Tatham v Tatham HC Wellington CIV-2010-435-152

[2010] NZHC 2315

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-435-152

IN THE MATTER OF     THE TE PAPA TRUST

AND IN THE MATTER OF THE TRUSTEES ACT 1956, SECTION

64A

BETWEEN  ROBERT HARDING TATHAM TERRY MARGARET TATHAM GRAEME ALBERT BAYLISS Plaintiffs

ANDRACHEL MARGARET TATHAM MARY CELIA MOTION

DANIEL JAMES TATHAM GEORGE FREDERICK TATHAM HENRY WILLIAM JOHN TATHAM Defendants

Hearing:         9 November 2010

Counsel:         I R Millard QC for Plaintiff

L Theron for Defendants

Judgment:      20 December 2010 16:45:00

I direct the Registrar to endorse this judgment with a delivery time of 4.45pm on the

20th day of December 2010.

RESERVED JUDGMENT OF MACKENZIE J

[1]      This is an application for an order under s 64A of the Trustee Act 1956, granting approval, on behalf of all minors and unborn children and unknown persons who are or could be beneficiaries of the Te Papa Trust, to a variation of the Trust changing the date of distribution from the present date of 30 November 2016 to

6 May 2044 or such earlier date as the trustees shall elect.

TATHAM V TATHAM HC WN CIV-2010-435-152 20 December 2010

[2]      The existing adult beneficiaries of the Trust as to both capital and income have consented to an extension of the date of distribution to 6 May 2044 or (as in the existing deed) such earlier date as the trustees in their absolute discretion determine. The present application is necessary because there are minors, unborn children and unknown persons who may become beneficiaries.

[3]      The Trust is a very typical family trust.  It was established in 1966, and was to continue for a period of 50 years from 30 November 1966. The trust property is to be held on trust for such of the children and grandchildren of the first named plaintiff Mr Tatham as the trustees might appoint, and, in default and until such appointment, in trust for the children of Mr Tatham, with a gift over to the children of any child dying before attaining a vested interest.  There are further wide powers of applying both capital and interest to a much wider range of discretionary beneficiaries.

[4]      The reason for the application is that the Trust has substantial timber rights pursuant to a forestry right.   Much of the forest will not have reached a maturity which would render it economically harvestable before 30 November 2016.   If it were vested on that date, then under subpart FC of the Income Act 2007 such vesting is deemed to be a disposal of the forests by the Trust giving rise to an income tax liability at that point.  Such vesting would also cause a deemed sale of any plant or equipment owned by the Trust which might trigger a tax liability for depreciation recovered.

[5]      It is clear from the terms of the application that the main, if not the sole, purpose  of  the  extension  of  the  date  of  distribution  is  to  avoid  those  tax consequences.  On the face of it, the deferral of the date of vesting falls within the literal meaning of the term “tax avoidance arrangement” in s YA(1) of the Income Tax Act 2007.   It is an arrangement which has tax avoidance (namely directly or indirectly  avoiding  postponing  or  reducing  any  liability  to  income  tax  or  any potential or prospective liability to future income tax on the Trust), as both the purpose and intended effect of the change.

[6]      Not every arrangement which falls within the literal meaning of the term “tax avoidance arrangement” will in fact be void as a tax avoidance arrangement.  There

is  much  case  law  directed  to  when  a  transaction  which  falls  within  the  literal meaning of those words, will, or will not, constitute tax avoidance.   I raised with counsel at the hearing whether there were any possible implications which might arise from the fact that the variation for which the Court’s sanction is sought might constitute part of a tax avoidance arrangement within the literal meaning of that term.     I  gave  counsel  an  opportunity  to  make  further  submissions  and  both Mr Millard QC and Ms Theron have subsequently filed helpful written submissions, supported by an opinion from a tax barrister.

[7]      The first issue which arises is whether the possibility that the variation sought might fall within the definition of “tax avoidance arrangement” is a factor which should be taken into account in determining whether it is proper to make such an order.

[8]      The starting point is that, in exercising the power under s 64A, the Court is not required to concern itself with a possible loss of revenue to the Inland Revenue Department.  In Re Beetham's Trust, Wardell v Ramsden and Others,[1] the Court was concerned with a variation of a trust which would avoid an increase in estate duty payable under the Estate and Gift Duties Act 1955.  McGregor J said:[2]

…   In the present case all adult beneficiaries and contingent beneficiaries consent to the proposed variation.   All adult beneficiaries and contingent infant beneficiaries born or unborn obtain the advantage of the considerable saving in estate duties. The Court has authority to consent to a variation on behalf of infant beneficiaries. In my opinion in carrying out this function under the section the Court is not required to concern itself with the possible loss of revenue of the Inland Revenue Commissioner. If all beneficiaries are of  full  age  they  themselves  can  approve  a  variation  irrespective  of  the possible revenue position. The Court must be in the same position in regard to infants. …

[1] Re Beetham's Trust, Wardell v Ramsden and Others [1964] NZLR 576.

[2] At 577.

[9]      Earlier, in re Whittome’s Trust,[3] Hardie-Boys J said:[4]

[3] In re Whittome’s Trust [1962] NZLR 773.

[4] At 776.

In  this  state  of  the  law  as  shown  by  the  attitude  of  English  Judges  to variations sought to avoid undesigned fiscal consequences, Mr Bain is, I believe, right in conceding as he does (in a statement at the bar in extension of his written memorandum) that the Court looks only at the interests of the

four classes of beneficiary set out in s. 64A (1) (a) to (d). Indeed, I noted him as saying that the Court will be anxious to see that as much of the estate as possible accrues to those whose interests the Court must watch.

[10]     In Re Bodle’s Trust,[5] Woodhouse J took into account the likely depletions for estate duties if the trust were not varied as a factor in favour of exercising the power of variation.  In Re Thompson (Deceased), Williamson J said.[6]

There is no doubt that the purpose of these proceedings is to bring about a reduction in the estate duty payable on the plaintiff’s death.  The fact that that is the object need not deter the Court from making orders under s 64A or s 66 of the Trustee Act 1956.  See Re Beethams Trusts [1964] NZLR 576, Whittome’s Trust [1962] NZLR 773 at 776 and Re Bodle’s Trust [1970] NZLR 750.

[5] Re Bodle’s Trust [1970] NZLR 750.

[6] Re Thompson (Deceased) HC Christchurch A134/85, 28 March 1988 at 5.

[11]     It is to be noted that all of those authorities are concerned with potential savings of estate duty under the Estate and Gift Duties Act 1955 (and 1968).  There is no general anti avoidance provision in that Act.  I therefore do not consider those cases to be directly applicable to the present circumstances.  In Dalziell v Dalziell,[7] an application which was, for present purposes, identical with the present application was approved by Mallon J.  She said:[8]

The authorities relied on by the trustees make it clear that the loss to the Inland Revenue is not a relevant consideration. That line of authority was referred to with approval in Re Thompson (deceased), 28/3/88, Williamson J, HC   Christchurch   A134185   at   p5.   The   proposed   variation   does   not completely cut across what the settlor intended to achieve in that the circumstances that have arisen may not have been foreseeable when the trust was established. I am satisfied that it is appropriate to exercise my discretion under s 64A of the Trustee Act to approve the variation on behalf of the grandchildren and any further children of William Dalziell or remoter issue (whether born or unborn).

[7] Dalziell v Dalziell (2008) 27 FRNZ 276.

[8] At [19].

[12]     Counsel also refer to Broad v Broad.  Simon France J said:[9]

The situation is almost identical to that which arose in The Manawa Trust case, Dalziell v Dalziell (2008) 27 FRNZ 276. Mallon J there consented, and I do likewise. The change will benefit all who have an interest in the Trust. The operative tax law was not in effect at the time the Trust was created, and there is no reason to consider the change would be inconsistent with the Trust’s purposes.

[9] Broad v Broad HC Wellington CIV-2009-435-91, 28 August 2009 at [7].

[13]   In neither of those cases was any issue as to the possibility that the circumstances might fall within the literal meaning of the term “tax avoidance arrangement” raised.    I have thought it appropriate specifically to consider that possibility.

[14]    I consider that the fact that the proposed variation might be part of an arrangement which falls within the scope of the definition of the term “tax avoidance arrangement” does not affect the propriety of the exercise by the Court of its power of approval.  The law is clear that the Court is concerned with the interests of the beneficiaries or other persons on whose behalf the Court’s approval is sought.  It is not concerned with the consequences to the revenue.  That general principle is not, in my view, affected by the existence of the anti avoidance provisions in the Income Tax Act.   I do not consider that the Court is required to embark on the difficult exercise of considering whether the granting of approval might engage those provisions.

[15]     It is however desirable to state that the approval of the Court to a variation of Trust will not alter the nature of the arrangement.   If the overall circumstances in which the variation of Trust is effected are such that the arrangement falls within the spirit,  as  well  as  the letter,  of the term  “tax  avoidance arrangement”,  then that consequence will not be avoided simply because, in implementing that arrangement, the approval of the Court has been necessary.  The approval of the Court will not give the arrangement an imprimatur so far as possible tax avoidance is concerned.

[16]     In one respect however, I consider that the possibility that the variation might involve a tax avoidance arrangement is a relevant consideration for the Court.  The Court must consider whether the variation is in the interests of those persons on whose behalf the sanction of the Court is necessary.  In this case, the lessening of the tax liability is relied upon as a benefit to the persons with whose interests the Court is concerned.  If there were a significant risk that the benefit might not be achieved, that  is  clearly  a  material  consideration  for  the  Court,  when  considering  their interests.

[17]     In assessing that risk, the test to be applied is as set out in Re Greenwood:[10]

[10] Re Greenwood [1988] 1 NZLR 197 at 211 to 212.

The purpose of s 64A is in my view to put the Court into the shoes of a beneficiary who is, by reason of infancy or other incapacity, incapable of assenting to the variation, revocation or enlargement of powers proposed. Similarly the Court is put in the shoes of unborn and unknown persons. The Court, as one part of its consideration of the application, should ask itself whether, if the person on whose behalf it is acting had been alive and of full capacity and properly advised, that person would have been likely to have approved the arrangement on his or her own behalf and with or without conditions or amendment to the scheme.

As it was put by Danckwerts J in Re Cohen's Will Trusts [1959] 3 All ER

523 at p 524:

". . . if it is a risk that an adult would be prepared to take, the court is prepared to take it on behalf of an infant."

[18]     The Court should approach the arrangement in a practical and business like way.    In  this  case,  professionally  advised  trustees  and  adult  beneficiaries  have already taken the risk for themselves.  That is a relevant consideration in determining whether the Court should expose the other potential beneficiaries to that risk.  Also, counsel have filed an affidavit from Mr J Coleman, a very experienced tax barrister. He expresses the following conclusion:

In my opinion a variation in the vesting date so as to enlarge the time in which assets may be transferred to the beneficiaries is not tax avoidance.  In my opinion Inland Revenue would never take the view that such a situation amounted to avoidance.  A reasonable beneficiary of full age and capacity would, having taken advice, be assured that there was no potential risk that the change in vesting date could be construed as tax avoidance.

[19]     Ms Theron submits that it would be reasonable for an adult, having obtained legal advice that this is not the type of transaction which is considered to be tax avoidance, to take the risk of the Commissioner of Inland Revenue taking a different view.  I accept that submission.

[20]     Turning then to the other relevant circumstances to be taken into account, Ms Theron  had,  in  her  original  submissions,  noted  a  number  of  effects  of  the variation which had been identified by her.  In her submission none of those is to the disadvantage of the persons and potential persons she represents.  The more time that

there is before distribution the more likely it is that the discretionary beneficiaries

will benefit from discretionary decisions.   If any of the persons presently in the category represented by Ms Theron were to obtain a direct capital interest in the estate (grandchildren of Mr Tatham obtaining an interest on the death of one of his children) they would be in the same position as the current direct beneficiaries are of facing a tax liability without any sale proceeds from which to meet it.  She submits that to the extent that their capital interest remains contingent, postponing the date of distribution makes it more likely that they will have a direct interest.   In her supplementary submissions Ms Theron also submits that the prospects of the minors and unborn children benefiting from the Trust if it were to vest in 2016 must (quite apart from the tax consequences) be significantly lower than if the vesting date were postponed.  As a general proposition, while acknowledging that there are potential differences  between the different categories of persons with whose interests the Court is concerned, I consider that those factors do point in favour of an approval of the variation.

[21]     There will be an order under s 64A of the Trustee Act 1956 approving on behalf of all minor and unborn children and possible wives and widows (being persons unknown) who are or could be beneficiaries of the Te Papa Trust of the alternation of the meaning of the term “date of distribution” as appearing in cl 1 of the Te Papa Trust deed to 6 May 2044 or until such earlier date as the trustees in their absolute discretionary shall elect.

“A D MacKenzie J”

Solicitors:         Logan Gold Walsh, Masterton for Plaintiffs