Re Queensland Law Foundation P/L

[2001] QSC 286

SUPREME COURT OF QUEENSLAND

CITATION:

The Queensland Law Foundation Pty Ltd, Re [2001]QSC 286

PARTIES:

THE QUEENSLAND LAW FOUNDATION PTY LTD
(ACN 066 550 687)
(Applicant)

FILE NO/S:

S 6537 of 2001

DIVISION:

Trial Division

PROCEEDING:

Civil Application

ORIGINATING COURT:

Brisbane

DELIVERED ON:

6 August 2001

DELIVERED AT:

Brisbane

HEARING DATE:

24 July 2001

JUDGE:

White J

ORDER:

Direct that the Queensland Law Foundation Pty Ltd may distribute the net income of the Law Foundation Insurance Trust for the year ended 30 June 2001 to Justin O’Sullivan as trustee for the Queensland Law Society Inc.

CATCHWORDS:

EQUITY – TRUSTS AND TRUSTEES – APPLICATIONS TO THE COURT FOR ADVICE AND AUTHORITY – MISCELLANEOUS APPLICATIONS FOR AUTHORITY NOT CONFERRED BY THE TRUST INSTRUMENT – OTHER CASES – appropriate exercise of trustee’s discretion with regard to intermediate income – contingent interests.

Income Tax Assessment Act 1936
Trusts Act 1973

Attorney-General (Cth) v Breckler (1999) 197 CLR 83 Fenton v Perpetual Trustee Company (Limited) (1940) 64 CLR 52

COUNSEL:

Mr D Russell QC. And Mr Mark Robertson for the applicant

SOLICITORS:

Minter Ellison

1. The Queensland Law Foundation Pty Limited (“QLF”) has applied to the court pursuant to s 96 of the Trusts Act 1973 for a direction that it may distribute the net income of the Law Foundation Insurance Trust (“LFIT”) in respect of which it is the trustee for the year ended 30 June 2001 to Justin O’Sullivan as trustee for the Queensland Law Society Inc (“QLS”).

1. At the conclusion of the hearing on 24 July 2001 I directed that QLF may so distribute that income and now publish my reasons.

1. QLF is the trustee of LFIT.  The beneficiaries of LFIT are all the members of QLS for the time being at a particular date, in this case 30 June 2001.

1. On 20 December 2000 QLF held a duly constituted meeting of the beneficiaries of LFIT at which the beneficiaries passed a resolution that QLF may transfer the net assets of LFIT to a trust, having purposes connected with advancing the practice of and understanding of law in Queensland.  The beneficiaries further resolved that QLF may approach this court for its approval of this course and that prior to so doing QLF may take steps to establish a trust having the purposes of advancement referred to, as might be appropriate to receive any transfer of assets from QLF.

1. In considering how best to give effect to the intention of the beneficiaries embodied in the resolution, QLF received proposals from QLS as to how the income and/or capital of LFIT might be applied for the members of QLS generally.  A number of these proposals are set out by Mr O’Sullivan at paragraph 5 of his affidavit.  They appear eminently capable of giving effect to the beneficiaries’ desire to advance the practice of or understanding of law in Queensland. 

1. QLF was unable to bring this matter to fruition prior to 30 June 2001 but nonetheless is desirous of applying the income of LFIT for the financial year 30 June 2001 in a manner which would satisfy the intention of the resolution of 20 December 2000.

1. The income for the financial year under consideration is approximately $400,000.  There are approximately 5,000 members of the QLS who might be eligible to participate in a distribution.  Any distribution directly to them would be a paltry amount with administrative costs estimated by QLF’s accountants at more than half of the total income sum, as well as burdensome issues of accounting for such a sum in their income tax returns by the beneficiaries.  In any event, such a distribution would be contrary to the wishes of the beneficiaries as expressed in the resolution.

1. QLF has no capacity itself to give effect to the intent of the resolution.  QLS has many programmes and activities which would enable it to do so but QLS is not a beneficiary of the trust.

1. QLF has taken the advice of two senior counsel, Mr L F Harrison QC and Mr D Russell QC, and junior counsel, Mr Mark Robertson, as well as its solicitors, Minter Ellison and, as relevant, its accountants, Carthills.

1. The options identified were to distribute the income for the benefit of the individual beneficiaries by payment to QLS as their professional organisation, or by way of actual payment to them, or by a nominated beneficiary declaring a trust over his/her interest in LFIT (including any distributions therefrom) in favour of QLS and thereafter receiving a distribution of the income which would be held in trust for QLS and paid to it.

1. On 27 June 2001 Mr O’Sullivan declared a trust over his interest in LFIT in favour of QLS.

1. QLF after considering the opinions of its advisers and taking account of the wishes of the beneficiaries concluded that the income should be applied in one amount to Mr O’Sullivan on the basis that he held his interest in LFIT on trust for QLS absolutely and passed a resolution to that effect on 29 June 2001.  That actual distribution has not been made and Mr O’Sullivan will not call for those funds prior to the advice from this court that the distribution is appropriate. He then proposes to authorise QLF to pay the finds directly to QLS.

1. Part 5 of the Trusts Act confers powers upon a trustee additional to those which might be found in any trust instrument.  Furthermore s 60 provides that

“The provisions of this part shall apply whether or not a contrary intention is expressed in the instrument (if any) creating the trust.”

1. Section 61(3) provides a means whereby QLF may be permitted to distribute the income of the trust to give effect to the beneficiaries’ wishes. That subsection provides

“Where any property is held by a trustee in trust for a beneficiary of full age who has a contingent interest in that property, the trustee may, at the trustee’s sole discretion, pay to such beneficiary or otherwise apply for or towards the beneficiary’s maintenance, education (including past maintenance or eduction) advancement or benefit, the income of that property or any part thereof.”

1. There are a number of issues which arise for consideration:

(i) The ambit of s 61(3) ;

(ii)       Whether such a distribution as contemplated would be a proper exercise of the trustee’s power;

(iii)      Would the arrangement be rendered ineffectual by application of Part IVA of the Income Tax Assessment Act 1936?

1. (i) Section 61(4) of the Trusts Act provides

“This section shall apply in the case of a contingent interest only if the limitation or trust carries the intermediate income of the property, but it applies to a future or contingent legacy by the parent of, or a person standing in loco parentis to, the legatee, if and for such period as, under the general law, the legacy carries interest for the maintenance of the legatee, and in any such case as last aforesaid the rate of interest shall (if the income available is sufficient, and subject to any rules of court to the contrary) be 4% per annum; and where in the case of a contingent interest the limitation or trust would, but for the operation of a protective trust (whether created or statutory) carry the intermediate income of the property, that limitation or trust shall for the purposes of this subsection be deemed notwithstanding the protective trust to carry the intermediate income.”

1. The question then is whether the contingent interest of a beneficiary of this trust carries the intermediate income of the property as described in s 61(4), cf Fenton v Perpetual Trustee Company (Limited) (1940) 64 CLR 52 at 62 where the reference was to a contingent “share”. The definition of “Trust Fund” in cl 1.1 of the Trust Deed encompasses the income of the fund. The Trust Deed directs no other use for the income other than its distribution to the beneficiaries. Accordingly, QLF may distribute the income of the trust to the beneficiaries. The Trust Deed does not exclude distribution to only one beneficiary. QLF could, therefore, distribute the whole of the income to one beneficiary.

1. (ii)         The second question is whether it is appropriate for QLF to make a distribution of the whole of the income to one beneficiary in all the circumstances that the designated beneficiary has declared a trust over his interest in favour of QLS.  The High Court has considered the approach which should be taken to review the exercise of discretion by a trustee.

1. In Attorney-General (Cth) v Breckler (1999) 197 CLR 83 at 99 it was said

“In Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd (1998) 79 FCR 469 at 480, Heerey J set out a passage in which the primary judge in that case (Northrop J) summarised the effect of decisions defining the scope for challenges in courts of equity to the exercise of discretions reposed in the trustee of a settlement. In this Court, the accuracy of that summary was not disputed. It is as follows:

“Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously (60), wantonly, irresponsibly (61), mischievously or irrelevantly to any sensible expectation of the settlor (62), or without giving a real or genuine consideration to the exercise of the discretion (63).   The exercise of a discretion by trustees cannot of course be impugned upon the basis that their decision was unfair or unreasonable (64) or unwise (65).  Where a discretion is expressed to be absolute it may be that bad faith needs to be shown (66).  The soundness of the exercise of a discretion can be examined where reasons have been given, but the test is not fairness or reasonableness.  See In re Londonderry's Settlement [1965] Ch 918 at 928-929; Karger v Paul [1984] VR 161 at 165-166.” ”

1. It is arguable that QLF could distribute the income directly to QLS for the purposes expressed in the beneficiaries’ resolution pursuant to the power given to it by s 61(3) of the Trusts Act. Such a payment would be for the beneficiaries’ education, advancement or benefit. That the trustee proposes to distribute the income for the financial year 30 June 2001 to a beneficiary who has declared that he holds his interest in LFIT upon trust for QLF is cautious and removes any doubt (if there is one) as to the ambit of s 61(3).

1. The impractical consequences of an equal distribution to each beneficiary have been mentioned.  Further, QLS is a tax exempt organisation while each beneficiary would be obliged to account for the receipt of the share in the income for taxation purposes which would add an administrative rather than a fiscal burden upon each beneficiary.

1. The approach which the trustee proposes to take in the exercise of its discretion in respect of the income of the trust for the year under consideration is appropriate.

1. (iii)        Finally, it seems likely that there would be no basis for the Commissioner of Taxation to make a declaration that Part IVA of the Income Tax Assessment Act applied to the arrangement.  There is no relevant taxation benefit to either the trustee or the beneficiary but, more to the point, it could not be said that the dominant purpose of those entering into the “scheme”, if it is so described, was to obtain any relevant taxation  benefit for QLF.

1. Queensland Law Foundation Pty Limited may distribute the net income of the Law Foundation Insurance Trust for the year ended 30 June 2001 to Justin O’Sullivan as trustee for the Queensland Law Society Incorporated.