Entitlements (Attributable Stakeholders and Attribution Percentages) Principles 2001
REASONS FOR DECISION
Dr Gordon Hughes, Member
21 September 2015
The applicants sought a review of a decision by the respondent which determined that Mr Franke's assets, for service pension assessment purposes, included 100% of the assets of the H&L Franke Family Trust (the Trust).
Specifically, the Tribunal was required to determine whether the Trust was a "controlled private trust" under the Veterans' Entitlements Act 1986 (the Act), whether the applicants were "attributable stakeholders" in the Trust, and the effect of a purported variation of the trust deed on 1 May 2015.
Legislation
Section 52ZZB(1) of the Act provides that:
(1) For the purposes of this Division, a trust is a designated private trust unless:
(a) all of the following conditions are satisfied:
(i) the trust is a fixed trust;
(ii) the units in the trust are held by 50 or more persons;
(iii) the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Division and/or Part 3.18 of the Social Security Act; or
(b) the trust is a complying superannuation fund (see subsection (3)); or
(c) the trust is an excluded trust (see subsection (4)); or
(d) the trust is an FHSA trust (within the meaning of the First Home Saver Accounts Act 2008).
Section 52ZZH of the Act provides as follows:
Controlled private trusts
(1) For the purposes of this Division, a trust is a controlled private trust in relation to an individual if the trust is a designated private trust and:
(a) the individual passes the control test set out in subsection (2); or
(b) the individual passes the source test set out in subsection (3).
Control test
(2) For the purposes of this section, the individual passes the control test in relation to a trust if:
(a) the individual, or an associate of the individual (other than an associate covered by paragraph 52ZQ(1)(j)), is the trustee, or any of the trustees, of the trust; or
(b) a group in relation to the individual was able to remove or appoint the trustee, or any of the trustees, of the trust; or
(c) a group in relation to the individual was able to vary the trust deed or to veto the decisions of the trustee; or
(ca) it could reasonably be expected that the trustee of the trust would make an application of the corpus or income of the trust to the individual if the individual could not meet his or her reasonable costs of living; or
(d) the aggregate of:
(i) the beneficial interests in the corpus or income of the trust held by the individual (whether directly or indirectly); and
(ii) the beneficial interests in the corpus or income of the trust held by associates of the individual (whether directly or indirectly);
is 50% or more; or
(da) either or both of the following apply:
(i) the individual is eligible to receive an application of the corpus or income of the trust;
(ii) one or more of the individual's associates are eligible to receive an application of the corpus or income of the trust;
and the aggregate number of entities covered by subparagraphs (i) and (ii) is 50% or more of the total number of entities eligible to receive an application of the corpus or income of the trust; or
(e) a group in relation to the individual had the power (by means of the exercise by the group of any power of appointment or revocation or otherwise) to obtain, with or without the consent of any other entity, the beneficial enjoyment of the corpus or income of the trust; or
(f) a group in relation to the individual was able in any manner whatsoever, whether directly or indirectly, to control the application of the corpus or income of the trust; or
(g) a group in relation to the individual was capable under a scheme of gaining the enjoyment or the control referred to in paragraph (e) or (f); or
(h) a trustee of the trust was accustomed or under an obligation (whether formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.
(2A) For the purposes of paragraph (2)(da), an entity is eligible to receive an application of the corpus or income of the trust if the trustee of the trust has a discretion to make an application of the corpus or income of the trust to the entity.
(2B) For the purposes of applying paragraph (2)(da) at a particular time, subparagraph (2)(da)(i) is taken to apply at that particular time to the individual if the individual was eligible to receive an application of the corpus or income of the trust at any time during:
(a) the period beginning at the start of the tax year in which that particular time occurs and ending at that particular time; or
(b) the preceding tax year.
(2C) For the purposes of applying paragraph (2)(da) at a particular time, subparagraph (2)(da)(ii) is taken to apply at that particular time to an entity that is an associate of the individual at that particular time if:
(a) the entity was eligible to receive an application of the corpus or income of the trust at any time during:
(i) the period beginning at the start of the tax year in which that particular time occurs and ending at that particular time; or
(ii) the preceding tax year; and
(b) the entity was an associate of the individual at the time the entity was so eligible.
(2D) For the purposes of applying paragraph (2)(da) at a particular time, in working out the total number of entities eligible to receive an application of the corpus or income of the trust, take into account an entity that was eligible to receive an application of the corpus or income of the trust at any time during:
(a) the period beginning at the start of the tax year in which that particular time occurs and ending at that particular time; or
(b) the preceding tax year.
(2E) No paragraph of subsection (2) limits any other paragraph of that subsection.
Source test
(3) For the purposes of this section, an individual passes the source test in relation to a trust if:
(a) the individual has transferred property or services to the trust after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000; and
(b) the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer.
Group
(4) A reference in this section to a group in relation to an individual is a reference to:
(a) the individual acting alone; or
(b) an associate of the individual acting alone; or
(c) the individual and one or more associates of the individual acting together; or
(d) 2 or more associates of the individual acting together.
Section 52ZZJ of the Act relevantly provides:
Attributable stakeholder, asset attribution percentage and income attribution percentage
…
(2) For the purposes of this Division, if:
(a) a trust is a controlled private trust in relation to an individual; and
(b) the trust is not a concessional primary production trust in relation to the individual (see section 52ZZZF);
then:
(c) the individual is an attributable stakeholder of the trust unless the Commission otherwise determines; and
(d) if the individual is an attributable stakeholder of the trust--the individual's asset attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Commission determines a lower percentage in relation to the individual and the trust--that lower percentage; and
(e) if the individual is an attributable stakeholder of the trust--the individual's income attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Commission determines a lower percentage in relation to the individual and the trust--that lower percentage.
…
Determinations
(3) A determination under this section is to be in writing.
(4) A determination under this section has effect accordingly.
(5) In making a determination under this section, the Commission must comply with any relevant decision-making principles.
Discussion
Background
Mr Franke applied for a service pension with the Department of Veterans' Affairs under the Veteran Entitlements Act 1986 on 15 September 2005 and was denied. He reapplied on 25 September 2007 and was successful.
The Department of Veterans’ Affairs conducted a review of Mr Franke’s pension and decided, on 8 August 2014, to include a property owned by the H&L Franke Family Trust among his assets. The property was previously owned by Mr Franke's late mother who died on 9 September 2008.
The Trust was established on 24 June 2005 as part of the applicants' estate planning. The shareholders were the two applicants and seven other persons. The sole director was Amanda Volkoff, Mr Franke's daughter. The beneficiaries included Mrs Franke's children from a previous marriage.
On 1 July 2005, the applicants contributed two properties to the Trust, 13 Anglers Road, Cape Paterson and 64 Anglers Road, Cape Paterson.
At the time of her death, Mr Franke's mother owned two properties, 39 Kidds Road, Doveton and 51 Seaward Drive, Cape Paterson. She left these properties to her three children. The children agreed that Mr Franke would receive 39 Kidds Road by transfer to the Trust and his sister Cornelia would receive 51 Seaward Drive subject to settling accounts with the third sibling, Kurt.
The net result of settling accounts, on re-valuations of each property at $285,000, was that Mr Franke and Cornelia would pay Kurt $95,000.
On 16 September 2010, 39 Kidds Road was transferred from the deceased estate to the Trust.
On 23 February 2015, a Change to Company Details form was lodged with ASIC, changing the shareholders of the Trustee Company from the applicants to the children of Amanda Volkoff, aged 19 years and 11 years respectively. Mr Franke asserted that this had been the initial intention in relation to the shareholding of the trustee company, Cape Paterson Investments Pty Ltd but that there had been a delay in its implementation.
On 1 May 2015, a resolution was made by the sole director, Amanda Volkoff, that clause 20 of the trust deed would be amended to provide that the power of removal of the current trustee and the appointment of the new trustee shall be made by a resolution of all beneficiaries who had attained the age of majority, at the time of the removal and appointment.
On 8 August 2014 the respondent advised the applicants that Mr Franke's service pension had been reduced due to the inclusion of the real estate held by the Trust. The basis of the decision was that the applicants controlled the private Trust by virtue of their shareholding and were named as principals with the power of appointment of a replacement trustee.
Was the Trust a "controlled private trust"?
The applicants contended that they did not have effective control of the Trust. They said that the Trust had been set up for the benefit of their children before the death of Mr Franke's mother. Any assets held by the rust were intended for the benefit of Mr Franke's children, as part of his estate planning. .
The applicants further contended that merely holding shares did not give them any control over the operation of the (discretionary) Trust. The prerogative of decision making rested with the director of the trustee company, Amanda Volkoff.
The respondent contended that the Trust was a controlled private trust under section 52ZZH of the Veterans Entitlement Act.
Mr Franke, in his evidence to the Tribunal, did not purport to have a detailed knowledge of the nature or legal effect of the Trust. He said he had left the arrangements to Mrs Franke.
For the purposes of section 52ZZH(1), a trust will be a "controlled private trust" if it is a "designated private trust" and the individual either passes the "control test" set out in section 52ZZH(2) or the "source test" set out in section 52ZZH(3).
A "designated private trust" is defined in section 52ZZB as comprising any trust unless the conditions described in subparagraphs (a), (b), (c) or (d) exist. The applicant did not contend that the conditions set out in anywhere in subparagraphs (a) to (d) of section 52ZZB(1) existed, nor was any evidence presented to this effect.
The Tribunal is satisfied that the H&L Franke Family Trust is a "designated private trust".
The respondents contended that the applicants passed the "control test" in section 52ZZH(2).
In order to satisfy the "control test", it is only necessary for one of the indicia in subparagraphs (a) to (h) of section 52ZZH(2) to be satisfied.
The respondent submitted that the applicants, or at least Mr Franke, satisfied or arguably satisfied the indicia set out in each and every subparagraph of section 52ZZH (2).
In relation to subparagraph (a), the test of whether an individual passes the control test in relation to a trust is whether "the individual, or an associate of the individual…is the trustee, or any of the trustees, of the trust".
For the purpose of determining whether a trust is a designated private trust, an "associate" is deemed by section 52ZQ(1)(e) to include "a relative of the individual".
The Tribunal has no difficulty concluding that Mr Franke answers the description in section 52ZZH(2)(a) and therefore passes the control test in relation to the Trust.
The respondent took the Tribunal through subparagraphs (b) to (h) of section 52ZZH(2) in order to establish alternative grounds upon which the applicants H satisfied the "control test". The applicants' representative argued that some of the respondent's contentions in relation to subparagraphs (b) to (h) required the Tribunal to speculate as to the extent of the applicants' potential influence over the director of the Trust. In view of the Tribunal's finding in relation to paragraph (a), however, it is not necessary to consider any other subparagraphs in this decision.
The respondent further contended that the applicants passed the "source test" in section 52ZZH(3).
In view of the Tribunal’s findings in relation to the "control test", it is not necessary for the Tribunal to consider the "source test". Suffice to say that were it relevant to the Tribunal’s finding, the Tribunal would have concluded that the “source test” was satisfied, since it is clear that property was transferred to the Trust after 9 May 2000 for no consideration.
On this basis, the Tribunal is satisfied that the H&L Franke Family Trust is a "controlled private trust".
Are the applicants "attributable stakeholders" in the Trust?
It is next necessary to determine whether the applicants are "attributable stakeholders" for the purposes of section 52ZZJ(2). This in turn determines the appropriate asset attribution percentage under section 52ZZJ.
The respondent submitted, and the Tribunal agrees, that prima facie the applicants were 100% attributable stakeholders in the Trust.
The respondent's contention that the appropriate asset attribution percentage under section 52ZZJ is 100% was based on the fact that the applicants contributed most or all of the assets to the Trust, were beneficiaries of and could obtain benefits from the Trust, were the appointors with power to remove and appoint trustees, and are entitled to three months' notice of any intention by the trustee to vary the Trust.
Next, it is necessary to consider the requirements of subsections (3) to (5) of section 52ZZJ,dealing with determinations as to a finding that an individual is an attributable stakeholder.
Subsection (5) requires compliance with any relevant decision making principles.
In this instance, the "relevant decision making principles" are the Veterans' Entitlements (Attributable Stakeholders and Attribution Percentages) Principles 2001 (the Principles).
Section 4 of the Principles explains that their purpose is to direct the decision maker in making a determination under section 52ZZJ of the Act that an individual is not an attributable stakeholder of a company or trust, or that a specified percentage lower than 100% is the appropriate asset attribution percentage.
Section 7 of the Principles sets out matters to be considered by the decision maker which would make it inappropriate for the individual to be an attributable stakeholder of the company or trust. Section 7(2) provides that relevant circumstances for these purposes include the extent to which the relationship between the individual and the company or trust is affected by any of the following:
(a)circumstances arising from the legal structure of the company or trust;
(b)circumstances arising from the administrative arrangements of the company or trust;
(c)whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust.
In this regard, the legal structure of the company or trust is significant. The trust deed places the control of the H&L Franke Family Trust in the hands of the principals who, by virtue of paragraph 20 of the deed, have the power to appoint a new trustee. Relevantly, paragraph 20 of the deed states:
The Principal [Mr and Mrs Franke] may at any time by notice in writing to the Trustee remove from office any or all of the Trustees or Trustee for the time being of this Deed and may [by] Deed appoint a new Trustee in its or their place to the Trustee hereof and such new Trustee may be any person (other than the Principal himself) or a company resident in any country throughout the world.
Whilst the trustee is given the power at any time to vary the terms of the deed, the trustee must provide the principals with three months' notice of an intention to do so. The effect is that if the principals disapprove of the proposed variation, the trustee can be removed and the variation will lapse.
It follows that in the Tribunal's opinion, the applicants were "attributable stakeholders" in the H&L Franke Family Trust.
Was the Trust effectively varied on 1 May 2015?
It is next necessary to consider whether the variation to the trust deed on 1 May 2015 altered the status of the Trust.
The purported variation took the form of a resolution of the sole director of the trustee company, signed by Amanda Volkoff. Relevantly, it was resolved that paragraph 20 of the trust deed would be amended to include the following:
The power of removal of the current trustee and the appointment of the new trustee shall be made by a resolution of all beneficiaries who attained the age of majority, at the time of the removal and appointment.
The respondent contested the validity of this variation on two grounds.
First, the respondent contended that the formalities of paragraph 17 of the trust deed had not been complied with. Clause 17 provides the trustee with the power to vary the Trust at any time by deed on three months' notice. In this instance, there was no deed of variation, only a resolution by the sole director of the trust.
Of further relevance to the effectiveness of the variation, the respondent contended that it was questionable whether the power of the trustee to vary the Trust extended to removing the principals as appointors.
The respondent contended that a trustee could not vary a trust by removing the appointor, given that it is established as a trust controlled by the appointor. The objective is that the trustee be in a position to control the trust and it was questionable whether a trustee, whether by resolution or even by deed of variation, could alter this fundamental premise.
In support of this contention, the respondent referred to a decision of the Supreme Court of Queensland in Jenkins v Ellett [2007] QSC 154, which considered whether a trustee could be allowed to defeat the ability of the principal to remove the trustee, should the need arise, by amending the deed so as to remove the principal. In that case, Douglas J observed:
The Principal's ability to remove and replace a trustee seems to me to be one of the fundamental features of the structure of this deed, one setting up a family discretionary trust. The maintenance of that power is obviously designed to ensure that the control of the trust will remain with the significant intended beneficiary…to allow the power…to be subverted by the trustee it was designed to supervise purporting to use [the power] to amend the deed rather than the trust's declared by the deed is not, in my view, permissible. It is akin to destroying the substratum of the deed.
This is an issue with significant legal connotations which the Tribunal need not decide at this point, given that it has already determined that the purported variation is ineffective owing to the form it has taken.
For the same reason, the Tribunal does not consider it necessary or appropriate to determine at this stage whether, in the event the trust deed is subject to an effective future variation in the manner proposed by the applicants, it would no longer be a "controlled private trust".
Decision
For the reasons set out above, the Tribunal affirms the decision under review.
I certify that the preceding 53 (fifty-three) paragraphs are a true copy of the reasons for the decision herein of Dr Gordon Hughes, Member .......[sgd]...................................................
Associate
Dated 21 September 2015
Date(s) of hearing 24 August 2015 Advocate for the Applicant T Loh Solicitors for the Respondent Ken Rudge, Department of Veterans' Affairs
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