Lester v Lester
[2018] VSC 611
•16 October 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2017 04395
IN THE MATTER of the Will of MASHA LESTER, deceased
- and –
IN THE MATTER of an application under Order 54.02 of the Supreme Court (General Civil Procedure) Rules 2015
BETWEEN
| DAVID RICHARD PELHAM LESTER (in his capacity as co-trustee of the estate of Masha Lester) | Plaintiff |
| v | |
| DAMIAN RICHARD ROHAN LESTER | Defendant |
---
JUDGE: | Ierodiaconou AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 28 June 2018 (further submissions of 10 July, 25 July, 17 September and 20 September 2018) |
DATE OF JUDGMENT: | 16 October 2018 |
CASE MAY BE CITED AS: | Lester v Lester |
MEDIUM NEUTRAL CITATION: | [2018] VSC 611 |
---
WILLS AND ESTATES – Construction of Will – Whether a life tenancy – Whether income or capital – Whether interest accelerated – Settled Land Act 1958 – Supreme Court (General Civil Procedure) Rules 2015, r 54.02.
---
APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr S F McNab | Lawson Hughes Peter Walsh |
For the Defendant | Mr M Livesey QC | Allen Burtt Legal Services |
TABLE OF CONTENTS
Introduction....................................................................................................................................... 1
The Will............................................................................................................................................. 1
Evidence............................................................................................................................................ 4
Did David hold a life tenancy in the estate’s share of the Toorak Property pursuant to the Will?......... 4
Are net sale proceeds of estate assets in the Toorak Property income or capital?................................ 9
Are net sale proceeds of assets forming part of the residuary estate income or capital?.................... 11
Applicable principles.............................................................................................................. 13
Analysis.................................................................................................................................. 19
How should cl 17 of the Will be construed?....................................................................................... 23
Analysis.................................................................................................................................. 28
Answers to questions in originating motion...................................................................................... 33
HER HONOUR:
Introduction
Questions have arisen in the administration of the Will of Masha Lester (‘the testator’). Direction from the Court is sought pursuant to O 54 of the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’). The plaintiff and defendant are both executors and trustees of the testator’s will dated 21 November 1996 (‘the Will’). The relationship between the parties is father and son.
Distilling the parties’ questions, the central issues for determination in this proceeding are as follows:
(a) Did the plaintiff hold a life tenancy in the estate’s share of a property in Toorak pursuant to the Will?
(b) Are net sale proceeds of estate assets income or capital?
(c) How should cl 17 of the Will be construed?
The Will
The Will originally appointed six individuals as executors and trustees, however probate was granted to just three of these individuals: the plaintiff, the defendant and Richard Beauregard Lester (‘Richard’). Subsequently, Richard was dismissed as an executor.[1]
[1]Order of the Honourable Justice Beach (as he then was) made on 2 May 2000.
The plaintiff (‘David’) is the testator’s only son. The defendant (‘Damian’) and Richard are David’s sons. Damian and Richard are grandsons of the testator.
The following clauses are central to the issues in dispute.
Clause 4 of the Will states:
I GIVE DEVISE AND BEQUEATH all of my one half (½) right title and interest in and to the freehold property known as [the Toorak Property] to my trustees UPON TRUST to permit my said son DAVID RICHARD PELHAM LESTER to use the same rent free during his lifetime with my said son paying all rates and taxes thereon and other outgoings thereof and keeping the same in a good and habitable state of repair fair wear and tear and damage by fire lightning Act of God inevitable accident flight and tempest expected [sic] with my said son keeping the same insured to the full value thereof against fire and such other risks as my trustees may desire and to the satisfaction of my trustees and after his death TO HOLD all of my one half (½) right title and interest in and to the [Toorak Property] to form part of my residuary estate.
Clause 17 of the Will states:
I GIVE DEVISE AND BEQUEATH all the rest of my real and personal estate whatsoever and wheresoever situate including any property over which I may have a power of appointment or disposition to my trustees UPON TRUST subject always to clause 19 to sell call in and convert into money such parts thereof as shall not consist of money and to hold the proceeds of such sale calling in and conversion and my ready money and any part or parts of my said real estate and personal property for the time being remaining unconverted and all my money (herein after all included in the term ‘my converted estate’) UPON THE FOLLOWING TRUSTS:
17.1TO PAY thereout all my just debts funeral and testamentary expenses including the costs of erecting or causing to be erected a suitable tombstone or memorial over my grave and all probate estates legacy succession and other duties payable in respect of my estate or any part thereof or in respect of any interest therein or in respect of any property which is deemed to form part of my estate or in respect of which an amount is required to be included in my estate by or for the purposes of any statutes imposing death duties all of which shall be paid out of the corpus of my estate and shall not be charged against any legacy annuity devise life or other interest herein bequeathed or given AND I DIRECT that all such duties, debts, costs and expenses shall be paid as a debt due by my estate and shall not be apportioned among the beneficiaries under this my Will nor recovered from any beneficiary to whom any part of my estate may have passed;
17.2AS TO ALL the rest and residue of my converted estate (hereinafter called ‘my residuary estate’) UPON THE FOLLOWING TRUSTS:
17.2.1 TO PAY the net annual income arising from my residuary estate:
17.2.1.1as to an undivided fifty percent (50%) part or share to my said son DAVID RICHARD PELHAM LESTER during his lifetime;
17.2.1.2as to an undivided ten percent (10%) part or share to my said grandson DAMIAN RICHARD ROHAN LESTER during his lifetime;
17.2.1.3as to an undivided ten percent (10%) part or share to my said grandson RICHARD BEAUREGARD LESTER during his lifetime;
17.2.1.4as to an undivided ten percent (10%) part or share to my nephew [BENEFICIARY A] during his lifetime;
17.2.1.5as to an undivided ten percent (10%) part or share to my nephew [BENEFICIARY B] during his lifetime; and
17.2.1.6as to an undivided ten percent (10%) part or share to my niece [BENEFICIARY C] during her lifetime.
17.2.2ON and from the date of the death of any of the income beneficiaries referred to clause 17.2.1 TO HOLD such part or share of the net annual income to which any such beneficiary was entitled for the children of my said grandson DAMIAN RICHARD ROHAN LESTER until they attain the age of twenty five (25) years as tenants-in-common in equal shares and after they attain the age of twenty five (25) years TO PAY such part or share of the net annual income to the children of my grandson DAMIAN RICHARD ROHAN LESTER as tenants in common in equal shares;
17.2.3ON and from the date of death of all of the income beneficiaries TO PAY both capital and income to the children of my said grandson DAMIAN RICHARD ROHAN LESTER when they obtain the age of twenty five (25) years as tenants in common in equal shares absolutely and beneficially.
Clause 19 of the Will states:
I INSTRUCT AND DIRECT my trustees that:
19.1if the properties situate at and known as [Queens Road, Melbourne Properties] form part of my residuary estate at the date of my death, my trustees shall be entitled to retain or sell such properties;
19.2if my interest in the [Toorak Property] forms part of my residuary estate at the date of my death, my trustees shall be entitled to retain or sell my interest in the [Toorak Property]; and
19.3any remaining commercial real estate and all my remaining residential real estate forming part of my residuary estate shall not be sold by my trustees and shall be retained by my trustees upon the trusts herein contained
AND I EMPOWER my trustees to make such outlay as they may from time to time deem necessary for repairs alterations and improvements to any freehold forming part of my residuary estate and to charge such repairs alterations and improvements to the income of my residuary estate.
Clause 22 of the Will states:
I DECLARE that for the purposes of enjoyment and transmission under the trusts herein contained my estate shall be considered money from the date of my death and the rents interest dividends and other yearly product thereof which shall accrue after my death as well as before after the sale calling in and conversion thereof shall as well during the first year after my death as subsequently be deemed to be the annual income thereof and applicable as such for the purposes of the trusts thereof without regard to the amount of the said income or the wasting or hazardous nature of the investments producing the same.
Evidence
The parties rely on the following affidavits:
(a) affidavits sworn by David Richard Pelham Lester on 27 October 2017 (‘David’s first affidavit’) and 1 February 2018 (‘David’s second affidavit’); and
(b) affidavits of Damian Richard Rohan Lester sworn on 19 January 2018 (‘Damian’s first affidavit’) and 5 April 2018 (‘Damian’s second affidavit’).
Did David hold a life tenancy in the estate’s share of the Toorak Property pursuant to the Will?
The Toorak Property was originally the family home. The testator owned half and David owned the other half. They were tenants in common. At the time of the testator’s death, David and his wife were residing in the Toorak Property.
David submits that he was a life tenant with respect to the half share in the Toorak Property owned by the estate. He contends that the operation of the Settled Land Act 1958 (Vic) (‘SLA’) is attracted by the wording of the Will itself. The right of a tenant for life in settled land must be something more than a personal right and amount to a legal, or equitable right to possession of the settled land. David refers to a series of authorities to support his contention that this was settled land and attracted the operation of the SLA.
David further submits that the word ‘use’ in cl 4 of the Will should be construed more widely than being the equivalent of residing. David points to the fact that the right to use the property extends for the duration of his lifetime and does not terminate on, for instance, him ceasing to reside in the property. In the alternative, he says that even if the words of cl 4 convey less than a complete life interest, such as a right to use for his benefit or reside, that this is not necessarily inconsistent with him having the right to receive income under the SLA. Finally, he says that even if he is found not to have a complete life tenancy, he would still be a person having the powers of a tenant for life under the SLA.
On the other hand, Damian submits that the Will needs to be interpreted independently of the SLA. On the terms of the Will, David did not have a life interest in the Toorak Property. Damian contends that cl 4 of the Will merely confers a personal right of residency on David. Damian relies on Re Potter[2] in support of his contention.
[2][1970] VR 352.
Damian does not concede that David had a life interest in the Toorak Property pursuant to the Will. However, he does concede that the Toorak Property is settled land pursuant to the SLA because the property is held on trust for persons by way of succession within the meaning of s 8(1)(a) of the SLA. He concedes that as David’s interest was sufficient to amount to a beneficial entitlement to possession, he was a tenant for life pursuant to the SLA.
The following authority is instructive on the terms of a will conferring a life tenancy.
In Re Dick, Martin J held that the following clause conferred a tenancy for life:
upon trust to permit my daughter… to reside therein during her life (she being responsible for payment of all rates taxes and other outgoings thereon and for keeping the property in repair) and after her death upon trust for her children living at her death in equal shares. If at her death there are no such children living my trustee shall hold the said property upon trust for children then living of my said son… in equal shares.[3]
[3][1954] VLR 546, 546 (emphasis added).
The rationale for this conclusion follows:
as there is nothing in the will here other than the use of the word ‘reside’ to suggest a mere licence, I propose to hold that the daughter of testatrix is beneficially entitled to possession of the freehold property … and so a tenant-for-life for the purposes of the Settled Land Act 1928.[4]
[4]Ibid 549.
In Bothmann v White[5] Daly AsJ held that a life tenancy arose from a clause in the will providing for the plaintiff ‘to have the use and occupation thereto and to receive the net income therefrom for her lifetime she during such time being responsible for payment of rates and taxes’. The conferring of the right upon the plaintiff to receive the net income from the property was critical to this conclusion.[6] Daly AsJ held that this right necessarily contemplated the plaintiff not being in occupation or residence in the property, but still having all of the powers of the proprietor of the property during her lifetime.[7]
[5][2015] VSC 247 (3 June 2015).
[6]Ibid [16].
[7]Ibid.
In Re Potter[8] the will stated:
To my daughter … for her own use and benefit absolutely provided that my said son … may reside in the said house as long as he so desires.
[8][1970] VR 352.
Menhennitt J stated that the son correctly conceded that he did not have a life estate in the house property.[9] This was because the son’s personal right to reside there persisted for only ‘as long as he so desires’. It would terminate if he abandoned the house.[10] Further, the house property devised to the daughter ‘for her own use and benefit absolutely’ gave her a right of residence. Therefore the son’s right of residence was not an exclusive one.[11] The son did not have a right to income.[12] Menhennitt J held the words of the will gifted the house property in fee simple to the daughter, subject to a trust in favour of the son giving him the right to reside personally in the house as long as he desired.[13] Separately, Menhennitt J held that the daughter, not the son, was a tenant for life pursuant to the SLA.[14]
[9]Ibid 353.
[10]Ibid.
[11]Ibid.
[12]Ibid 354.
[13]Ibid 359.
[14]Ibid 358.
In Royal Melbourne Hospital v Equity Trustees Ltd (as trustee for the estate of Langford (dec’d)[15] (‘Royal Melbourne Hospital’), the Court of Appeal considered the phrase ‘use, occupy and enjoy’. The will provided for a class of beneficiaries ‘to use, occupy and enjoy’ certain estate land. A much earlier proceeding held that the land was settled land for the purposes of the SLA, and that the class of beneficiaries were tenants for life for the purpose of the SLA. However, the will itself did not strictly give rise to a life interest. These findings were not challenged.[16]
[15](2007) 18 VR 469.
[16]Bell AJA however referred to these findings and expressed agreement with the conclusion: ibid 515–16.
A critical issue for determination by the Court of Appeal was whether the class of beneficiaries had an entitlement to income in the absence of a life interest. There were two judgments by the Court of Appeal: one by the plurality, namely Ashley and Redlich JJA, and the other by Bell AJA. Although the Court of Appeal was unanimous in deciding the class of beneficiaries had an entitlement to income, the rationale differed as between the two judgments. As discussed below, the plurality found there was an entitlement to income based on the will, and Bell AJA found the entitlement arose by operation of the SLA.
Bell AJA referred to authority on a ‘rule of construction’ that a gift of the ‘use and occupation’ of a property confers, at first sight, a life estate entitling the beneficiary both to personally reside in the property and also to receive rents from it.[17] Bell AJA concluded that the rule ‘must yield to clear indications of contrary intention’.[18] Contrary intentions may be revealed by ‘specific provisions of the will or the context of the will as a whole.’[19] In this case, Bell AJA held the will itself did not confer a right to take rent or otherwise enjoy income.[20] However, the beneficiaries had a right to income under the SLA.[21]
[17]Ibid 514.
[18]Ibid 514 [233].
[19]Ibid 514.
[20]Ibid 516 [243]-[244].
[21]Ibid 524-5 [293]-[296]; ibid 527 [305].
On the other hand, the plurality in Royal Melbourne Hospital, Ashley and Redlich JJA, held that the terms to ‘use occupy and enjoy’ may give an entitlement to income even without a life interest.[22] The question was whether the clause containing that phrase, ‘considered in the context of the will as a whole, gave such an entitlement’.[23] The plurality held there was such an entitlement.[24]
[22]Ibid 483–5 [55]–[59].
[23]Ibid [59].
[24]Ibid [62]–[63].
Turning now to the Will in this proceeding.
Firstly, the word ‘use’ in cl 4 of the Will is not accompanied by other words such as ‘and reside’ or ‘and occupy’ which have been held, in other cases, to narrow construction to a mere right of residence. In the absence of any clear expression of contrary intention in the Will, the word ‘use’ is consistent with a life tenancy, as described by Bell AJA in Royal Melbourne Hospital above. There is no clear expression of contrary intention in the Will.
Secondly, David’s right to use the Toorak Property is not subject to any temporal limitations, such as ‘for as long as the beneficiary desires’ or ‘whilst the property forms part of the Estate’. The only temporal limitation in cl 4 of the Will is for David’s life, which is consistent with a life tenancy.
Thirdly, by commencing with the word ‘if’, cl 19.2 of the Will adverts to the possibility that the Toorak Property may not form part of the residuary estate at the time of the testator’s death. This is consistent with cl 4 which provides that the Toorak Property only becomes part of the residuary estate after David’s death.
In conclusion, I find that the words in cl 4 of the Will, considered within the context of the entire Will, lead inexorably to the conclusion that David held a life tenancy in the Toorak Property.
The parties agree that, pursuant to s 12 of the SLA, David’s interest in the Toorak Property is as tenant for life.
On either analysis, the SLA regulates the mode of the exercise of the power of sale and the manner in which the proceeds of sale are to be dealt with.
Are net sale proceeds of estate assets in the Toorak Property income or capital?
There is a question as to whether or not the sale proceeds from the estate’s half share of the Toorak Property are to be treated as income or capital under the SLA.
I find that, for the purposes of the SLA, any capital gains on David’s sale proceeds (from the estate’s half share in the Toorak Property) should be considered capital not income.
Section 38 of the SLA contains the power of a tenant for life to sell settled land, with the consent of the trustees. Section 90(1)(a) provides the power for that tenant to enter into a contract of sale to facilitate the power of sale. Section 90(5) provides that:
(5)All money, not being rent, received on the exercise by the tenant for life or statutory owner of the powers conferred by subsection (1) of this section, shall, unless the Court on an application made within six months after the receipt of the money, or within such further time as the Court may in special circumstances allow, otherwise directs, be capital money arising under this Act.
Section 90(5) of the SLA refers to ‘all money’ received, excluding rent, being capital money. This does not provide any latitude for the trustees to pay capital gains as income. Section 73 governs the application and modes of investment of capital money.
Section 75 regulates investment, devolution and income of securities and provides, amongst other things:
(1)Except in cases under section 48(d) capital money arising under this Act shall, in order to its being invested or applied as aforesaid, be paid either to the trustees of the settlement or into court at the option of the tenant for life, and shall in all cases (whether under the said paragraph or not) be invested or applied by the trustees, or under the direction of the Court, as the case may be accordingly.
…
(5)Capital money arising under this Act while remaining uninvested or unapplied, and securities on which an investment of any such capital money is made shall for all purposes of disposition, transmission and devolution be treated as land, and shall be held for and go to the same persons successively, in the same manner and for and on the same estates, interests and trusts, as the land wherefrom the money arises would, if not disposed of, have been held and have gone under the settlement.
(6)The income of those securities shall be paid or applied as the income of that land, if not disposed of, would have been payable or applicable under the settlement.
(7)Those securities may be converted into money, which shall be capital money arising under this Act.
(emphasis added)
As the sale of the Toorak Property was made with the consent of the trustees, s 48(d) of the SLA (which relates to the payment of the sale monies) is applicable and s 75(1) is not.
As a tenant for life, David is entitled to the income from the estate’s half share in the Toorak Property. As that interest has now been converted to capital money, s 75(5) of the SLA is applicable. This is because it provides any such capital money that is uninvested, unapplied or invested in securities is held ‘on the same estates, interests and trusts, as the land wherefrom the money arises would, if not disposed of, have been held and have gone under the settlement’.[25] Any land acquired under the powers of the SLA is ‘conveyed to the uses on the trusts and subject to the powers and provisions which under the settlement … are subsisting with respect to the settled land’.[26] Consequently David is entitled to the income of the investments into which the capital money can be traced.
[25]See also Royal Melbourne Hospital (2007) 18 VR 469, 482 [48] (Ashley and Redlich JJA) for a discussion of this section.
[26]SLA s 82(2).
The next question then is whether that realised capital gain from the sale of the Toorak Property should be treated as capital or income. David conceded that there would need to be a very clear provision in the deed or Will to justify treating the capital profit as income.[27] There is no provision in the Will for the treatment of realised capital gains as income. The realised capital gain should be treated as capital.
[27]Transcript of Proceedings, Lester v Lester (Supreme Court of Victoria, S CI 2017 04395, Ierodiaconou AsJ, 28 June 2018) 16.
The Toorak Property did not form part of the residuary estate as defined in clause 17.2 of the Will.
Turning now to the residuary estate.
Are net sale proceeds of assets forming part of the residuary estate[28] income or capital?
[28]Defined in cl 17.2 of the Will.
David submits that the realised capital gains on the sale of the assets of the residuary estate have been historically treated and distributed by the trustees as income.[29] Damian contends that realised capital gains should remain part of the corpus, not the income, of the residuary estate.[30]
[29]David’s first affidavit, exhibit ‘DRPL-9’.
[30]Damian’s Outline dated 21 June 2018 [34].
David maintains that capital gains should be paid as income to income beneficiaries. He relies on:
(a) clause 22 of the Will which refers to ‘and other yearly product thereof’ and says this includes income accrued to the estate in any year, including realised capital gains;
(b) that the Income Tax Assessment Act 1997 (Cth) allows beneficiaries to include realised capital gains in their trust income; and
(c) Clark v Inglis [2010] NSWCA 144 and Chapman v Wilson [2013] QCA 235 which he says are authority for the proposition that realised capital gains can be taken into account.
Before turning to Damian’s submissions, it is useful to identify the distinction between income and capital beneficiaries in the Will. Income beneficiaries are identified in cl 17.2.1. ‘Capital beneficiaries’ are described in cl 17.2.3 of the Will and are the children of Damian who attain 25 years on and from the date of death of all the income beneficiaries. They are named as Hamish and Alexander.
In support of his contention that realised net capital gains should be treated as capital, Damian relies on:
(a) the sharp distinction in the Will between capital beneficiaries and income beneficiaries;
(b) the reference in cl 22 of the Will to ‘rents interest dividends and other yearly product’ which it says should be interpreted analogously with authorities interpreting the phrase ‘rents interest dividends and other yearly produce’; and
(c) the Western Australian case of Orr v Wendt[31] in which Wheeler JA (Owen and Roberts-Smith JJA agreeing) concluded:
The important distinction is … between profits derived in a business operation or in carrying out a profit-making scheme, which are income, as distinct from proceeds of a "mere" realisation or change of investment.[32]
[31][2005] WASCA 199 (21 October 2005).
[32]Ibid [40].
Damian submits that the Court is not constrained by the prior treatment of the capital gains in the Trust’s tax returns and that the regime under income taxation law has no bearing on the categorisation of income and capital.
Damian posits that the issue should be resolved in two steps:
(a) what is the nature of the assets, conferred or passing under the Will?
(b) does the realisation of the assets suggest any business activity?
Damian says that the nature of the assets is as capital items, and their realisation does not give rise to income under ordinary concepts.
Damian submits that the authorities (McBride v Hudson,[33] Clark v Inglis,[34] and Chapman v Wilson[35]) establish that the starting point is the instrument creating the trust and any indication given in that instrument. In this case, there is no provision which allows the trustees to deem what is or is not to be regarded as capital or income. This leaves no other basis to determine this issue other than consistently with the very well recognised ordinary concepts of income and capital. The capital gains tax regime under the income taxation law does not bear on this. The Will as a whole makes it clear that there is a sharp distinction between the treatment of income and capital.
[33](1962) 107 CLR 604.
[34][2010] NSWCA 144 (29 June 2010).
[35][2014] 2 Qd R 213.
Damian submits that the phrase ‘yearly product’ in cl 22 of the Will is suggestive of repetition, consistent with the characteristics of income, but not the mere realisation of capital assets. Realisation of capital is distinguishable from rents, interest and dividends which are listed in cl 22 alongside ‘other yearly product’.
Applicable principles
The parties both referred to the ten principles in Fell v Fell regarding construction of wills, which I adopt.[36]
[36](1922) 31 CLR 268, 273–5 (Isaacs J). See: Damian’s Outline of Submissions [29]; Transcript of Proceedings, Lester v Lester (Supreme Court of Victoria, S CI 2017 04395, Ierodiaconou AsJ, 28 June 2018) 13.
The will ‘must be construed so as to give effect to the intention of the testatrix, such intention being gathered from the language of the will, read in light of the circumstances in which the will was made’.[37]
[37]Westmore v Westmore (2009) 26 VR 579, 583 [13] (Emerton J).
I will now address some authorities that the parties rely upon.
Clark v Inglis[38] is a New South Wales Court of Appeal decision which concerned an inter vivos discretionary trust established by the late Dr William Inglis. Clark was a director of the trustee company. The trust assets were shares. The trust ‘accounts were prepared on the basis of marking the share portfolio to market, that is revaluing it to market value and taking the net movement up or down to the profit and loss account as income, or expense.’[39] No sale of assets took place and there was no actual distribution or movement of cash. However, the trust accounts recorded distribution of income to trust beneficiaries in excess of $1 million (referable to the increase in the value of investments). The trust accounts recorded that distribution was then loaned back to it by Dr Inglis.[40]
[38][2010] NSWCA 144 (29 June 2010) (Allsop P, with McColl and Macfarlan JJA agreeing).
[39]Ibid [6].
[40]Ibid [7].
After Dr Inglis’ death, the issue arose as to whether it was permissible for the trustee to treat unrealised capital gains as ‘income’ and distribute it under the terms of the trust deed by crediting Dr Inglis’ loan account. The issue arose because Dr Inglis’ will identified the debt due to him by the trust, from the crediting of his loan account, as part of his estate.
The terms of the trust deed in Clark v Inglis gave the trustee a discretion to determine whether any property or monies held by them constituted capital or income. The exercise of this discretion was binding and permitted the trustee to determine that unrealised capital gains were income.[41] The trustee had purported to allocate to Dr Inglis the income derived from the capital gains by crediting such income to his loan account. The trial judge concluded that this amounted to an effective distribution of that income under the trust deed, and that finding was upheld by Allsop P on appeal.[42]
[41]Ibid [14].
[42]Ibid [17], [21], [51]–[53].
In the analysis on appeal, Allsop P rejected the submission that ‘the trust deed and the law do not permit unrealised increases in the value of investments to be treated as income’.[43] After referring to expert evidence regarding the trust’s accounting, Allsop P stated that the concept of income ‘encompasses both revenue and gains’ and that gains did not need to be realised.[44] The trust did not need to make a determination to treat the unrealised gain as income because it was an accepted accounting concept.[45]
[43]Ibid [37].
[44]Ibid [44].
[45]Ibid [47].
The present circumstances are distinguishable from Clark v Inglis.[46] The terms of the trust deed differ from the words of the Will here. In that case, the question was whether the accounting approach taken by the trustee was permissible in terms of the trust deed and the law.
[46][2010] NSWCA 144 (29 June 2010).
Chapman v Wilson[47] is a Queensland Court of Appeal decision concerning construction of a will. The testator’s daughter was left a life interest in the ‘income and profits’ of one third of the estate. The primary judge found that the phrase ‘income and profits’ extended to realised capital gains, net of the costs associated with accounting for the income and realisation of the gains respectively, made by the trust.
The inclusion of the words ‘and profit’ after the word ‘income’ shows an intention on the part of the testatrix for the first respondent to receive more than just income. I am satisfied that the testatrix intended that the first respondent receive realised capital gain made by the trust. The income and realised capital gains payable to the first respondent should be net of the costs associated with accounting for the income and realisation of the gains respectively.[48]
[47][2014] 2 Qd R 213.
[48]Quoted in ibid, 218 [21].
Further, the primary judge in Chapman v Wilson held that ‘income and profits’ do not extend to unrealised capital gains and that ‘[a]ny unrealised capital gain, provided it remains in this form, should be preserved for the residuary beneficiaries.’[49] An appeal against this finding was dismissed. Gotterson JA, with whom Holmes JA and Applegarth J agreed, stated:
The interpretation favoured by the primary judge gave a role to each of the expressions “income derived therefrom” and “profits derived therefrom”; the former to include income derived by way of dividends and interest, and the latter, realised capital profits. A realised capital profit was derived by the trustees when there was a disposal of an item of trust property. The realised capital profit was the difference between the consideration received by the trustees upon disposal and the aggregate of the costs of acquisition of the property and the costs of disposal of it.[50]
[49]Ibid.
[50]Ibid 219 [25].
After considering various authorities, Gotterson JA stated that they ‘demonstrate clearly that the meaning to be attributed to the concepts of profit and derivation of profit are highly influenced by the context in which they are used, albeit in a statutory or other legal instrument.’[51] Clark v Inglis was distinguished because of the differences in the ‘words of the trusts and their respective administrations’.[52]
[51]Ibid [36].
[52]Ibid [41].
Gotterson JA analysed the words of the will in question, including the contextual setting of the words ‘income and profits’.[53] The inclusion of the words ‘and profits’ in the life interest left to the appellant were instrumental in the Court’s conclusion that the appellant was entitled to realised capital profits. The approach taken by Gotterson JA in analysing the particular circumstances and context of the will are applicable here. Indeed, that approach is consistent with the well-established principles referred to at the outset of this analysis.[54]
[53]Ibid 221 [36].
[54]It is also consistent with the principles in McBride v Hudson (1962) 107 CLR 604, 622–4 (Taylor J) that Damian relies upon.
Re Kennon[55] concerned a will which provided that, after conversion of the testator’s real and residuary personal estate (with a power to postpone sale of real estate and shares), the trustees should pay monies from the conversion as income to the testator’s widow (the defendant) until her remarriage or death. There was a clause in the will ‘that pending conversion, the rents, interest, and yearly produce shall be deemed annual income’.[56] Cussen J did not place great significance on that phrase.
These words as to rents, interest, and yearly produce come, I think, from a common form, and were not relied on as affecting nor do they, I think, affect the conclusions to be drawn from the general statement as to income and corpus.[57]
[55]Re Kennon; Kennon v Holst [1924] VLR 356.
[56]Ibid 359.
[57]Ibid.
The circumstances in that case were that half the monies paid to the estate trustees as company dividends were retained by the estate as capital and the other half paid to the defendant as income. After remarriage, the defendant signed a release of all claims from the estate. It was only after a query from income taxation officials that the defendant realised she may be entitled to the other half of the dividends held by the trustees.[58]
[58]Ibid 362–3.
Cussen J reasoned that, at first sight, ‘money paid to a trustee as a dividend would all go to the person who I may call a tenant for life, unless the company exercised a power to convert such a sum … into capital’.[59] In this case, the company did not convert any part of a dividend or bonus dividend into capital.[60] Therefore the defendant was entitled to the monies (as income). Respectfully, I do not consider this analysis by Cussen J to be applicable. As later authority states: ‘to look at the treatment by the company may not be, in all circumstances, a satisfactory way of ascertaining whether a particular receipt is of the nature of income in the hands of the trustee.’[61]
[59]Ibid 363.
[60]Ibid 365.
[61]Orr v Wendt [2005] WASCA 199 (21 October 2005) [31].
In Re Cross,[62] the subject will contained a clause that ‘the rents, dividends, and interest and other yearly produce thereof respectively to accrue due after my death and until the actual sale … shall be deemed the annual income thereof’. The issue in dispute was whether certain expenses should be borne by capital or income. MacFarlan J concluded that yearly produce from a farm should not simply be income from produce, but rather income less costs:
Some clue as to what may be meant by the clause that the rents, etc., shall be deemed the annual income of the estate may be afforded by considering the case (which was a possible case as the testatrix died possessed of country land and the will refers to the power of the trustees to cultivate land) of the land being cultivated as a farm. It is clear, in my opinion, that in such a case the testatrix would not mean, if the trustees cultivated the land as a farm, or in whatever manner else testatrix contemplated it should be cultivated, that in arriving at the yearly produce they should simply credit income with the produce of the crops, etc., or the gross amounts realised therefrom, without debiting the cost of producing it. The yearly produce would, in my opinion, mean yearly produce in the ordinary sense, that is the income remaining after making payments for seed, labour, and so on.[63]
[62][1943] VLR 38.
[63]Ibid 40–1.
Macfarlan J held that various recurring expenses such as fire insurance premiums on buildings, insurance on crops and ordinary recurring rates and taxes must be deducted from income.[64] I do not consider this case applicable to the circumstances here given it concerned expenses from profit making ventures such as a farm and city rental property. I shall now refer to later authorities which are applicable and useful.
[64]Ibid 42–3.
In Orr v Wendt,[65] the Western Australian Court of Appeal considered whether capital profits made on share trades were income or capital. The principles are applicable. Wheeler JA (with whom Owen and Roberts-Smith JJA agreed) adopted the approach in Sinclair v Lee,[66] as follows:[67]
If a testator … creates successive interests, with an interest in income followed by an interest in capital, he intends that the person entitled to the income interest, (A) shall have the benefits flowing from the use of the property or the income derived from it for the period of his life … but that the fund shall remain intact for the remainderman, (B) in due course.
[65][2005] WASCA 199 (21 October 2005).
[66][1993] Ch 497 (‘Sinclair v Lee’).
[67]Ibid 506 cited in Orr v Wendt [2005] WASCA 199, [29] (21 October 2005).
Applying Sinclair v Lee, Wheeler JA referred to the characterisation of income, stating:[68]
First, while it is no doubt important to follow well-established authority…it may not be desirable, in approaching a receipt which is not directly the subject of such authority, to begin with cases decided in a very different set of investment conditions, and to reason by analogy from them. Second, it is desirable to consider the receipt in a way which is consistent with the underlying presumed intention of the testator, to achieve fairness between beneficiaries, if that can be done in accordance with the meaning of the terms used in the Will and in accordance with any authority directly on point.
[68]Orr v Wendt [2005] WASCA 199, [33] (21 October 2005).
Wheeler JA then considered the terms of the will in question, finding ‘income’ should be understood in its ordinary context.[69] Her Honour found income taxation cases identifying what constitutes income within ‘ordinary concepts’ to be of considerable assistance.[70] The submission that there is always a distinction to be drawn between the use of income in trust cases and taxation cases was rejected.[71] Her Honour applied the principles described in Federal Commissioner of Taxation v Myer Emporium Ltd.[72]
[69]Ibid [36].
[70]Ibid [37].
[71]Ibid [43].
[72]Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199, 213–15 (‘Myer Emporium’).
Her Honour concluded:
The important distinction is… between profits derived in a business operation or in carrying out a profit-making scheme, which are income, as distinct from the proceeds of a ‘mere’ realisation or change of an investment.[73]
[73]Orr v Wendt [2005] WASCA 199, [40] (21 October 2005).
Relevantly, her Honour highlighted the following principles which emerge from Myer Emporium concerning the realisation of investments, and which are applicable here:
(a) profits made on the realisation or change of investments may constitute income if the investments were initially acquired as part of a business with the intention that they be realised subsequently in order to capture a profit; and
(b) by contrast, where the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquiring it for the purpose of profit-making by sale, the profit made is capital because it proceeds from a ‘mere’ realisation.
Before turning to the circumstances here, it is useful to summarise several further applicable principles from Myer Emporium:[74]
[74]Myer Emporium (1987) 163 CLR 199, 215–16.
(a) periodicity, regularity and recurrence of receipt have been considered to be the hallmarks of income according to ordinary concepts;
(b) the need to distinguish capital and income for trust and other purposes has given rise to the analogical difference between the ‘fruit and the tree’;[75] and
(c) a receipt generated in the course of a business or as part of a profit‑making scheme may bear the character of income even if it is unusual or extraordinary.
[75]The fruit being analogous to income, whilst the tree is analogous to capital.
Analysis
The terms of the Will indicate what is income and what is capital. The definitional term must be read specifically and in the context of the entire Will so as to give effect to the testator’s intentions.
I find the net sale proceeds of assets forming part of the residuary estate to be capital for the following reasons.
Firstly, cl 22 of the Will, set out at paragraph 9, contains a definition of deemed ‘annual income’, being ‘the rents interest dividends and other yearly product thereof’.
Applying the principles in Myer Emporium discussed above: periodicity, regularity and recurrence of receipt are hallmarks of ordinary income. The phrase ‘rents interest dividends and other yearly product’ is consistent with these hallmarks. It is the fruit rather than the tree. Conversely, the mere realisation of capital assets does not exhibit those hallmarks.
Secondly, if the testator had intended to include capital profits in the income to be distributed in the trusts contained in cl 17.2.1 of the Will, she could have included clear words to that effect. There are no such words in either cl 22 or cl 17.2.1. For instance, there is no reference to profit. Clause 17.2.1 is limited to payment of ‘net annual income’.
Thirdly, the Will sets out successive interests delineating between income and capital beneficiaries. The principles discussed above by Wheeler JA in Orr v Wendt (applying Sinclair v Lee) are applicable.That is, that the capital should remain intact for the capital beneficiaries. Treating capital profits as capital rather than income is consistent with this delineation. Further, again referring to the principles enunciated by Wheeler JA, ‘it is desirable to consider the receipt in a way which is consistent with the underlying presumed intention of the testator, to achieve fairness between beneficiaries, if that can be done in accordance with the meaning of the terms used in the Will and in accordance with any authority directly on point.’
Fourthly, the omission of capital profits from income is consistent with the testator’s express prohibition in cl 19.3 on the sale of real property forming part of the estate at the date of her death (save for the Queens Road and Toorak Property).
It provides that any remaining commercial and residential real estate ‘shall not be sold by my trustees and shall be retained by my trustees upon the trusts herein contained’. Some real estate has been sold.
At the time of the testator’s death, the following real estate formed part of the residuary estate:
(a) South Yarra Property;
(b) Queens Road, Melbourne Properties;
(c) St Kilda Road Property;
(d) Armadale Property; and
(e) a second Armadale Property.[76]
[76]David’s first affidavit, exhibit ‘DRPL-3’.
It is common ground between the parties that the Toorak Property, South Yarra Property and a property in Hawthorn were all sold.[77] David also identifies capital profits from the sale of 12 groups of shares.[78]
[77]David’s first affidavit [3], [32].
[78]Ibid [32(a)].
The sale of the South Yarra Property was inconsistent with the express prohibition in cl 19.3 of the Will. The power to sell, call in and convert into money in cl 17 of the Will is ‘subject always to clause 19’. It is in the context that the real properties were not to be sold by the trustees, that the terms ‘rents interest dividends and other yearly product thereof’ must be construed. Consistently with cl 19.3, no capital profit on that real property was envisioned and it was therefore unnecessary to expressly designate it as either capital or income.
For clarity, the fact that the prohibition in cl 19 of the Will has not been treated as binding by the executors is not in dispute between the parties. That issue is not before the Court. However, it is necessary to consider the prohibition in cl 19 when construing the Will as each clause must be considered in the context of the entire Will.
Fifthly, applying the Myer Emporium principles above, it is necessary to distinguish between profits derived from a profit-making scheme in comparison to the mere realisation of profits or a change in investments. I accept Damian’s submission that no evidence has been adduced to suggest that any of the real properties in the estate that have subsequently been sold[79] were initially acquired for the purposes of a profit-making scheme. As outlined above, the South Yarra Property was owned by the testator at the time of her death and consequently formed part of the residuary estate which cl 19.3 prohibited the sale of until the death of all of the income beneficiaries in cl 17.2.1. David and Damian both deposed that the Hawthorn property was for the purpose of providing Richard with a residence.[80] Thus there is no basis to conclude that any capital profit on the sale of those properties should be considered income.
[79]Question 3 of the originating motion is a question concerning capital profits on any sale or transfer of any asset.
[80]Damian’s first affidavit [3.1]; David’s second affidavit [10(a)].
For clarity, cl 19 does not prohibit the sale of personal property and is therefore irrelevant to the determination of whether capital profits on the sale of the groups of shares are income.
Limited evidence has been provided in respect of the trustees’ acquisition or disposal of the groups of shares. There is no basis to conclude that the trustees’ share trading activities carried the hallmarks of income, as identified by the High Court in Myer Emporium,[81] namely of periodicity, regularity or recurrence or being generated in the course of carrying on a business or profit-making scheme.
[81](1987) 163 CLR 199 as quoted in Orr v Wendt [2005] WASCA 199, [38]–[40] (21 October 2005).
For completeness, it is evident in the affidavits of both David and Damian that there is a dispute about taxation treatment of estate monies. In comparison to some of the authorities discussed above, this Will does not give the trustees an express power to determine whether matters are capital or income. The questions posed in the originating motion require interpretation of the Will. Further, orders were made requiring service of these proceedings on Alexander and Hamish[82] and they did not participate. They should be given notice if the trustees require further directions from the Court.
[82]Orders of the Honourable Justice McMillan made on 5 December 2017.
How should cl 17 of the Will be construed?
After the testator’s death, and following resolution of a dispute concerning the Will and testator’s estate, a settlement deed was executed on 18 March 1999 (‘Settlement Deed’).
A question arose as to how cl 17 of the Will should be interpreted and effected following the execution of the Settlement Deed. In particular, what should happen to the 30 per cent interest in annual income that was previously enjoyed by Beneficiaries A, B and C collectively pursuant to cl 17.2.1 of the Will (‘the 30% interest’)?
Preamble D of the Settlement Deed states:
D. Pursuant to the terms of the Will, inter alia, the deceased:
(a)Appointed David, Damian, Richard, [Beneficiary A], [Beneficiary B] and [Beneficiary C] as Executors and Trustees (Clause 1).
(b)Bequeathed her one half right title and interest to the freehold property known as [the Toorak property] to David for life and after his death to form part of the residuary estate (Clause 4).
(c)Bequeathed the rest of residue of the real and personal estate upon trust to sell and convert upon the following trusts (Clause 17):
(i)to pay debts, funeral and testamentary expenses (Clause 17.1);
(ii)as to all the rest to residue (‘the residuary estate’) to pay the net annual income arising from the residuary estate:
a. As to 50% to David for life.
b. As to 10% to Damian for life.
c. As to 10% to Richard for life.
d. As to 10% to [Beneficiary A] for life.
e. As to 10% to [Beneficiary B] for life.
f.As to 10% to [Beneficiary C] for life. (Clause 17.2.1).
(iii)From the date of death of David, Damian, Richard, [Beneficiary A], [Beneficiary B] and [Beneficiary C] (‘the income beneficiaries’) to hold such part for the children of Damian being:
a.[Alexander]
b.[Hamish] (‘the children of Damian’)
until they attain 25 years and after they attain 25 years to pay such part of the net annual income as tenants in common in equal shares (Clause 17.2.2).
(iv)On the date of death of all the income beneficiaries to pay both capital of income to the children of Damian when they obtain 25 years as tenants in common in equal shares absolutely (Clause 17.2.3).
Clause 4 of the Settlement Deed states:
4.(a)David, Damian and Richard in their capacity as Executors and Trustees jointly and severally covenant and agree to pay from the deceased estate the following amounts to:
(i) [Beneficiary A] the sum of [amount]
(ii) [Beneficiary B] the sum of [amount]
(iii) [Beneficiary C] the sum of [amount] (‘the sums’)
in full and final discharge of all their or either of their rights and entitlements pursuant to the Will within 3 months from these Terms of Settlement being approved by this Court.
(b)[Beneficiaries A, B, and C] covenant and agree that they assign and relinquish their rights to receive income pursuant to the Will, subject to the payment to them of the sums.
(c)David, Damian and Richard in their capacity as Executors and Trustees jointly and severally covenant and agree to pay [Beneficiaries A, B, and Cs’] solicitor/client costs incurred to this day including their costs of the mediation conducted on [date] 1999 and their costs in the implementation of these Terms.
In June 2009 the trustees sought legal advice on how the 30% interest should be treated. Save for provision of the Will, it is not evident what instructions were provided for the purpose of seeking the advice. It is not evident whether the Settlement Deed itself was provided. The advice (‘the Legal Advice’) [83] in response to this included the following:
The first question that this presents is how the income now be distributed amongst the remaining income beneficiaries. The answer to that is that David Lester will now receive 50/70 of the income, 71.4%, and Damian and Richard Lester will each receive 10/70 of the income, 14.3% each.
The next question is whether the entire income that the (diminished) residuary estate will generate should be distributed in those proportions to David Lester and his two sons, or whether 30% of the income (referable to the 30% that would otherwise have been distributed to [Beneficiaries A, B and C]) should be retained and invested. Clearly it should not. The residuary estate will be diminished by reason of the capital payments made to those three income beneficiaries in satisfaction of their entitlement to ongoing income payments. Therefore the total income that the residuary estate will generate will be less than would have been the case if the strict terms of the will had been followed. It would be unfair and inappropriate for the Lester income beneficiaries to share 70% of the diminished income simply because the [Beneficiaries A, B and C] income beneficiaries had decided to accept capital payments in satisfaction of their income entitlements. [84]
[83]David’s first affidavit, DRPL-12.
[84]Ibid [7]–[8].
The Legal Advice concludes the following. Beneficiaries A, B and C have extinguished their entitlements to continuing income payments so their death will not trigger the entitlement of the great-grandsons (Hamish and Alexander) to income. This is because Beneficiaries A, B and C have no entitlement to receive income and so there is nothing upon which clause 17.2.2 can operate by way of gift over. That clause gives to Hamish and Alexander the income that was formerly being paid to one of the income beneficiaries and, since income is now only payable to Lester income beneficiaries, the death of Beneficiaries A, B or C is of no relevance and cannot trigger any gift over. That part of the capital which would have produced the 30 per cent income for Beneficiaries A, B and C has already been distributed hence there is no income to distribute.
David says that the 30% interest should be split between the remaining income beneficiaries in the same proportions as under the Will were the interests of Beneficiaries A, B and C excluded from the overall pie, i.e. 71.4 per cent to David and 14.3 per cent each to the Damian and Richard. He makes the following submissions:
(a) the wording of cl 17.2 clarifies that it is only on the death of an income beneficiary that a deceased income beneficiary’s share of income passes to Alexander and Hamish;
(b) at the time of the settlement, it was the understanding of all parties that the 30 per cent income would be divided between the remaining income beneficiaries in accordance with the existing provisions of cl 17.2 and the Legal Advice;
(c) Damian has not raised any objection until now;
(d) the only people entitled to the income are David, Damian and Richard; and
(e) David, Damian and Richard have ordered their affairs on the basis of the Settlement Deed.
David also submits, in the alternative, that there may be a partial intestacy as to the allocation of the 30% interest had the Settlement Deed not been executed. The Will does not directly provide for that 30% interest in the circumstances of an income beneficiary assigning their share of it.
On the other hand, Damian says there is no intestacy. He says the deceased clearly conveyed the 30% interest to Beneficiaries A, B and C. The terms of the Settlement Deed assigned that income to the trustees, in their capacity as trustees, jointly and severally.
Damian submits that the 30% interest in the income was assigned to the trustees. In support of this position he says:
(a) the prohibition on self-dealing suggests that the trustees could not take advantage of their position to the detriment of the capital beneficiaries (especially as they were minors at the time of execution of the Settlement Deed);
(b) the settlement was funded from the residuary estate;
(c) the Settlement Deed’s terms reveal no intention to otherwise work any detriment to the interests of the capital beneficiaries; and
(d) the percentages in the Legal Advice were never approved by the Court.[85] The Legal Advice, dated 14 June 1999, post-dates the approval of compromise by Beach J in orders made on 6 May 1999.
[85]Damian’s Outline dated 21 June 2018 [22.4]–[22.5].
Damian refers to the language in the Will and says that it was clearly the testator’s intention that were any of the income beneficiaries to die and not be able to take their share of net annual income that the great-grandchildren would take their share. This is distinguishable from a class of income beneficiaries where, in the event of a death of any of the income beneficiaries, the remaining income beneficiaries would share in what was left over. The gifts are precise and in specified amounts. The language of the Will does not suggest that the shares of the surviving income beneficiaries were to be enlarged were any of them to die and no longer take their share.
Following the hearing, the parties were requested to provide submissions on the doctrine of acceleration. Both parties agreed there was an acceleration of interests but disagreed as to the effect. I now refer to those submissions.
David submits that the interests of Alexander and Hamish should be treated as being vested in possession, but subject to being divested if they fail to attain 25 years of age, in which circumstance the income right would pass to Damian and Richard, but not otherwise. Accordingly the income rights of Beneficiaries A, B and C would accelerate to Alexander and Hamish provided they attain 25 years of age.
However, David submits that as the capital that generated the 30% interest has been capitalised, and paid to Beneficiaries A, B and C, there is no income attributable to those shares of income upon which any acceleration of the income interest can apply under the terms of the Will. Clause 5 of the Settlement Deed provides that the parties agree that the sums referred to in cl 4(a) are the actuarial value of their present entitlements to income over the projected lifespan of the income trusts.
Damian submits that the Settlement Deed relinquished and determined the interests of Beneficiaries A, B and C. He says that on ordinary principles the interests of the remainder beneficiaries (Alexander and Hamish) were accelerated.
In the alternative, Damian submits that if the Settlement Deed did not relinquish and determine the life interest of each of Beneficiaries A, B and C under cl 17.2.1 of the Will, but assigned them to the Trustees jointly and severally, they remain part of the residue of the estate held for the capital beneficiaries under cl 17.2.3 of the Will.
In support of this submission, Damian highlights the following words of the Settlement Deed: cl 4(a) of the Settlement Deed states that the payment to Beneficiaries A, B and C was ‘in full and final discharge of all their or either of their rights and entitlements pursuant to the Will’; cl 4(b) states that Beneficiaries A, B and C ‘agree that they assign and relinquish their rights’ (emphasis added). Damian submits that this combination of terms shows that Beneficiaries A, B and C intended to relinquish their life interest, but the use of the word ‘assign’ shows that they did not intend to extinguish it. In consequence, Damian says that the life interest was not prematurely determined so there could be no acceleration of the remainder interest.
Damian further submits that the assignment is effective until the death of each of Beneficiaries A, B and C. Upon the death of any income beneficiary, the income that they would have been entitled to receive under cl 17.1.1 is held by the Trustees for Alexander and Hamish until they attain the age of 25 pursuant to cl 17.2.2. As regards the 30 per cent interest income paid to the Trustees from the date of the Settlement Deed, that income forms part of the residuary estate held for Alexander and Hamish.
Analysis
The principles regarding the doctrine of acceleration may apply in the following circumstances. Where there is a life interest in tenancy, the beneficiaries taking the remainder interest on the death of the life tenant must wait until the tenant dies. If however, the life tenant’s interest fails or ends earlier, for instance by being surrendered, this accelerates the interests of the remainder beneficiaries who then take their interest absolutely at that earlier time rather than on the death of the tenant for life.[86]
[86]Re Flower’s Settlement Trusts; Flower v Inland Revenue Commissioners [1957] 1 All ER 462, 465.
The authorities indicate that the same applies where there are successive interests in income followed by a remainder interest.[87] Acceleration will not occur where there is a contrary intention in the wording of the will, or, ordinarily, if there is a contingent interest with a gift over.[88]
[87]Collins v Equity Trustees Executors & Agency Company Ltd [1997] 2 VR 166 (‘Collins v Equity Trustees’).
[88]However, there is some authority for the view that in certain instances contingent interests may be accelerated, see Re Syme (dec’d) [1980] VR 109, 116 (Lush J) and the other cases examined in Collins v Equity Trustees [1997] 2 VR 166, 171–2 (Batt J).
Clause 4(b) of the Settlement Deed states that Beneficiaries A, B and C ’assign and relinquish their rights to receive income pursuant to the Will’.
The only interest that could be surrendered by Beneficiaries A, B and C was their right to receive, collectively, the 30% interest. They never, at any time, had an interest in the capital of the estate to assign.
Clause 17.2.2 of the Will provides what is to happen in the event of the death of an individual income beneficiary. On the death of one income beneficiary, the trustees are to hold that beneficiary’s share of the net annual income to which they were entitled during their lifetime, for Alexander and Hamish until they attain 25 years of age and, after they attain that age, to pay the net annual income to Alexander and Hamish absolutely and in equal shares.
Clause 17.2.3 of the Will provides that, on and from the date of death of all of the income beneficiaries, both capital and income should be paid to Alexander and Hamish.
Clause 18 provides for a gift over in favour of Damian and Richard in the event that Alexander and Hamish predecease the deceased, or die before attaining a vested interest in the deceased's estate. They would then take the capital and income equally between them.
In Tompkins v Simmons,[89] the High Court held that the remainder interest in favour of the testator’s grandchildren had become accelerated. Dixon J (Duffy CJ, Evatt and McTiernan JJ agreeing) said:
But the destruction of such an interest for life does not cause an intestacy in respect of the interest, unless it is clear that the interest limited in succession to the life interest was to take effect only upon the specified event of the death of the life tenant and was not to fall into possession on the sooner determination of the life interest. In a limitation to a donee for life and after his death upon trust for his children, or some other donee, the reference to his death whether expressed by the words 'upon', or 'after his death,' or 'from and after his decease,' or otherwise, may have one of two imports. It may mean that the second donee shall take nothing until the death of the first, or it may merely show the order of the limitations through which the estate or interest is to pass. It is well established that, prima facie, these words are to be understood as denoting the order of succession of limitations.[90]
[89](1931) 44 CLR 546.
[90]Ibid 558-9.
Collins v Equity Trustees[91] involved a gift of the fee simple interest in remainder to the testator’s son after a life interest to the testator’s wife, but subject to a subsequent gift over should his son fail to survive his wife. Batt J reviewed the authorities and concluded that the clause created a vested interest which could be accelerated by the surrender of the interest held by the life tenant. Batt J accepted that the doctrine of acceleration does not generally apply where there are contingent interests.[92] However Batt J reasoned that:
the rule is based on the principle that the subsequent gift over in the event of the first donee’s dying under the specified age or failing to satisfy the other condition sufficiently shows the meaning of the testator to have been that the first donee should take whatever interest the party claiming under the gift over is not entitled to, which of course gives the first donee the immediate interest, subject only to the chance of it being divested on a future contingency. In this class of case, then, the words of contingency are treated as governing the gift over but not the first gift.[93]
[91][1997] 2 VR 166.
[92]Ibid 172.
[93]Ibid 169.
Batt J concluded that the interest of the son was best characterised as a vested interest that was subject to divestment (and not contingent) and could therefore be accelerated.[94] In that case, as here, there was an express gift over to others in the event that the gift in remainder after the initial life interest failed.
[94]Ibid 172–3.
Where there is any doubt about the time when a gift shall vest there is a presumption that the testator intended the gift to be vested, subject to being divested, rather than remain in suspense.[95] In other words, a presumption in favour of early vesting.
[95]Hickling v Fair [1899] AC 15, 27.
It is a requirement of the doctrine of acceleration that the prior interest has come to an end. After a comprehensive review of the authorities Heenan J, in the decision of Hamersley v Newton,[96] stated:
… the proposed renunciation would need to be by deed of surrender and not by a deed of assignment. A mere assignment would, obviously, simply assign the existing life interest from the assignor to the assignee without terminating it leaving the assignee the recipient of an estate in the land limited to the duration of the assignor's life.[97]
[96](2005) 30 WAR 568.
[97]Ibid 586.
I find that the interests of Alexander and Hamish were accelerated upon the execution of the Settlement Deed, as both parties now acknowledge. The language of cls 17.2.2 and 17.2.3 of the Will commencing with the words ‘on and from the date of death’ coupled with the gift-over in cl 18 suggests that the interests of Alexander and Hamish are vested interests, subject to be divested if they do not attain the age of 25 years. Alexander is already 26 years old and so he is absolutely entitled to his interest in the net annual income.
Nothing in the Will ousts the application of the doctrine of acceleration. The principles outlined above in Tompkins v Simmons,[98] and Collins v Equity Trustees[99] are applicable. The requirement of ‘the death of any of the income beneficiaries’ in cl 17.2.2 is merely denoting the order of succession of beneficiaries. Thus, upon the relinquishment of the 30% interest, Alexander and Hamish’s interests in the income of that interest was accelerated.
[98](1931) 44 CLR 546.
[99][1997] 2 VR 166.
For completeness, I will address the alternative submission made by Damian. He submits that the use of the term ‘assign’ in cl 4(b) of the Settlement Deed suggests that the 30% interest has not been extinguished. I reject that submission. The language used is ‘assign and relinquish’. The word ‘assign’ should not be considered in isolation.
In Re Harker's Will Trusts,[100] Goff J considered a deed of release and surrender in the following terms:
… the life tenant hereby releases, surrenders and assigns unto the trustees all that the life interest and all other (if any) the interest of the life tenant of and in the investments and cash mentioned in … the schedule hereto to the intent that the interests aforesaid of the life tenant of and in the investments … shall forthwith cease merge and be extinguished in the reversionary interests aforesaid of the children of the life tenant who attain the age of 21 years with remainders over as aforesaid.[101]
[100][1969] 3 All ER 1, 3.
[101]Ibid 3 (emphasis added).
Goff J rejected the submission that the effect of the deed of release and surrender was to assign the life interests and keep the remainder interest alive.[102]
[102]Ibid.
In this case, there is further support for reading ‘assign and extinguish’ compendiously. It is this. The Settlement Deed does not state to whom Beneficiaries A, B and C assign their rights.
Here, the words ‘assign and relinquish’ in the Settlement Deed are consistent with a surrender of interests. The interests of Beneficiaries A, B and C have been extinguished. Consequently, the interests of Alexander and Hamish were accelerated but necessarily held by the trustees pending their reaching 25 years of age.
I reject David’s submission that the 30% interest was capitalised and thus that there is no income attributable to those shares of income upon which any acceleration of the income interest can apply under the terms of the Will. I agree that the residuary estate is diminished by the settlement payments and that consequently the total income generated by such a residuary estate is also diminished, however such is the effect of the Settlement Deed.
To place the burden of the diminished residuary estate on Alexander and Hamish would unfairly preference David, Damian and Richard’s interests.[103] It would offend the prohibition against self-dealing[104] and suggest that the trustees took advantage of their position to the detriment of the capital beneficiaries (who were minors at the time of execution of the Settlement Deed). The settlement sum was funded from the residuary estate and the Settlement Deed reveals no intention to otherwise work any detriment to the interests of the capital beneficiaries.
[103]Orr v Wendt [2005] WASCA 199, [33] (21 October 2005).
[104]At the time the Settlement Deed was executed Richard remained an executor and trustee of the Will.
For completeness, I reject David’s alternative submission of a partial intestacy. It is a well-established principle that where there are alternative constructions of a will, the better construction is the one that avoids intestacy.[105] I refer to the findings above.
[105]Fell v Fell (1922) 31 CLR 268, 273–5 (Isaacs J).
As to David’s submission that he, Damian and Richard have organised their affairs in a certain way, that is a matter for them.
Turning now to answer the specific questions in the originating motion.
Answers to questions in originating motion
(1)In the events that have happened and on a true construction of the Will of the testator:
(a)does the provision contained in clause 4 of the Will in respect to the deceased's one half interest in the [Toorak Property] create settled land for the purposes of the SLA?
The parties agree that this should be answered ‘yes’.
(b)if ‘yes’ to the above question, after the sale of the testator's half interest in [the Toorak Property] did the net proceeds of sale of the testator's half interest in [the Toorak Property] still constitute a settlement for the purposes of the SLA?
Yes.
(c)If the answer to questions a. and b. above is "Yes" is the tenant for life pursuant to clause 4 of the Will obliged with the consent of the trustees of the settlement to invest the net proceeds of sale of [the Toorak Property] in accordance with the provisions of the SLA?
The trustees are to invest with the consent of the tenant for life pursuant to s 75(4) of the SLA.
It is common ground between the parties that the questions in 1(d) and (e) of the originating motion are now unnecessary. Accordingly they are not reiterated here.
(f) If the answer to question 1(a) above is ‘No’;
(i)Who is entitled to the income derived from the proceeds of sale of the deceased’s half interest in [the Toorak Property]?
(ii)Who is entitled to the capital of the net proceeds of the deceased's half interest in the sale of [the Toorak Property], and when?
Given the answer to question 1(a) is ‘yes’, this question falls away.
(2)In the events that have happened and on a true construction of the Will of the testator and the provisions of the [Settlement Deed]; for the purposes of clause 17.2 of the Will, answers are sought to the following questions which have arisen in the administration of the Trust.
(a)Who is entitled to the 30 per cent of the income derived from the residuary estate that the said [Beneficiary A, B and C] would take pursuant to clauses 17.2.1.4, 17.2.1.5 and 17.2.1.5 [sic] of the Will which rights were capitalised by the said [Settlement Deed]?
The parties agree that the doctrine of acceleration applies. Consequently, the income rights of Beneficiaries A, B and C accelerate to Alexander and Hamish provided the latter attain 25 years of age.
(b)Would this income derived after [date of Settlement Deed] when the said Terms of Settlement were signed:
(i)Be divided between all the other income beneficiaries set out in paragraph 17.2 (other than [Beneficiary A, B and C]) for their lives in the proportions they already take their income shares under clauses 17.2.1.1, 17.2.1.2 and 17.2.1.3 of the Will;
(ii)Be divided between the children of the testator's grandson Damian Richard Rohan Lester, namely [Alexander] and [Hamish] pursuant to clauses 17.2.2 and 17.2.3 of the testator's Will;
(iii)Be divided between all, or any one, or more of David Richard Pelham Lester, Damian Richard Rohan Lester and Richard Beauregard Lester; or
(iv)Should the said income be paid or applied in some other manner?
It would be held by the trustees pending each of Alexander and Hamish reaching 25 years of age pursuant to cls 17.2.2 and 17.2.3 of the Will.
(3)In the events that have happened and on a true construction of the Will of the testator in respect to the settlements and trusts created by clauses 4 and 17 of the testator's Will, are the capital profits made on any sale or transfer of any asset of either of the trusts created by clauses 4 and 17 of the Will (including any capital profit made on the sale of the deceased's half interest in the [Toorak Property]) income to be enjoyed by those persons entitled to the income of the trust concerned, or to be treated as an accretion to the capital of the trust concerned.
Any capital profits are treated as an accretion to the capital of the trust concerned.
---
4
9
0