By Amrit MacIntyre, Partner, Baker McKenzie
Identification of what is a “trust” assumes considerable importance for revenue purposes, given that legislation dealing with trusts, typically attaches to particular identified trusts. In the income tax and GST context, the “trust” identified as such is the “entity” to which taxation applies. In the duties context, exemptions for transfers of trust property from an outgoing to an incoming trustee also require identification of the particular “trust” within which the transfer occurs.
Where a trust instrument vests different rights in different classes of beneficiaries, complexity can arise in determining who the relevant “entity” is, that is, whether the arrangement comprises multiple trusts or a single trust. This question typically arises where the beneficial ownership of a particular asset held within the trust is expressed to be vested in particular beneficiaries and other assets are held for other classes of beneficiaries. In these types of situations, the question often arises whether the relevant trust instrument operates as a single trust or creates separate trusts referable to each class of beneficiaries.
This was one of the questions that fell for consideration in the recent Full Federal Court decision of Aussiegolfa Pty Ltd (Trustee) v FC of T 2018 ATC ¶20-664. In this case, the conclusion of the full court was that the creation of a separate class of units in what purported to be a single unit trust gave rise to a separate trust. The question arose in the context of whether certain trust activities breached the “sole purpose” test under s 62 of the Superannuation Industry (Supervision) Act 1993 (see CCH Tax Week ¶630).
The court found that the provisions of the trust instrument suggested that a single trust was not established. Holders of units in a particular class were entitled to an equivalent amount of income as the income derived from a nominated property. The class of units carried specific rights and entitlements to income and capital relating solely and exclusively to that property. Particular classes of units could be terminated independently of the fund as a whole. The responsible entity was only to issue classes of units in circumstances where, among other things, “the responsible entity is not entitled to be indemnified out of the relevant scheme assets of a class in relation to the relevant liabilities of another class”. The court found that the responsible entity had separate fiduciary duties to the holders of interests in the relevant class. The relevant product disclosure statement was also found to be relevant secondary evidence as to the specific rights, obligations and restrictions attaching to the class of units in question. The conclusion was that there was a distinct trust created despite provisions of the trust that purported to establish a single trust.
In its most general sense, a trust is said to be “the whole relationship which arises between the parties in respect of the property the subject of the trust, and the obligation of the trustee to the beneficiary and the interest of the beneficiary in the property may be regarded as results flowing from the existence of that relationship” (Jacobs Law of Trusts in Australia (8th Ed)). It is not surprising that such a wide understanding of what a trust is, can give rise to difficulties in identifying where a trust ends and where a different trust begins. Whether the creation of differential classes of beneficiaries under a trust instrument will allow the trust to claim the character of one trust or gives rise to several trusts is one such difficulty. In the particular case of “unit trusts”, it is well established that there is no fixed normative meaning of what is a “unit trust” absent a statutory definition (CPT Custodian Pty Ltd v Commr of State Revenue (Vic) 2005 ATC 4925).
In the Aussiegolfa case, it appears that one of the relevant considerations in coming to the conclusion that a separate trust was created was the limitation of the trustee’s right of indemnity in respect of the particular class to assets attaching to that particular class. The Aussiegolfacase did not consider in detail whether provisions dealing with voting could also impact on the determination. For example, if beneficiaries of each class had exclusive rights of voting in respect to matters relating to the assets of that class, this may help reinforce the conclusion that there was a single trust. On the other hand, if voting by beneficiaries occurred without regard to particular classes so that all beneficiaries generally could vote to alter the rights of a particular class, the conclusion may have been different. Great care needs to be taken when drafting trust instruments creating separate classes of beneficiaries (and any relevant product disclosure statement) so that there is clarity as to whether a single trust remains or whether separate trusts are created as a result of separate rights given to different classes of beneficiaries.
[This article was originally published in CCH Tax Week on 7 September 2018. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow – Income Tax module. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]