Saunders v Deputy Commissioner of Taxation
[2010] WASC 261
•4 OCTOBER 2010
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: SAUNDERS -v- DEPUTY COMMISSIONER OF TAXATION [2010] WASC 261
CORAM: KENNETH MARTIN J
HEARD: 8 JULY 2010
DELIVERED : 4 OCTOBER 2010
FILE NO/S: CIV 1171 of 2010
BETWEEN: JOHN CHARLES SAUNDERS
First Plaintiff
BEWICK MOREING PTY LTD
Second PlaintiffAND
DEPUTY COMMISSIONER OF TAXATION
Defendant
Catchwords:
Declaration of trust - Subjective intention - Intention to create trust over residential property - Inconsistent acts by declarant - Evidentiary onus to counter intention to create trust - Declaratory relief sought as to valid establishment of trust
Legislation:
Nil
Result:
Declaration made
Category: B
Representation:
Counsel:
First Plaintiff : Mr D H Solomon
Second Plaintiff : Mr D H Solomon
Defendant: Mr J D Allanson SC & Ms L B Black
Solicitors:
First Plaintiff : Solomon Brothers
Second Plaintiff : Solomon Brothers
Defendant: Australian Government Solicitor
Case(s) referred to in judgment(s):
Arthur v The Public Trustee (1988) 90 FLR 203
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588
Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1
Cohen v Cohen (1929) 42 CLR 91
Commissioner of Stamp Duties (Qld) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178
CPG01 Pty Ltd v Kourinos [2010] WASC 92
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471
Fitzgerald v Masters (1956) 95 CLR 420
Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624
Hyhonie Holdings Pty Ltd v Leroy [2004] NSWCA 72
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Kauter v Hilton (1953) 90 CLR 86
Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366
Owens v Lofthouse [2007] FCA 1968
Pascoe v Boensch [2008] FCAFC 147; (2008) 250 ALR 24
Re Armstrong (Dec) [1960] VR 202
Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491
Re Steel; Public Trustee v Attorney‑General (SA) [1925] SASR 272
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449
Starr v Starr [1935] SASR 263
Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331
Victims Compensation Fund Corporation v Brown [2003] HCA 54; (2003) ALJR 1797
White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650
KENNETH MARTIN J:
Overview
This application for declaratory relief centres around arrangements made between brothers, John Charles Saunders (John), the first plaintiff, and Dr Brian Saunders (Brian). Brian died sometime after 4 March 2010.
In December 1990 John, who appears at all times to have been a resident of the United Kingdom, acquired a property at 258 Marine Parade, Swanbourne for $744,742.51 (the Swanbourne Property). Sixteen years later, the Swanbourne Property was subdivided into two lots with separate certificates of title: 258A Marine Parade (lot 1) and 258 Marine Parade (lot 2).
In March 2006 a contract of sale for the disposition of lot 2 to a third party purchaser was entered at a sale price of approximately $3.925 million. That transaction settled in late June 2006.
In 2009, the defendant assessed John to capital gains tax on the basis of profit made on the 2006 subdivision and sale of lot 2.
John contends that, by a declaration of trust he made on 9 July 1995, all beneficial interest in the then undivided Swanbourne Property (and so in lot 1 and lot 2) from that time was held by the Bewick Moreing Trust, not by him. The second plaintiff is the corporate trustee of the Bewick Moreing Trust, which is a discretionary trust established under a deed of settlement of 7 August 1980.
The second plaintiff was incorporated in June 1980 under the name Bouvardia Pty Ltd. It changed name to Bewick Moreing Pty Ltd in September 1980. Between August 1980 to March 1999, Brian was a director of the second plaintiff. Some six years later, commencing on 21 July 2005, Brian was reappointed as a director of the second plaintiff, a position he held as sole director from July 2006 until his death in 2010.
The essential question at issue in the proceedings is whether the beneficial ownership in the Swanbourne Property passed from John to the Bewick Moreing Trust in July 1995, or whether it remained with John until the disposition of lot 2 in June 2006. In the latter case John is potentially exposed to capital gains tax.
An important fact to be appreciated from the outset is that when lot 2 was sold for $3.925 million in June 2006, the proceeds of sale were immediately paid to a bank account operated at a branch of the St George Bank in Perth. That bank account was operated in the name of 'Bewick Moreing Pty Ltd as trustee for the Bewick Moreing Trust'.
The proceeds of the sale realised for lot 2 were then declared as a capital gain in the income tax return filed for the Bewick Moreing Trust for the financial year ended 30 June 2006.
The defendant contends that the Swanbourne Property (and therefore lot 2) did not become an asset of the Bewick Moreing Trust at any time between 1995 and 2006 (that is, prior to lot 2 being sold). However, no allegation of sham is raised by the defendant in the proceedings.
Evidence
The matter proceeded on the plaintiffs' originating summons, under which declaratory relief was sought in the alternative, in the following terms:
1.a declaration that the declaration of trust executed by the first plaintiff on 9 July 1995 (the 'Declaration') is valid and has the following effect:
1.1that the first plaintiff holds the property described in the Declaration (the 'Property') on trust for the second plaintiff as the trustee of the Bewick Moreing Trust; or
1.2Alternatively, that the first plaintiff holds the Property upon the trusts of the Bewick Moreing Trust.
2.The defendant pay the plaintiffs' costs of this application.
The declaration under par 1.1 above is the plaintiffs' preferred relief.
It is convenient at this point to set out in full the terms of a declaration of trust (the Declaration Instrument) in respect of which relief is sought. The document is in these terms:
Definitions
John Saunders: John Charles Saunders of 26B Channels Farm Rd, Southampton, SO16 2PE
Bewick Moreing Trust: Bewick Moreing Trust of 258 Marine Parade Swanbourne WA 6010 Australia
The house:The property situate at 258 Marine Parade Swanbourne WA 6010 Australia and being the land contained in Certificate of Title Volume 1732 Folio 606
Declaration
I, John Saunders, declare and confirm that I hold the house as trustee for the Bewick Moreing Trust.
[signature of John Charles Saunders] [signature of John Cook]
……………………………… …………………………..
John Charles Saunders Witness John Cook
Name
dated Occupation Production Manager
this 9 day of July 1995 Address 28A Channels Farm Rd
SwaythlingSouthampton SO16 2PE
There are some matters to observe immediately concerning this one page document:
1.The Declaration Instrument does not appear to have been professionally drawn. To the contrary, it appears to have been printed, signed by John then witnessed by a John Cook.
2.The signing and witnessing of the Declaration Instrument would appear to have taken place on 9 July 1995 at Swaythling, Southampton, in the United Kingdom.
3.The Declaration Instrument appears to have been brought into Western Australia sometime after it was executed, then presented and stamped for duty on 5 June 1996 at the Midland Courthouse in Western Australia.
4.The reference to 'vol 1732 folio 606' as is seen in the definition of 'the house' is an obvious error. There is no dispute that the correct formal title description for the Swanbourne Property as of July 1995 was Cottesloe lot 193 and being lot 24 on Plan 6276 in certificate of title vol 1549 folio 931. Uncontradicted evidence adduced in the proceedings showed that the vol 1732 folio 606 description mistakenly refers to a property in Bellevue (see exhibit 3, par 4), a suburb of Perth some distance inland from the beachside suburb of Swanbourne.
5.The error in the definition can be corrected as a matter of the proper construction of the Declaration Instrument because it is an obvious error. There is no need for a formal order for rectification: see Fitzgerald v Masters (1956) 95 CLR 420; Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1 [120] (EM Heenan AJA); CPG01 Pty Ltd v Kourinos [2010] WASC 92 [137] ‑ [138], [159] ‑ [160].
6.John's one‑line declaration uses the expression 'declare and confirm'. The first aspect of the plaintiffs' submission concerning the proper understanding of that terminology points to that expression's location under the underlined heading 'Declaration'. The plaintiffs contend that the expression 'declare and confirm' is merely a complex phrase within which the word 'confirm' remains subordinate to the word 'declare'. As a result, 'confirm' merely adds emphasis to the more substantive concept invoked by the word 'declare'. In other words, the plaintiffs contend that the expression 'declare and confirm' is a hendiadys: see Fowler HW, A Dictionary of Modern English Usage (2nd ed, 1965) 245; Victims Compensation Fund Corporation v Brown [2003] HCA 54; (2003) ALJR 1797 [34] (Heydon J). That analysis in my assessment is clearly correct and must be accepted.
7.A clumsy reference in the one‑line declaration to 'the house' must actually be read as being to the entire Swanbourne Property, bearing in mind the earlier definition of the term.
8.The component in the one‑line declaration which reads 'I hold the house as trustee' is confusing. The reference to 'trustee', as regards John, has no doubt been a stimulus for the plaintiffs' pursuit of the declaration under the second (less preferred) alternative prayer for relief (1.2), by the declaration that '[John] holds the Property upon the trusts of the Bewick Moreing Trust'.
9.There is no doubt, as I mentioned, that as of 9 July 1995 the Bewick Moreing Trust was in existence, with the second plaintiff as its corporate trustee. This discretionary trust had existed since August 1980, a period of just over 15 years. In July 1995 Brian was a co‑director of the second plaintiff. The existence of, by then, an established discretionary trust which had the second plaintiff as its corporate trustee - are relevant surrounding extrinsic facts of which the court may and, in my view, should take notice in assessing the 1995 Declaration Instrument.
10.Both John and Brian, by respective affidavits read in these proceedings, confirm that the original Declaration Instrument was handed to Brian after it had been executed by John. In John's affidavit sworn on 19 February 2010, exhibit 1 par 6, John says that he handed over the Declaration Instrument to Brian in Brian's 'capacity of director of the second plaintiff'. In his affidavit of 4 March 2010, exhibit 2 par 11, Brian swore shortly before his death:
Since in or around July 1995, the second plaintiff, in its capacity as trustee of the Bewick Moreing Trust, has had possession or control of the stamped original of a declaration of trust dated 9 July 1995 executed by the first plaintiff and handed to me by the first plaintiff, [a copy of which is attached to Brian's affidavit].
11.During the hearing counsel for the plaintiffs said that the original Declaration Instrument was in court, if it was required. Senior counsel for the defendant inspected the original document in court, but did not call for the original instrument to be tendered.
12.In July 1995 the two directors of the second plaintiff were Brian and Dorothea Ann Keuhlmann (who was a director for over 20 years between December 1985 and July 2006).
Essential issues
The case proceeded before me on the basis of the plaintiffs' originating summons seeking declaratory relief. There were no pleadings. Evidence adduced during the hearing from the plaintiff comprised:
(a)the affidavit of John sworn at Salisbury in the United Kingdom on 19 February 2010 (exhibit 1) (but excluding par 4, which was not read);
(b)the affidavit of Brian sworn at Southampton in the United Kingdom on 4 March 2010, before his death later in 2010 (exhibit 2); and
(c)the affidavit of Peer Benjamin Hanich affirmed on 11 May 2010 (exhibit 3).
On behalf of the defendant, the evidence adduced was:
(a)the affidavit of Aris Zafiriou sworn on 27 April 2010, comprising 36 annexures (exhibit 4); and
(b)a copy of a two‑page undated letter from Brian to John with the heading 'Mortgage 258 Marine Parade' (exhibit 5).
There was no cross‑examination of any witness during the hearing. John was made available for cross‑examination on the afternoon of 8 July 2010 via a video link from Perth to the United Kingdom, as had earlier been requested by the defendant at a directions hearing. However at the commencement of the hearing, senior counsel for the defendant indicated that cross‑examination of John would be wasteful and therefore that the defendant did not propose to avail itself of the opportunity to cross‑examine John.
Fundamentally, the plaintiffs' position is that the Declaration Instrument of 9 July 1995 is a valid and effectual declaration of trust by John in respect of the Swanbourne Property. The plaintiffs' preferred construction of the instrument, it obviously not being professionally drawn, is that the Declaration Instrument vested full beneficial entitlement in the Swanbourne Property in the second plaintiff from 9 July 1995, to be held by the second plaintiff on trust in accordance with the terms of the Bewick Moreing Trust established in 1980. In the event of the court not preferring that construction, the plaintiffs submit that the effect of the Declaration Instrument in July 1995 was to constitute John as trustee of the Swanbourne Property on and by reference to the terms of the Bewick Moreing Trust for that trust's discretionary beneficiaries.
Essentially, the plaintiffs submit that the Declaration Instrument fulfilled all three crucial requirements for the valid creation of an express trust, with reference to the touchstones of certainty of intention, certainty of subject matter and certainty of object by way of beneficiary. No issue arose that the statutory requirements for a valid declaration of trust, pursuant to s 34(1)(b) of the Property Law Act 1969 (WA), had not been met.
The defendant, however, took issue over two of these three essential requirements. By written submissions of 25 March 2010 the defendant contended that there was no certainty of intention established (the relevant intention being the subjective intent of the person seeking to establish the trust - ie, John), that issue being a question of fact. By reference to the one‑line declaration in the Declaration Instrument, the defendant's submission was (par 11):
It is not clear whether the first plaintiff was purporting, as a legal owner with full beneficial ownership, to create an equitable interest in the property, or was purporting to declare that his ownership was not a full beneficial ownership by reason of a pre‑existing trust. The first plaintiff's affidavit does not resolve the uncertainty. In any event, the first plaintiff's actions with regard to the property are not consistent with either alternative.
In relation to certainty of object, the defendant observed (correctly) that the Bewick Moreing Trust is not, itself, a legal entity. It referred to the alternative formulations of the plaintiffs' declaratory relief as pursued, pointing out that the two alternatives were quite different and that (pars 17.1 ‑ 17.2):
a declaration that the first plaintiff held the property on trust for the second plaintiff would create an equitable estate in the property and convey it to the second plaintiff, as trustee and subject to the trusts created by the Bewick Moreing Trust Deed. As a result the first plaintiff would be subject to clause 1.11 of the Trust Deed. As a person making a disposition to the Trustee, other than for adequate consideration, he would be absolutely excluded from the class of beneficiaries;
a declaration that the property is held upon the trusts of the Bewick Moreing Trust, however, may not come within that clause, as there may be no disposition of property from the first plaintiff.
On the defendant's argument the asserted ambiguity goes to absence of sufficient certainty of intention to create a trust, or to the uncertainty as to the objects of the trust, or to both those fundamental requirements being absent - thereby invalidating what John might have been attempting under the Declaration Instrument.
Before proceeding to evaluate these arguments, it is necessary to say something about the legal principles which govern that exercise. The parties canvassed these principles extensively in their written submissions, but in large measure there was very little difference between them in terms of their ultimate positions on the applicable law. By reference then to the mutual written submissions of both parties, I will briefly set out the following largely uncontroversial legal principles.
Principles of law governing the application
I have already referred to the three critical requirements for a valid creation of a trust: certainty of intention; certainty of subject matter; and certainty of object or beneficiary. The following further principles emerged as relevant.
1.The existence of a trust is to be determined with reference to a declaration of trust by the subjective intention of the settlor, although that intention may be inferred from objective circumstances: Commissioner of Stamp Duties (Qld) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178; Starr v Starr [1935] SASR 263; and White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650, 673 [128] ‑ [129] (Campbell J).
2.Because it is a subjective intention which is at issue, the parole evidence rule does not limit the evidence which may be taken into account in determining whether a trust was validly declared: Starr v Starr (266); Owens v Lofthouse [2007] FCA 1968 [62] ‑ [72].
3.Subjective intention may be inferred from language employed in the written instrument: Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491, 503.
4.Subjective intent may also be inferred from the conduct of the parties as well as from the surrounding circumstances in a particular case: Cohen v Cohen (1929) 42 CLR 91.
5.Generally speaking, the legal onus of establishing that the intention to create a trust existed at the relevant time remains with the person asserting the existence of the trust: Re Armstrong (Dec) [1960] VR 202, 206; Hyhonie Holdings Pty Ltd v Leroy [2004] NSWCA 72 [45]; Pascoe v Boensch [2008] FCAFC 147; (2008) 250 ALR 24 [21].
6.Where there is an unambiguous use of language in a written instrument establishing a trust, the evidentiary onus will shift to a contradicting party to show that a trust does not exist through the establishment, if possible, of a contrary intention: Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331, 340 ‑ 343.
7.The evidentiary onus falls upon the party seeking to show the contrary intention and strong evidence is required to do so: Re Steel; Public Trustee v Attorney‑General (SA) [1925] SASR 272.
8.The evidence as to a contrary intention may be circumstantial. All relevant circumstances may be examined to determine whether there actually was the intention to create a trust: Kauter v Hilton (1953) 90 CLR 86; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588.
9.Subsequent events may be proved to negate a finding as to an intention to create a trust. Circumstantial evidence that will be admissible to be weighed in this process may include the circumstance where an ostensible declarant of a trust nevertheless continues to exercise personal dominion over the property the subject of the declaration of trust: Arthur v The Public Trustee (1988) 90 FLR 203, 209 ‑ 210; Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624 [34] ‑ [41] (result affirmed on appeal in Hyhonie Holdings Pty Ltd v Leroy [2004] NSWCA 72); Owens v Lofthouse.
10.Evaluations of subjective intention towards the establishment of a trust raise issues of fact which are to be determined by reference to the particular circumstances of each individual case.
11.The word 'sham' is an expression carrying a well understood legal meaning: see Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [46], where it was observed that a sham 'refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences' (referring to Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449).
The parties' submissions
The oral submissions of senior counsel for the defendant eschewed any sham submission concerning the 9 July 1995 Declaration Instrument. Rather, the defendant confined itself to the twofold challenge concerning the asserted failures of the plaintiffs to establish certainty of intention and object.
To that end, the defendant sought to rely upon some uncontroversial evidence as to John's conduct concerning the Swanbourne Property after 1995, to buttress the submission that the evidence as a whole tended against a conclusion that there had been an intention by John to establish a trust by the Declaration Instrument of 9 July 1995. In advancing that factual submission the defendant relied upon four matters:
(a)Ambiguity in the Declaration Instrument itself, particularly by reference to the asserted holding of the Swanbourne Property by John 'as trustee'.
(b)An undated licence deed between John and Brian (an executed copy of which was enclosed in a letter from Brian's solicitors (Solomon Brothers) to the Australian Government Solicitor of 5 July 1995 (annexure AZ8 to Mr Zafiriou's affidavit)) which does not contain any reference to a trust over the Swanbourne Property. The content of this deed tends to suggest, it is put, that John remained in a position to grant lifetime occupancy rights over the Swanbourne Property to Brian. In essence, it is contended that there is an irreconcilable inconsistency as between the granting to Brian of lifetime occupancy rights (by John as licensor, to Brian as licencee) under that undated deed and an acceptance of a scenario in which John had earlier divested all beneficial interest in the Swanbourne Property on 9 July 1995 under the force of the Declaration Instrument.
(c)During 2005 John, not Brian, signed papers for a loan secured by a first mortgage with RAMS Mortgage Corporation Ltd (RAMS) over the Swanbourne Property to secure a 'low‑doc' advance of $500,000 (annexures AZ13 ‑ AZ15 to Mr Zafiriou's affidavit). This loan was then drawn down against the Swanbourne Property on 26 August 2005 to the extent of $500,000, but was essentially then repaid to the extent of $498,165 by 30 August 2005 four days later. This is confirmed in the RAMS home loan statement (page 78 within annexure AZ13 to Mr Zafiriou's affidavit). Exhibit 5, an undated letter but prepared around the time of these loan events in 2005 from Brian to John, elaborates on these matters.
(d)In the years after the Declaration Instrument of 9 July 1995, an examination of the annual accounts of the Bewick Moreing Trust does not reveal the Swanbourne Property as being listed as an asset of the Bewick Moreing Trust.
Measured against those four adverse factual considerations relied upon by the defendant, the following established factors are advanced on behalf of the plaintiffs:
(a)The fact of the existence of the Declaration Instrument itself, which is not contended to be a sham.
(b)Uncontradicted evidence by John in his affidavit (exhibit 1), which at par 6 is in these terms:
At the time I executed the Declaration of Trust, I knew that the Bewick Moreing Trust was the name of a trust fund constituted by deed of which the second plaintiff was trustee. After the Declaration of Trust was executed, I handed it o [sic: to] Brian Saunders in his capacity as director of the second plaintiff.
John was made available for cross‑examination via a video‑link to the United Kingdom from Perth at the hearing of the originating summons on 8 July 2010, but he was not cross‑examined. Manifestly then, no Jones v Dunkel inference can be drawn against the plaintiffs by reason of John having been made available for cross‑examination (Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298).
(c)As a corollary to point (b), the plaintiffs say it is relevant that the defendant did not take up the opportunity to cross‑examine John, the very person whose subjective intention to establish a trust is put in issue, when he was made available by video link. Nor was the opportunity taken to cross‑examine John as the relevant declarant about the incidents of fact relied upon by the defendant as to the subsequent (ie, after 9 July 1995) factual matters set out above, which are said to run contrary to finding a certain subjective intention in John to establish a trust over the Swanbourne Property in July 1995.
(d)The ultimate settlement proceeds of the sale from lot 2, once obtained on 26 June 2006, were paid into the bank account of the Bewick Moreing Trust, rather than to John personally.
(e)The Bewick Moreing Trust in due course filed a tax return for the financial year ended 30 June 2006 (annexure AZ25 to Mr Zafiriou's affidavit, pages 144 ‑ 155) which acknowledges a capital gains tax event at item 18. See also annexure AZ20 to Mr Zafiriou's affidavit, pages 97 ‑ 99, and correspondence from the plaintiff's solicitors Solomon Brothers to the defendant of 7 October 2009, in these terms (pars 5 ‑ 6):
No resolution distributing the net income, or any part thereof, of the trust estate of the Bewick Moreing Trust for the year ended 30 June 2006 to our client was made. Nor, arguably, was any such resolution capable of being validly made by reason that our client then fell outside the class of beneficiaries of the trust. In any event there was no net distributable income of the trust available after deduction of carried forward losses. The total income of the Bewick Moreing Trust for the year of income was a loss of $1,507,091.00.
The statement speaks for itself. An examination of the tax return for the Bewick Moreing Trust for the year ended 30 June 2006 discloses the net capital gain of $779,590.00 as assessable income of the trust and the capital gain or capital loss worksheets attached to the tax return provide detail as to the calculation of that net capital gain comprising the sale of not only lot 2 on strata plan 47816 but also two other pieces of real estate.
It is necessary to evaluate the competing considerations raised by the plaintiffs and the defendant. Before doing so I must mention some further facts.
Additional facts
The Bewick Moreing Trust was established by a deed of settlement taking effect from 7 August 1980. A schedule to the deed identifies specified members of the class of beneficiary (item 5) as 'all of the persons who are the children of Brian Saunders of 151 Carr Street, West Perth'.
Item 6 of the schedule to the deed identifies additional members of the class of beneficiary. The first additional member identified by item 6(i) is Brian Saunders.
The deed carries all the hallmarks of a discretionary trust. No members of the classes of beneficiaries identified enjoyed vested or fixed entitlements to the trust property: see Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366 [47] ‑ [50] (French CJ).
The trustee of the Bewick Moreing Trust is identified in item 3 of the schedule to the deed of settlement as 'Bouvardia Pty Ltd'. According to the affidavit of Brian (par 6) this corporation changed its name to Bewick Moreing Pty Ltd on 19 September 1980.
The Bewick Moreing Trust established under the 1980 deed of settlement was subsequently varied under eight separate deeds of variation executed between June 1982 and September 1996. Those variation deeds are appended to Brian's affidavit (exhibit 2). Of significance is the deed of variation of 5 July 1993 which varies the deed of settlement:
by including all the persons who are brothers of Brian Saunders of 258 Marine Parade Swanbourne WA adjacent to the heading Specified Members of the Class of Beneficiaries in the Schedule to the Trust Deed.
Prima facie that 1993 change introduced John into the class of specified beneficiary under the discretionary arrangements of the Bewick Moreing Trust. But that observation as to John becoming a potential beneficiary in 1993 must then be qualified by another subsequent development, that I will shortly address.
In terms of variations, the last variation of 25 September 1996 altered the deed of settlement again, this time 'by excluding Brian Saunders adjacent to the heading Additional Members of the Class of Beneficiaries in the Schedule to the Trust Deed'. So, from September 1996 Brian was no longer a potential beneficiary under the Bewick Moreing discretionary trust arrangements.
My foreshadowed qualification concerning John's status as a discretionary beneficiary arises from the terms of cl 1.11 of the deed of settlement (which has not been varied since the inception of the Bewick Moreing Trust in August 1980). Clause 1 of the deed of settlement deals with definitions and interpretations. Clause 1.11 raises some qualifications concerning potential members of the class of beneficiaries, in terms:
Notwithstanding the definition of the Members of the Class of Beneficiaries above -
1.11.01…
1.11.02any person who makes any disposition to the capital Trustees of Property other than for adequate consideration;
1.11.03…
1.11.04…
1.11.05…
Shall by virtue alone of being one of the persons described above, be absolutely excluded from membership of the Class of Beneficiaries.
By reference to the position of John and the Declaration Instrument of 9 July 1995 in respect of the Swanbourne Property, a question arises as to whether John thereby made a disposition to the trustee of the Bewick Moreing Trust (the plaintiffs' preferred case and first alternative as its declaratory relief). If so, the terms of the Bewick Moreing Trust deed of settlement by cl 1.11 then excluded John as a trust beneficiary from 9 July 1995, notwithstanding the earlier deed of variation of 5 July 1993 which on the face of it added John as a specified beneficiary by reason of his status as a brother of Brian.
On the other hand, if the effect of the Declaration Instrument was not a disposition to the trustee of the Bewick Moreing Trust, but rather was only a declaration that John himself was from then holding the Swanbourne Property on trust for the beneficiaries of the Bewick Moreing Trust, then the terms of cl 1.11.02 would not be engaged, so that John, at least from the time of the variation on 5 July 1993, would have been a potential beneficiary under the discretionary trust arrangements of the Bewick Moreing Trust.
The defendant, of course, argues that this uncertainty about John as a beneficiary invalidates the Declaration Instrument by reference to an uncertainty of object issue as at 9 July 1995. I disagree.
It is correct that the Bewick Moreing Trust is not a legal entity. Therefore it could not in its own right be a beneficiary of the Swanbourne Property, referred to in the Declaration Instrument. But given that the Declaration Instrument was not professionally drawn, grammatical imperfections are not surprising. On its face, the Declaration Instrument seems to carry the hallmarks of a layman's effort. Construed by reference to ascertaining the subjective intent of the declarant (John), I am of the view that what John subjectively intended was to declare that the Swanbourne Property would be held on trust by the trustee of the Bewick Moreing Trust. Coincidentally, the name of the trustee of the trust in July 1995 was Bewick Moreing Pty Ltd. It is no real interpretive strain therefore to read the words appearing in the one‑line declaration as intending to refer to Bewick Moreing Pty Ltd as trustee of the Bewick Moreing Trust.
Upon that assessment of the Declaration Instrument, which I favour, there is no difficulty over certainty of object. The variation of 5 July 1993 added John as a potential beneficiary to the Bewick Moreing discretionary trust arrangements. However, from 9 July 1995 the effect of cl 1.11.02 of the deed of settlement for the Bewick Moreing Trust excluded John at that time as a member of the potential class of discretionary beneficiaries of the Bewick Moreing Trust.
The 1995 deeds: first deed
I will now address the circumstances surrounding two deeds entered between Brian and John in 1995.
Annexures AZ6 and AZ7 to Mr Zafiriou's affidavit contain two differently dated (and stamped) but identically worded deeds, between Brian and John. The first deed is dated 3 January 1995 and appears to carry the duty stamp of the Midland Stamp Office of 5 July 1995. The second deed is dated 1 February 1995 and appears to carry a duty stamp of the Midland Stamp Office of 29 May 1995. The subject matter of each deed is the Swanbourne Property (defined in a schedule attached to each deed). Nothing, I assess, turns upon the fact that the same document appears to have been entered as a deed between the same parties (John and Brian) on 3 January 1995 and again on 1 February 1995.
In the first deed Brian is described as donor, with John as the donee. The deed recites:
Whereas:
(a)The Donor has or may have an interest in the property detailed in the attached Schedule.
(b)The Donor is desirous in consideration of the friendship and affection of the Donee to assign to the Donee the property detailed in the attached Schedule on the terms and conditions hereunder contained.
The operative component of the deed contains four covenants in these terms:
1.In consideration of the friendship and affection of the Donee by the Donor, the Donor hereunto from the Deed assigns by way of gift the property to the Donee.
2.The Donor hereby warrants that he has good title to the property at the date of this Deed.
3.The Donor hereby agrees to do all such deeds, acts, matters and things as shall be necessary to give full force and effect to the provisions of this Deed.
4.The costs of and incidentals to the preparation of this Deed including stamp duty shall be borne by the Donor.
Superficially the content of this deed could be viewed as surprising, particularly because John (not Brian) was, at that time, the registered proprietor of the Swanbourne Property. That being so, the covenant by which Brian, as donor, warrants that he has good title to the Swanbourne Property at either January or February 1995, is curious. So also is Brian's following gift of the Swanbourne Property to John, under the first covenant of the deed.
Those curiosities, however, on the face of it, do not detract from the capacity of John, either with or without the benefit of this gift by deed from Brian, to be in the position some months later (as at July 1995) to then execute a valid declaration of trust over the Swanbourne Property.
The 1995 deeds: second deed
John and Brian then entered into another deed in 1995, referred as a 'licence' (annexure AZ10 to Mr Zafiriou's affidavit, which must be read with annexure AZ8, a letter and annexed unexecuted draft from Brian's solicitors). The licence deed between Brian and John which is found at AZ10 is undated. However, it carries the stamped imprint of the Western Australian Stamp Duty Office of 7 August 1996. By reference to the terms of the letter from Solomon Brothers, sent on behalf of Brian to the Australian Government Solicitor of 5 July 1995, it is overwhelmingly likely that this draft proposed licence deed was then perfected by its execution as between John and Brian about 14 days after 5 July 1995.
The solicitor's letter to the Australian Government Solicitor on behalf of Brian was made in the context of Supreme Court of Western Australia proceedings CIV 1385 of 1995, where it would appear that an earlier interim injunction had been discharged on the faith of the court's acceptance of undertakings from Brian. The letter explains that the proposed draft licence deed (in the same terms as the final 1996 stamped executed version) was enclosed.
In this correspondence, Solomon Brothers advised the Australian Government Solicitor, on behalf of Brian, that:
Our client has provided instructions to us to document the oral arrangement between him and his brother in relation to [the Swanbourne Property].
We enclose a copy of a licence document ('the Written Licence') our client proposes to enter into with his brother, John Saunders. The Written Licence has been prepared because of our client's concern that the arrangement between him and his brother is not recorded in writing and our client did not appreciate his legal position with respect to the Swanbourne Property until he had provided us with the facts which, upon analysis, in our opinion establish the rights now recorded in the Written Licence.
One of the major reasons our client wishes to now have documented the oral arrangement between him and his brother is that his brother is now marrying and our client is concerned that his rights to use and occupy the Swanbourne Property may come under attack if that marriage breaks up and his brother's wife claims half of the assets of John Saunders and thereby probably resulting in a forced sale of the Swanbourne Property and an attack upon our client's right to occupy it.
Following execution of the Written Licence, our client proposes to lodge a caveat to protect his interest in the Swanbourne Property.
From a timing perspective this communication looks to have been dispatched four days before John signed the Declaration Instrument.
Given the terms of the solicitor's communication, it is unlikely that the draft proposed licence deed would have been executed between John and Brian until at least another 14 days later, taking its likely execution date to a time well after 9 July 1995.
Under the Declaration Instrument, John declares that the Swanbourne Property will, from then (ie, 9 July 1995), no longer be held by him, beneficially. Yet an examination of the terms of the as executed licence deed sees John, as licensor, nevertheless purport (after 9 July 1995) to grant to Brian, as licensee, the right to occupy the Swanbourne Property for Brian's life, backdated to 12 December 1990, on the basis that no rent or licence fees are payable by Brian to John.
Of particular insight are the recitals in the licence deed. Essentially, as between the brothers, they record that in December 1988, Brian had gifted the amount of $1,261,133.21 to John to enable John to purchase a property in Johnson Parade, Mosman Park (the Mosman Park property). In March 1991, the Mosman Park property was subdivided, with the rear portion then sold off.
The recitals then go on to record that in December 1990, Brian advanced further funds to John, namely $744,742.51, this time to enable John to purchase the Swanbourne Property. That was the entire purchase price. However, as distinct from the earlier gift of money which Brian had made to John in respect of John's purchase of the Mosman Park property in 1988, this time the funds advanced by Brian were expressed to be by way of loan.
The recitals to this licence deed further record that the sale of the rear portion of the subdivided Mosman Park property in March 1991 realised $575,000. Those sale proceeds were then paid by John to Brian in full and final satisfaction of Brian's $744,742.51 loan to John. In other words, there was a shortfall of just under $170,000 on the Swanbourne Property loan to John. But John's shortfall was forgiven by Brian. That $170,000 shortfall amount, when added to the earlier gift amount of $1,261,133.21 to John, provides more insight towards why John would seek to benefit Brian by affording him the lifetime occupancy of the Swanbourne Property, rent free.
Recitals I and J of the licence deed then record:
Since the purchase of the Swanbourne property, the Licencee has enjoyed a personal right to use and occupy the Swanbourne Property together with any other person he so wished and in common with the Licensor, with a prohibition on the Licencee in assigning or sub‑letting or dealing in any way with the Licencee's interest in the Swanbourne Property.
The Licensor and the Licencee wish to enter into this Deed which is intended to be a record and an acknowledgement of the oral agreement made between the Licensor and the Licencee prior to completion of the purchase by the Licensor of the Swanbourne Property.
Clause 2 of the licence deed implements the operative grant of a lifetime licence to occupy the Swanbourne Property by John to Brian, in these terms:
The Licensor, grants to the Licencee the non‑exclusive right to use and occupy the Swanbourne Property during the Licencee's lifetime or until earlier termination under clause 6 ('Term') together with any other person that the Licencee may, from time to time wish to have residing with him, such right to be in common with the Licensor and on and subject to the observance and performance of the other covenants and agreements contained in this Deed. The right granted by this Deed shall be deemed to have commenced on 12th December 1990.
Some clarification emerges from the content of the undated licence deed. First, the recitals as between the brothers relating to substantial funds emanating from Brian and received by John (and used for the 1989 or 1990 respective acquisitions by John of the Mosman Park and Swanbourne properties) go a long distance towards explaining the rationale for the first 1995 deed entered between John and Brian. The recitals provide insight towards why the view might have been taken that Brian could still have held some equitable interest by way of constructive trust in the Swanbourne Property - bearing in mind that Brian initially advanced all funds for its purchase by way of loan to John and Brian was not repaid all funds which he had loaned John; to the extent of there being a deficiency in repayment of almost $170,000 in March 1991, which Brian is recorded to have forgiven (ignoring any issues as to Brian's potential loan interest entitlements against John).
Knowledge as to substantial funds advanced by Brian to John in 1988 and 1990 does not, however, go so far as to fully explain the warranty covenant by Brian in the first 1995 deed, as to Brian's interest in the Swanbourne Property. But the evidence is crystal clear that John, not Brian, was at that time the registered proprietor of the Swanbourne Property as from December 1990. That is not at all controversial.
Therefore Brian's warranty under the first 1995 deed, as to his holding title in the Swanbourne Property, is an erroneous curiosity.
Second, the defendant has pointed to the curious timing of the undated, as executed, licence deed, stamped in 1996. It contends that if the beneficial interest in the Swanbourne Property really was enjoyed by the Bewick Moreing Trust as from 9 July 1995, grant arrangements by John to Brian the subject of the licence deed would be inconsistent. If the Bewick Moreing Trust held a full beneficial entitlement to the Swanbourne Property from 9 July 1995, then surely it (more correctly, its trustee), and not John, should have been licensor to Brian? Or at least the second plaintiff as trustee should have been party to the licence deed, granting its confirmation of the licence arrangements which clearly benefit Brian by reference to his rent free occupancy of the Swanbourne Property for life.
As to the latter point there is, I think, little doubt that in a perfect world Bewick Moreing Pty Ltd, as trustee of the Bewick Moreing Trust, should have been party to any post 9 July 1995 licence arrangements reached as between John and Brian concerning the Swanbourne Property. But that consideration needs to be balanced against two stronger countervailing considerations. First, these were arrangements between brothers, in which a certain element of informality would not be unexpected, particularly when the corporate trustee of the Bewick Moreing Trust is a corporation in which Brian himself (as of 1995) was one of the two directors. Second, and even more importantly, the licence deed as drawn chiefly seeks, as I assess it, to confirm earlier oral licence arrangements between the brothers said to have already been in place essentially since the Swanbourne Property was acquired by John as registered proprietor in December 1990. As the licence deed seeks merely to formally document the earlier oral licence arrangements then in place as between the brothers for approximately four and a half years, it is perhaps understandable, again, that this licence deed was drawn in the way it ultimately manifested. It was, in 1995, merely recording what had been done since 1990 and at a time when John held the legal interest in the Swanbourne Property, so that John was the appropriate person to grant the licence for lifetime occupancy to Brian.
Fundamentally, I do not assess there to be a problem of such inconsistency as between the licence deed and the Declaration Instrument of a magnitude to carry me to an assessment that John did not hold the intention as at 9 July 1995 to relinquish, under the Declaration Instrument, his beneficial ownership and to impose the regime of the Bewick Moreing discretionary trust over the Swanbourne Property. The incongruities which the defendant raises, whilst evident, are not of such moment overall, when measured against the totality of the other evidence and surrounding circumstances, to negate John's subjective intention (and the force of the Declaration Instrument's content) in establishing a discretionary trust regime over the Swanbourne Property from 9 July 1995.
The 2005 RAMS loan documents
Similar observations can be made in respect of the RAMS mortgage and the $500,000 loan facility established in August 2005, in the documents that were signed by John. Brian's letter to John (exhibit 5) makes it very clear that at this time Brian (who had been reappointed to be sole director of the second plaintiff from 21 July 2005, after a hiatus in his directorship of some six and a quarter years) was fully cognisant of the RAMS loan and mortgage arrangements for the Swanbourne Property. Indeed, exhibit 5 establishes that Brian was actually the initiator of those loan arrangements, in the context of the looming subdivision of the Swanbourne Property into two and the funding of the erection of new dwellings upon each subdivided lot. Brian wrote to John in his (undated) exhibit 5 letter (but which must have been written just before August 2005, when the RAMS loan and mortgage were effected):
Dear John
Mortgage 258 Marine Parade
The house is nearly finished, and when it is, the southern half will be let out via an estate agent. It is proposed that this will be managed by Bewick Moreing Pty Ltd who will collect all rent and benefit, in return for the money they have put up. Importantly, you will receive no income, so there is no tax complication.
I have run out of funds and I need to open up a line of credit to finish things off and also to sit there in case of emergency.
…
The balance of exhibit 5 essentially shows that Brian forwarded the RAMS documentation to John for him to sign (John, of course, being resident out of the country), in order to facilitate the RAMS 'low doc' loan.
My analysis of the loan and mortgage arrangements is that they were entered to facilitate the completion of the new constructions on the subdivided lots of the Swanbourne Property. This conduct was highly advantageous to the Bewick Moreing Trust in the long term because, in June 2006, the eventual sale of lot 2 to a third party purchaser realised $3.925 million to the advantage of the Bewick Moreing Trust.
The Bewick Moreing accounts
The last matter raised as a negative consideration by the defendant concerns what is not recorded in the accounts of the Bewick Moreing Trust for the financial years ending 30 June 1995 through to 30 June 2005 (annexures AZ27 ‑ AZ36 to the affidavit of Mr Zafiriou). The circumstances in which the defendant obtained those financial accounts are not explained within Mr Zafiriou's affidavit (par 36). At face value it would seem to be correct that the Swanbourne Property, if it became trust property from 9 July 1995, ought to have been identified in the Bewick Moreing Trust's balance sheet, as a non‑current asset, in the Trust's accounts prepared for financial years ending 30 June 1996 and thereafter. Perusal of those accounts and the notes to the accounts is not amenable to that conclusion.
However, the trust accounts produced do not appear to be audited accounts. The circumstances in which they were obtained are not, in any manner, explained. For all that is known, these accounts may simply have been prepared erroneously on this issue - in which case they may require correction, after the event. Statutory consequences may follow from the late correction of the Trust's accounts.
However, in my view, the fact of what is not found in the Trust's accounts does not, of itself, raise a consideration of sufficient inconsistency, as against the force of the Declaration Instrument of 1995 and its surrounding circumstances, to cause me to conclude that there was no subjective intention in John to establish a trust regime over the Swanbourne Property in July 1995.
Moreover, a more powerful and countervailing factual consideration is the unchallenged evidence that on 26 June 2006 $3,858,313.79, the proceeds of the sale of lot 2, was paid into a portfolio cash management account at the St George Bank, Perth, being the account of Bewick Moreing Pty Ltd, as trustee for the Bewick Moreing Trust (annexure AZ16 to Mr Zafiriou's affidavit).
Final evaluations
In the assessment of the competing considerations, the terms of the written Declaration Instrument of 9 July 1995, which is not attacked as a sham, must carry considerable weight.
I am not satisfied that the defendant has negated the evidence as to the subjective intention in John towards the establishment of a trust regime over the Swanbourne Property, in the face of that instrument. It is clear from the face of the Declaration Instrument that it was not professionally drawn. It carries hallmarks of being homemade.
Two particular extrinsic facts are of importance to this conclusion, in my view. First, there is the undoubted existence of the Bewick Moreing Trust under its deed of settlement, as from August 1980. The presence of such a trust and its corporate trustee (the second plaintiff) in July 1995 affords definitive content to the reference to the Bewick Moreing Trust in the Declaration Instrument of July 1995. Second is the fact that John handed the Declaration Instrument to his brother Brian, after that instrument was executed (apparently in the United Kingdom). There is significance, I think, in a physical handover of the Declaration Instrument. John stands unchallenged and uncontradicted upon par 6 of his affidavit, containing his evidence that the Declaration Instrument was handed to Brian, after it was executed, and 'in (Brian's) capacity of director of the second plaintiff'.
As I have said, it is also established that Brian, in 1995, was a co‑director of the second plaintiff with Ms Keuhlmann, to whom I have referred.
In the face then of a written instrument, albeit drafted in somewhat cumbersome terms, I do not find it difficult to reach my conclusion that John subjectively intended to relinquish his beneficial ownership in the Swanbourne Property, and from that point, the Swanbourne Property was held on trust by John for Bewick Moreing Pty Ltd as trustee of the Bewick Moreing Trust. That is of course not the actual terminology used in the one line declaration in the Declaration Instrument. But assessed against the surrounding circumstances, the preferred conclusion of the plaintiffs upon their claim for declaratory relief is made out.
The next question is whether, from that starting point, any of the matters relied upon by the defendant, either alone or in aggregate, detract from that assessment. In my view they do not. They are either equivocal, or are counter‑balanced by the stronger considerations raised by the plaintiffs, particularly in this respect the payment on 26 June 2006 of the amount of $3,858,313.79 into a portfolio cash management account at St George Bank operated by Bewick Moreing Pty Ltd as trustee for the Bewick Moreing Trust.
Considerations relied upon by the defendant by reference to subsequent conduct to 9 July 1995, by:
(a)a failure to identify the Swanbourne Property in the Bewick Moreing Trust's annual trust accounts after 30 June 1995;
(b)the entry into of a deed between John and Brian, by which lifetime occupancy, rent free, was granted by John as licensor to Brian as licencee; and
(c)the establishment of a 'low doc' secured loan facility with RAMS in August 2005 to the extent of $500,000 - secured over the Swanbourne Property, but then essentially reduced down to an indebtedness of less than $2,000 within four days of drawn down;
do not, in my view, outweigh the countervailing considerations.
The matters raised by the defendant might, on analysis, ultimately be assessed as irregularities or imperfections. Or they might even be assessed elsewhere as conduct which constituted a breach of trust, or possibly an interference with trust property - matters which, if established, may not reflect well either upon the trustee (the second plaintiff), or upon John.
Nevertheless, the subdivision of the Swanbourne Property and a realisation of approximately $3.925 million by reference to the sale of the subdivided lot 2 sees the Bewick Moreing Trust, overall, as being advantaged. I would be inclined to assess any irregularities or imperfections on the basis employed by the full Federal Court, in Pascoe v Boensch [35] (Finn, Dowsett & Edmonds JJ) as follows:
We attribute no real significance to any of this subsequent conduct. While much of it may have been of relevance if the question of a sham, ie of no real intention, was in question, it is probably for the most part inadmissible in the present matter as being self serving to Mr Boensch's case: see generally Ford and Lee at 2-1066. The balance, such as it is, which was not self serving, has little probative value. In any event, we are satisfied that the memorandum considered in context speaks for itself.
At the risk of repetition, there is no contention as to sham in the present case. Accordingly, I am not persuaded that the events raised by the defendant, taken alone or in aggregate, outweigh the force of the written instrument, particularly once it is assessed and construed within the context of the other relevant surrounding circumstances, I have mentioned.
Accordingly, I accept the plaintiffs' case for declaratory relief, in the terms of par 1.1 of its originating summons. As the successful party, the plaintiffs, prima facie, should be entitled to receive their costs of the proceedings to be taxed, but I will hear the parties as to the final orders.
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