Lessons from Re McGowan & Valentini Trusts

Introduction

A recent case handed down in the Supreme Court of Victoria, Re McGowan & Valentini Trusts [2021] VSC 154 (Re McGowan & Valentini) has further clarified the position at law in respect of variations of trust deeds after vesting date.

The decision can be seen as favourable for trustees who may find themselves in a situation where a trust has vested without their knowledge and against the interests of the relevant parties, who may seek the trust to continue for their benefit.  It is also an important reminder to trustees and their advisors of regular reviews of the provisions of their trust deed.

This decision has also had an effect of overturning at least part of an Australian Taxation Office taxation ruling related to the taxation consequences of trust vesting.

The background of Re McGowan & Valentini

Re McGowan & Valentini concerned issues which had arisen around the establishment, existence and continuation of two trusts which Giuseppe and Iris Norma Valentini (known as Norma) established for their two children.

While there were a number of issues which formed the basis of the questions put before the Court for judicial determination, in brief, the relevant facts are as follows:

1. By way of deeds dated 14 February 1977 (the 1977 Deeds), Giuseppe and Norma Valentini created two trusts, one for the benefit of each of their children respectively, named the Anna McGowan Trust and the Peter Valentini Trust (the Trusts).
2. A number of properties were purchased after the trust creation, each of which was purported to be held for the joint benefit of the Trusts (the ownership of these properties was the subject of another question put before the Court, which was answered in favour of the Trusts).
3. The 1977 Deeds provided that the trust property, which was settled in the respective Trusts, would vest absolutely in Anna and Peter respectively when they each turned 30 years old.  Anna turned 30 years old on 7 January 1988 and Peter turned 30 on 14 February 1991.
4. On 23 June 1991 (which was after the date the trust property had already vested absolutely  in Anna and Peter respectively in accordance with the 1977 Deeds), the Settlor, the Trustee and Anna / Peter executed further deeds (the 1991 Deeds).  The 1991 Deeds purported to amend the 1977 Deeds (by way of the variation power contained in the 1977 Deeds) to inter alia widen the class of beneficiaries and extend the vesting date.

Two of the five problems which arose as a result of these circumstances, which required judicial determination of questions posed to the Court, were:

1. What was the effect of the trust assets vesting in 1988 and 1991 respectively; and
2. What was the effect of the Trusts being amended by the 1991 Deeds?

The Court’s findings

The Court held that the vesting of the trust property in 1988 and 1991 respectively did not mean that the Trusts were at an end at that time.  Instead, because the Trusts were not wound up by the Trustee, the trust property continued to be held under the same terms of the 1977 Deeds as a continuing trust (and not on a different or bare trust) until they were subsequently amended by the 1991 Deeds.

In coming to this position, the Court found that there was nothing in the language of the 1977 Deeds that would prevent a continuation of the Trusts beyond the vesting dates pending the winding up of the trusts and the distribution of trust property.  Of particular importance was that Peter and Anna (the beneficiaries under the 1977 Deeds) on their actions consented to the continuation of the Trusts.

In relation to the residual extent of the power to amend the 1977 Deeds after the vesting date, the Court held that:

1. It is dependent on the construction of the provisions of the relevant trust deed whether a power to vary a deed exists after the vesting date;
2. The wording of the power of amendment here was such that it inter alia could be exercised “at any time”, as to alter, rescind or vary and or all of the trust provisions in any way and was limited only that it must be implemented by deed and not confer any beneficial interest on the Settlor or Trustee; and
3. This power was to be construed as permitting variations to the class of beneficiaries and the vesting date after the vesting date, provided such amendment was in written form and exercised for the benefit of and with the consent of the beneficiaries.

The Court acknowledged that the construction of the power to amend the 1977 Deed as a broad power capable of being exercised after vesting was inconsistent with Anna and Peter becoming absolutely entitled to the trust property on the vesting date.  However the Court held this could be overcome because the amendments were for their benefit and consented to by them (which could be seen by their actions and their execution of the 1991 Deeds).

In relation to the continuing nature of the trusts (as compared to the creation of new trusts, or resettlement of the trusts by way of the 1991 Deeds), the Court held that:

1. Because the scope of the amendment power in the 1977 Deeds was extremely broad, none of the amendments and variations in the 1991 Deeds went beyond the scope of the amendment power; and
2. The amendment did not affect the substratum of the trusts (the substratum being the purpose or underlying nature of the trust) as the purposes of the 1977 Deeds and 1991 Deeds were of the same nature (namely to benefit the Valentini family and to create a tax effective mechanism for spreading the income of the family enterprise in an advantageous way).

The effect of the amendments by way of the 1991 Deeds was not to create new trusts, but rather to continue the trusts in existence on the basis that there was a sufficient continuity of trust property, beneficiaries and the constitution of the trust.   

A full version of the judgment can be found here.

ATO Taxation Ruling TR 2018/6

Public rulings, including taxation rulings are binding advices made public by the ATO, which express the ATO’s interpretation of the laws they administer.  Taxation Ruling TR 2018/6 (the Taxation Ruling) (which is in force and has been since 2018) sets out the ATO’s position on the CGT and other taxation consequences of a trust vesting.

Specifically relevant here, the Taxation Ruling notes, at [8] that:

“However once the vesting date has passed, the trust has vested and it is no longer possible for a trustee to change the vesting date. Specifically, once the trust has vested, the interests in the trust property become fixed at law. This result cannot be avoided by the parties continuing to carry on as though the trust had not vested or by a purported exercise by the trustee of a power to vary the deed.  Further, neither a mistaken assumption that discretionary powers of appointment continue to apply after a trust’s vesting date, nor ignorance of the vesting date having occurred, can alter the legal and equitable rights of parties that are established by the terms of the trust on vesting.”

The Ruling then goes on to set out the possible taxation consequences of the vesting of a trust.

A full version of the tax ruling can be found here.

Effect of Re McGowan & Valentini on ATO Taxation Ruling TR 2018/6

The Court’s findings in Re McGowan & Valentini are in contrast to the ATO’s position that a trust’s terms, including its vesting date, cannot be varied after the date of vesting.

What the determination in Re McGowan & Valentini  has made clear is that the position at law is not an outright prohibition on the variation and continuation of a trust after vesting, even where under the terms of the trust deed the beneficiaries have an absolute entitlement to the trust property upon vesting.

The answer to whether a specific trust deed can be varied after vesting, and the effects of that variation is highly dependent upon the construction of the relevant trust deed in any case. Considerations of the construction of the specific power to vary a trust deed, the timing of when that variation can take place, what provisions of the trust deed can be varied and the interests of the beneficiaries are all considerations which the Court in Re McGowan & Valentini says must be taken into account in coming to such a determination.

In light of the findings in Re McGowan & Valentini It is likely that the ATO will look to review and amend their taxation ruling in relation to trust vesting, and the possible taxation consequences which flow from such a scenario.

Takeaway points

The main takeaway from Re McGowan & Valentini for trustees and their advisors is that they should:

1. Regularly review the relevant trust deed, to confirm they are continuing to act in accordance with the powers contained therein;
2. Ensure they know when the vesting date of the trust is, whether any events trigger vesting and what effect vesting has on the beneficiaries’ interests in the income and capital of the trust; and
3. Plan ahead.  Know the effect the vesting date will have upon the beneficiaries and their interests (i.e. taxation consequences and individual needs) and if need be and the trust deed allows, vary the vesting date accordingly prior to the vesting of the trust. 

Being aware of your powers and the terms of the trust can help you prevent and manage the risks of the types of issues which arose in Re McGowan & Valentini before they arise.  Parties are better placed to deal with these matters early, rather than require legal advice (or judicial determination) to determine rights and positions at a later period of time.  

In addition, while not at issue in this matter, there is a risk that in continuing the trust after the vesting date or in according not in accordance with the terms of a trust deed, a trustee may be found to be in breach of its obligations if an application is brought by an aggrieved beneficiary.