00:15
Mark Robertson KC (MR): Welcome everyone to this session that Level Twenty Seven is putting on. My name is Mark Robertson and I will be talking about a few recent Victorian Court of Appeal decisions on trustees dispositive discretions which I find quite disturbing. There has been some noises made in the professions recently about them. When this topic was advertised, I was surprised to receive quite a number of emails putting forward people's views about these decisions.
What I am going to do this afternoon is just take you back in time to the good old days when judgments were ex tempore which means after a trial the judge had made his mind up immediately and would then just speak off the cuff as to what he considered the legal result would be. Of course, this does not happen these days because issues are so complex and judges reserve for ages. So I thought because I have just finished a complex or what I thought was a complex seven day trial before Justice Logan. I thought I was doing pretty well. The judge said “Mr. Robertson, you going finish by lunchtime? Because I'd like to give an ex tempore judgment.” So, I don't know whether that is good or bad. But I did not finish by lunchtime so I will now have to wait three or four months.
TABOR V BROOKS
MR: What I wanted to do is read out an ex tempore judgment of Vice Chancellor Marlins in 1878, in a case Tabor v Brooks because this sets the scene one hundred and fifty years later. “Before the marriage took place between Mr. And Mrs. Tabor, it was well known that Mr. Tabor, who was then a young man of about twenty-five had long been addicted to habits of intemperance but he promised his intended wife that he would reform and lead a life of sobriety. And she, unfortunately for herself, believed him. As might have been expected, however, he soon after the marriage returned to his old habits and the result has been a life of misery and deprivation to the plaintiff who has obliged her for the last four years or thereabouts to live separate from him, it being impossible, as she says, on account of his drunken habits, that she should live with him, that he has been and I fear still is a drunkard of the worst description is I think, abundantly proved and is taken as admitted. The question I now have to decide arises under the marriage settlement of the parties dated, a certain date, which is in a very unusual form, no doubt on account of the then well-known habits of Mr Tabor.”
A marriage settlement back then was an arrangement where the father of the bride would convey certain property to trustees rather than to give a dowry so that if things might go wrong then his daughter would perhaps be looked after. Our settlor, the father of the bride chose Mrs. Tabor’s two brothers as the trustee. The whole stack of money, £10,000 has gone to Mrs. Tabor’s brothers and they were given discretions under the settlement.
“The trustees having executed the power of purchasing the life interests of Mr. Tabor and the settled fund, the result is that they now hold such as the trust funds have not been advanced to Mr. Tabor under a power contained in the settlement. It appeared before me upon an application in chambers that Mr. Tabor is now living in France, that Mrs. Tabor is living in London wholly unprovided for and that their son now rather more than seven years old is placed at school in Brighton at an expense of about £60 a year which is paid by the trustees out of the trust funds and that they were paying the whole of the remaining income, amounting to about £300 a year to Mr. Tabor, leaving Mrs. Tabor wholly destitute. Being then satisfied as I am now that Mr. Tabor has almost from the time of his marriage been of such confirmed drunken habits as to justify his wife in not continuing to live with him, I thought a fair application of the £300 a year would be to give it in equal shares to the husband and wife while they continue to live apart.” So, this is what the judge thinks is fair.
“The trustees, however, who are both brothers-in-law of Mr. Tabor…” actually Mrs. Tabor’s brothers “…think that Mrs. Tabor, notwithstanding the circumstances I have mentioned, ought to live with her husband, and I suppose, with the view of compelling her to do so, have paid the whole of the £300 a year to him and they insist that they have an uncontrollable right to do so with which the court cannot interfere and for the purpose of having that point decided the case was brought into court. The question I have to decide, therefore, is whether the absolute discretion which is vested in the trustees can be controlled by the court. As a general rule, the court will not interfere with the discretion of trustees where it is fairly and honestly exercised. But if they exercise their discretionary power in an arbitrary and unreasonable way the court will control them as I did where trustees capriciously persisted in not letting a father have the whole of a small income for the education and support of his children, though it was urgently needed on account of his limited means. But here, the power or discretion is to be uncontrolled and irresponsible. And Mr. Hawkins, the barrister relied on the decision of the House of Lords in Gisborne v Gisborne to show that such a discretion cannot be controlled by the courts. In that case, a fund was vested in trustees who were given an absolute discretion, an uncontrollable authority over its application and it was held that the court could not interfere with the discretion of the trustees in the application of the fund, always supposing that there was no malafides with regard to its exercise. I think that case is conclusive that under such a power of discretion as this, the court cannot interfere with trustees, so long as there is no malafides on their part. If the discretion of the trustees is to be absolute and uncontrollable, the court will not interfere. Here, although in the distressing circumstances of the case, the trustees would, in my opinion, act more wisely in dividing the fund between the husband and the wife than in giving it all to the husband. I cannot attribute any malafides to them in the course that they take and I regret, therefore, that I am unable to interfere with them.”
08:43
So, we have the ordinary situation where the court will interfere if the discretion is not exercised reasonably but where words “uncontrolled” are used or “irresponsible” or “absolute” then the court's jurisdiction is limited to fraud. The reason that is so is, at least in that time, the words and intentions of the settlor were paramount. You must remember that a settlor, person who has the money, can give…Anyone who can give his or her property to whomever they like and waste it as they like. If someone wants to create a trust, give money to someone else and say “Here are the beneficiaries. You can just give it to them as you like. Because I could do it, you can too. I am not going to hold you responsible for what you do. I am not going to let these beneficiaries drag you into court and tie up your valuable resources. Will you be a trustee for me in these circumstances?” The trustee says “All right mate, that's what you want. As long as I'm not dragged into court and as long as any fights between the beneficiaries as to what's fair or is not fair are not going to bother with my life, I will be your trustee. I will take that money and take that responsibility.” This type of provision does not absolve the trustee from investing the money wisely, it is quite a different thing, the High Court has said. But as far as the dispositive discretions are concerned, as long as I know who the beneficiaries are, or I know that one person is a beneficiary, I can give the property safely to that person, as long as there is no fraud. That was the thinking in the in the 19th century.
KARGAR V PAUL
MR: I might say, Gisborne v Gisborne was cited with approval by the Privy Council just last year, still the law in England. What I want to do is take you now to a case Karger v Paul. The reason I am taking you to that case is because it is relied on heavily by the Victorian Court of Appeal and these cases that we are looking at.
In Karger v Paul we had a situation where property was left on trust for two trustees. The testator’s, trickster’s solicitor and husband and the beneficiaries were the husband and a cousin who had been a good friend of the deceased for a while. The trustees had an uncontrolled absolute discretion as to which beneficiary should get the property. Our fellow says “Oh, okay, well, I vote that I give it to myself as beneficiary.” The solicitor said “Why not?” Then the property was given to the trustee as one of the beneficiaries the disappointed cousin went to court and said “Well, I should get something.” Justice McGarvie said “Well, the discretion was uncontrolled. As long as I was satisfied that the trustee knew he was a trustee and that he knew he was one of the beneficiaries then that is the end of the matter.”
The clever argument in the case for the cousin was that there was some evidence that our beneficiary thought he had a free option. He thought that he was just given an option to take the property for himself as opposed to being a trustee with a fiduciary duty to consider the beneficiaries, of which he was one, and then consider the exercise his discretion and give it to himself, subtly different from a free option. Justice McGarvie held, in the circumstances, the discretion is uncontrolled but there is the obvious limitation which almost goes without saying that the person must know that he is a trustee and must know that he is giving the property to a beneficiary. Simple, case dismissed and off they went.
14:38
Justice McGarvie did an excellent analysis of all the old English cases and what was critical was that the discretion was an unfettered, uncontrolled discretion. So, the case was just an orthodox application of the Gisborne v Gisborne principle.
Now, we move through the whole of the 20th century and we have a plethora of decisions of the House of Lords and the less decisions of the High Court. But certainly, whenever the High Court looked at the matter, they just said trustees have fiduciary duties, they have got to exercise them reasonably, they cannot exercise them wantonly or capriciously. However, if the discretions enlarge to be absolute discretion or an uncontrolled discretion then fraud must be proved. So, we just have an orthodox application of Gisborne v Gisborne and if the settlor wants to do that, well, that is all that is important.
But, we get to the Victorian Court of Appeal and we have exactly the same situation as Kargar v Paul in a modern context where we have a superannuation trust and there is a nominated person who is entitled to give the superannuation fund to dependents of the deceased. Or otherwise, if no nomination is made, then I think it just falls into the estate of the deceased. And so, we had the classic stepparent-child situation. The two dependents were the trustee, who I think was the daughter, and then I think that there was a stepfather. Now, that dynamic, and the stepfather was needy I suppose, but the daughter, the trustee, said “Well, okay” and went off and got legal advice, was told that she was a trustee and told that she was one of the dependents. She said “I'm gonna give everything to myself.”
Now, going back to Kargar v Paul orthodox, not a problem. The disappointed stepparent went off to the Victorian Supreme Court, ended up in the Court of Appeal to have that exercise of the uncontrollable discretion set aside. The Court of Appeal had no difficulty whatsoever in setting aside her exercise of discretion and replacing her as trustee. They said that there was a conflict of interest. Well, you think about that. You cannot be both trustee and beneficiary, what conflict is that? The set law says you can. There is a million years of case law saying that the trustee can be a beneficiary.
18:33
The trustee, the daughter, was insolent to her duties. Well, that begs the question as to what the duties are if she is given uncontrollable discretion. If she is given an ordinary discretion, well, yes, there are duties to act reasonably and take into account all these considerations. She may not have even known that her stepfather was a beneficiary and one of them was a dependent and so she had not done a survey of the eligible beneficiaries. Now, everyone in this room is a beneficiary of about a billion trusts, except to some particular people that are expressly excluded away – I am looking at some people. But, Kargar v Paul simply says as long as you identify a beneficiary and that person is a beneficiary then it does not matter that you have been reckless. As long as you have done your honest and competent best, it does not matter. As long as you have not been fraudulent, if that person is a beneficiary, you know, you are a trustee, you can give the whole lot to that person because the set law allows you to because that is what uncontrolled or absolute or irresponsible means.
20:22
But all of that was set to nought and the basis for the decision, leaving aside the broader jurist prudential, times have changed and judges now have a different view. Social justice seems to have been a misplaced analogy between admin law discretions and private law wishes of a settlor. I mean, there used to be from Julius v the Bishop of Oxford & Anor and a lot of old cases, admin law discretions where it was open to a decision maker to throw a request in the bin and it could not be reviewed. That type of thinking in admin law is still there on occasion but for the most part there is an irreducible, at least in the Federal sphere, a core obligation of a statutory decision maker to exercise a power having regard to relevant circumstances and not taking into account irrelevant circumstances and acting reasonably. We have this concept now in the High Court of legal reasonableness, is a decision legally reasonable? So, it seems like the this has been infected. This type of thinking infects the reasoning of the Victorian Court of Appeal. The House of Lords and the UK Court of Appeal in a case Pitt v Holt said that it is dangerous to draw analogies between public executive statutory exercise of powers and private law trustee duties. That warning which was made twenty years ago we now see in this decision of the Court of Appeal in Owies.
OWIES v JJE NOMINEES
22:42
MR: The decision is defiant. It says that one judge made an off the cuff comment in Gisborne v Gisborne and it should just be treated as dicta. The High Court's decision in Attorney General v Breckler which cited Gisborne as authority for this proposition, was cited in a tentative manner and Kargar v Paul stands as clear authority that the discretion must be exercised reasonably, even though on the facts of Kargar v Paul the trustee got away with it. It is, with respect, a decision which cannot withstand objective scrutiny when you go paragraph by paragraph, it is just simply wrong.
23:47
Now, one thinks, all right, special facts, social justice. We have come a bit of a way and the facts are really quite special. Trustee-beneficiary give everything to yourself. So, you can sort of see that decision is not really much of a problem and can be considered an aberration. The problem is that it has been followed in a further Victorian Court of Appeal decision in the ordinary discretionary trust context, and these days, discretionary trusts are used as a wealth management creation tool and which includes a tax minimisation tool. We all know that our family accountant sets up our structures for us as small business people and our accountant will say “Look, the business should be run through a company with asset protection advantages. The wealth should be put separately away from the company which is exposed to trading risks and it should be grown in a discretionary trust which gives you a lot of flexibility in relation to tax planning. Many structures involve a combination where you would have the business being run by a trustee and there would be a corporate beneficiary known as a ‘bucket company’ and every year the accountant would do the distribution minutes and dump all the taxable income to the corporate beneficiary. So, tax can be capped at 30 cents in the dollar and any capital gains on the long-held investments that the trustee might make would be distributed amongst the individual beneficiaries. Perhaps on paper they do not get it but at least on paper it is distributed to them so that they can get the advantage of the discount capital gains tax regime and everyone is happy because the taxable income or the tax impost for that year is minimised in accordance with the tax law, not a problem. It has been going on in accordance with the tax law. But now, what about trust law? Now, when one looks at all these discretionary trusts, you will see the Gisborne v Gisborne clause. All the dispositive powers of the trustee are to be uncontrolled and conversely the trustee is not liable for breach of trust, except for wilful default i.e. malafides.
So what now? This later case, Owies, Owies and Wareham are the two cases, involved that ordinary arrangement, but suddenly there is a massive family fight. Some of the kids say those discretions were not properly exercised in my favour and the trustee just did what the accountant said and it was done for tax reasons only and I was never properly considered. The trustees did not give real consideration to me as a beneficiary.
27:57
That argument was successful and the trustee was replaced and the exercise of the discretion was set aside. Absolute rubbish. If we go back to Kargar v Paul and all the cases, the only issue is whether the trustee knew it was a trustee, a lot of the time it is a corporate trustee, and was the distribution made to a beneficiary or an entity or person that qualified as a beneficiary. If those two things are met, that is the end of the matter. It does not matter how needy or deserving, as we can see from that Tabor v Brooks case, it does not matter how needy or deserving our snotty nosed little children are and nothing can be done about it. Yet, in this more recent Victorian Court of Appeals decision, if one of the children got more money than the other kids and that was held by the Court of Appeal to be wrong.
29:06
So, everything is now up for grabs. But what the Court of Appeal have basically done is say that the words ‘absolute’ or ‘irresponsible’ or ‘uncontrolled’ are meaningless and that we are now in the realm almost of public law where we are looking at this admin law test of legal reasonableness in the exercise of discretions where it seems that the courts are now almost diving in or this Victorian Court of Appeal decisions they dove into the merits of the actual decision.
RICHARD WALTER
MR: The converse proposition is one which was just exploded and rejected by the House of Lords in Pitt v Holt twenty years earlier, overruling a rule in Hastings-Bass. Now remember, the basic proposition is a trustee must act in accordance with the trust deed. If the trustee does not and the trustee has breached its trust, then it is up to the trustee to remedy that breach. It is not for the trustee to hide and do nothing. It is for the trustee…To get the property that has gone out of the trust to a person who is not a beneficiary because the trustee has made a mistake then the trustee has got to get it back. We see in the authorities like Livingston's case that when a beneficiary is claiming a right of property the beneficiary is claiming a ride of the trustees property and is seeking an order for due administration of the trust estate and requiring the trustee to exercise the trustee’s right to get the property back.
The classic example of that in a context which is relevant today is a case called Richard Walter. Here lies the danger of the decisions of the Court of Appeal when we look at it from the perspective of a trustee, of a naughty trustee. In that case, we had the Aurelius Commodus Trust. Now who has seen Gladiator? Marcus Aurelius was the was the poet-emperor or the philosopher-emperor and Commodus was Joaquin Phoenix, he was the evil fellow. One would think that is what they were adverting to and calling it the Aurelius Commodus Trust but Aurelius Commodus also means ‘golden toilet’.
Richard Walter concerned Jeffrey Eddleston and Richard Wanker. They made all their money when Medicare was introduced and it was rivers of gold. We had the white baby piano at the medical centres. I remember getting an affidavit over at a medical centre in the 80s, in the 90s, from a doctor. I came away with a tetanus jab and having signed a Medicare slip. It was rivers of gold coming in, or the pactalis. All this gold was coming into these trusts and being flushed down. This trustee lent money to Richard Walter which was public enemy number one for the tax office at the time. The tax office said that that loan was a sham and was not a real loan and it was truly a gift by the trustee to Richard Walter.
The Commissioner succeeded and Richard Walter got a massive tax bill on the basis that it had derived all this income. I was acting for Richard Walter and said “Well, okay, was Richard Walter a beneficiary of the trust? Why would a trustee be engaged in a sham fraudulent transaction that is effectively defrauding the beneficiaries of the trust assets?” Therefore, the trustee brought an action against Richard Walter for a return of all the money that it had given Richard Walter Pty Ltd.
So, you had a situation where the Commissioner of Taxation was an ordinary creditor of Richard Walter because Richard Walter owed all this tax. The trustee was a creditor in equity, claiming first priority and a beneficial interest in the assets of Richard Walter which would therefore defeat the rights of the ordinary creditors. So, the all the money would have to go back to the trustee and there would be nothing for the Commissioner of Taxation.
The Federal Court was extremely sceptical of this trustee who had for years done nothing but breached its fiduciary duties suddenly being so concerned with its fiduciary duty to the beneficiaries and defeated the claim because in New South Wales there is a ten-year statute of limitations for equitable claims. So good idea but bad luck, you missed out by reason of the statute limitations. Therefore, the Commissioner got all this money.
HASTINGS-BASS
MR: But the rule in Hastings-Bass is that you had all these trustees trying to avoid death duties in the UK and doing all these things, exercising the dispositive discretions and stuffing up for tax reasons and arguing “Well, my exercise of the discretion is void because I failed to take into account relevant considerations. I shouldn't have given it to this beneficiary because I failed to take into account that that beneficiary would have a big tax bill and so therefore that exercise of my power should be set aside and I should be able to re-exercise and give it to someone else.” That was rejected in the UK. One of the reasons why it was rejected is because the trustee’s discretion is absolute and uncontrolled. As long as the trustee is giving it to a beneficiary, tough luck if the trustee stuffs up on the tax avoidance. It is still a gift to that beneficiary and it is valid because the set law says it is valid.
Unfortunately, if Owies and Wareham are taken to the logical extreme, we are not going to have the situation where we have the disappointed warring brothers and sisters. Or, little Johnny's a quadriplegic, he cannot do anything. He is an infant. Soon as he turns 18, the lawyers come in, and they say “Okay, you should have been given all this money and looked after for all these years. You're now 18, you can now sue and go in and try and have things set aside.” Those fights are potentially going to happen now.
On the other side of the coin, we are going to have trustees revive this discredited rule in Hastings-Bass and say “No, I should have considered the taxation consequences. The law is very clear, trustees have to consider the taxation consequences. I got it wrong. I therefore took into account an irrelevant consideration. Therefore, I want the money back from this beneficiary.” Or, most of the time, the money has never gone to the beneficiary and we have a situation where the discretion is treated as void.
There is a lot of debate as to whether something is void or voidable. Very simply, if trustees own the property, if they transfer property to anyone, except in circumstances of fraud, then any equitable complaint in relation to the property which is now owned by the transferee is a complaint that the transaction is voidable. And so, the court of equity may set it aside, and may declare it void ab initio, or they might just set it aside. But where a trustee confers an entitlement to a transfer of property on a beneficiary but the property still remains owned by the trustee, then that declaration is either effective or ineffective, either valid or void, depending on whether it is authorised by the terms of the trust deed. In most of these cases, we will be dealing with situations where all the assets are still with the trustee and then we will get the Commissioner of Taxation’s worst nightmare which occurred in Richard Walter happening because the High Court recently in Kargar's case says that if income is appointed to a beneficiary and that beneficiary is entitled to the income at the 30th June then that beneficiary has got to pay the tax on it, come hell or high water, if that person is a beneficiary. But that beneficiary will, of course, want the money to pay the tax. But the trustee might say “Well, I didn't really consider the quadriplegic over here who's now made a claim, I should have. I will treat that as an improper exercise at my discretion because I didn't take that into account and I'm now setting aside all that discretion and giving all the money to Little Johnny over here.” So, we will have a disconnect between where the cash is and where the tax liability is. Now, you think that is a fantastic possibility. There are many people who have a whole range of views of what is moral and what is right, what is good tax planning, and what is within the law and outside the law. And some people…one part of the spectrum will think Owies and Wareham is a great opportunity to perhaps do something for what they think is in the best interest of their client.
OWIES & WAREHAM
MR: Leaving that terror aside, the more likely problem is that we will now have an Owies and Wareham situation in Queensland where there will be family warring and there will be many discretions attacked because the trustee has just acted in accordance with the accountant’s advice and dumped the income to the bucket company. There will be some judges who will take the view that that was simply for the benefit of the controller of the trust rather than for the benefit of the beneficiaries - that beneficiary is very needy and the discretion will be set aside.
I would think that we will get a decision in another state, Queensland or New South Wales. Based on the plethora of emails I have received, I am not the only person who thinks that there is something technically wrong with these decisions. There are very many barristers a lot cleverer than me and they will be torn apart in another coordinate jurisdiction. I reckon we will be seeing this in the High Court in the in the not too distant future. You can all read about it in the ALJ sometime next year, I think. I very rarely get annoyed at things and so don't put my head above the parapet so this will be the first article I have written for about fifteen years.
Q&A
MR: Any questions while we are here? We have all got our CPD point because it is after forty-five minutes I am told.
SPECIAL LEAVE TO OWIES & WAREHAM
Audience: [in audible question].
43:08
MR: The question is whether an application for special leave was made [to the Victoria decisions]? I do not know. The second one, I do not know that either. I did a search about two months ago to see whether there was any traction in other states and I could not find anything yet. But it must be on its way.
But one criterion for special leave is whether there are conflicting intermediate Court of Appeal decisions in various states that need to be resolved - public importance. I do not think the High Court likes intermediate court’s saying that their decisions on the point are sort of merely tentative. There are a lot more salacious cases here. I think that the complaint in Gisborne v Gisborne itself was that all the money had been given to a lunatic beneficiary and that was wrong. The best I have been able to find is that Tabor case.
DISCREATIONS LIMITED BY THE WORDS OF EXPANSION
44:46
MR: I must make it very clear that we are talking only about discretions that are limited or expanded by the words ‘absolute’ or ‘uncontrolled’. The Tabor case had the word ‘irresponsible’. So, if we were wanting to draft our trust deeds today, I would be adding the word ‘irresponsible’ to the discretion because that is pretty, super clear, isn't it? Trustee can act irresponsibly, you could even say it is a wanton, capricious or irresponsible discretion, if you wanted to at least focus the court on what you are intending to do.
Kargar v Paul also made it very clear, ironically, that the exception for fraud was fraud in the real sense of dishonesty. This is what annoys me so much because in Kargar v Paul, which was relied on by the Victorian Court of Appeal cases, to the very contrary of what it stood for, made it clear that the only exception was actual real fraud, rather than this species of equitable fraud which is acting for an improper purpose and all that. It may be our trust deeds might have to say “Except in the case of actual fraud, the discretion is on reviewable.” All this was discussed by the House of Lords in the Privy Council in the Dundee Hospital case as well. They made it very clear when testators use these types of words they are trying to ensure that these fights do not happen and that the courts are not to come involved and no one is to complain. That is the purpose of these words. It is your client, the testator’s trust deed or settlors trust deed, it is their wishes, they can say whatever they like. There is nothing wrong in making it crystal clear that our trustee who may not want to take the job unless it knows that it is not going to be sued has the testator’s wishes spelt out very clearly because it was not clear enough for two Victorian Courts of Appeal. So, I would add the word ‘irresponsible’ to our trust deed and I would be shoving that Tabor case in my opponent's face if a letter came in saying “You didn't consider my client beneficiary when you dumped all this property or this income into a corporate beneficiary.”
WHAT IS A MERITORIOUS CASE?
48:05
MR:Damian?
Audience: [in audible question].
48:31
MR: The question is, the trustee of our ordinary discretionary trust, where the class of beneficiaries is defined very widely, cannot possibly consider the circumstances of all the beneficiaries. And so, how could the court reviewing the matter itself do so and decide what is meritorious?
The answers to those two questions are, first, the trustee under an ordinary discretionary trust which does not have these words of expansion in them need not consider the circumstances of every beneficiary. The trustee need not even undertake a wide survey of the beneficiaries. It is sufficient that the trustee knows who the beneficiaries are. In most discretionary trusts, the trustees will be able to glean from sources, perhaps not in the trust deed but a letter of wishes, what the settlor’s general intentions are. That is what the House of Lords held in the case MacPhail v Doulton. You do not need to undertake a wide survey, you do not need to look at the circumstances of individual beneficiaries. Acting fairly does not mean acting equally. As long as the trustee has given sufficient consideration to the beneficiaries who get the money, then that is sufficient and cannot be impeached which provides the answer to the second question and this is the danger of these Court of Appeal decisions because it is crystal clear, even if words of limitation are not used, that the court's jurisdiction does not extend to how the discretion was exercised or why the discretion was exercised in the way it was because that goes into the merits. The court's jurisdiction, as was said in Kargar v Paul, is to look at whether the discretion was exercised in accordance with the terms of the trust deed.
GIVING REASONS IN DEEDS
MR: Yes?
51:34
Audience: [in audible question].
52:02
MR: This is the problem, you get yourself into more trouble. I mean, Cardinal Richelieu says “Let the most honest man write six lines and I'll find something in there to hang him by.” The moment the trustees delve into giving their reasons is the moment they are open to attack. Trustees do not have to give their reasons. Now, if the trustee has an uncontrolled absolute discretion, if a trustee gives their reason, as they did in Tabor v Tabor, “I gave all the money…we thought it was a good idea to give all the property, all the income, to the husband because we thought it was a good idea that our sister should go back and live with him.” Now, the court said “So what?”. The court examined that but it is uncontrolled. If it was not an uncontrolled, obviously, that is insane and capricious and wanton. It would be set aside and that is what the judge said he would do but for those words. But, the moment you try and protect yourself by saying I took into account a and b, some cousin down the road that you did not know about at the time might complain ten years later.
I am involved in a matter where that is exactly what has happened. In this, on your point, in these Victorian cases this is said “There is no doubt that under the Kargar v Paul principles the decision of a trustee may be reviewable for want of properly informed consideration. If the consideration is not properly informed, it is not genuine. In Kargar v Paul, the only information that the court was looking at was whether the person, whether the trustee, knew he was a trustee and a beneficiary. Duh, that was all there was in that case. This is why I am so annoyed because we have this strident comment “There is no doubt under Kargar v Paul principles” but you just read the case, says exactly the opposite but we are now in the realm, as you say, of properly informed consideration, so do we have to start creating documents to show how informed we were? And we are back to Cardinal Richelieu. Oh, well, you were informed to some extent we see that but not enough.
DISTRIBUTIONS & TAX
MR: Yes?
55:06
Audience: If a trustee asks for a distribution back, how is that handled as far as tax on such distribution is concerned? Would the beneficiary who got the money wrongly not be presently entitled? Would the distribution then be seen as an accumulation by the trustee and taxed accordingly?
55:28
MR: Well, I will have to send a fee note for that one.
55:37
My view is that the question of present entitlement to income for a particular year is a trust law question. It is ridiculous to think that a trustee can properly carry out his or her fiduciary duties to distribute income of a year, or any property, unless and until it knows what that income or what that property is. It is a complete breach of trust to distribute blindly property that you do not know is there. Your first duty is to get in the property and ascertain what the property is and what the income of the trust is. That is why the position is that trustees have a reasonable time after the property is got in to distribute it for a year. You have to wait for the accountants to tell you. So, you may not know for another six months after the end of the financial year what the income is. Then you say “All right, well, now I know that there's $100 or $100,000 there. I now know how much I can distribute out. I'm going to give $50,000 to that beneficiary, $50,000 to that beneficiary. They will be presently entitled to the trustee income for year. Then the Tax Act follows from that. But the High Court in Kargar's case says “No. For tax purposes, you have to be entitled to the income at the 30th of June or you have to determine who has the entitlement the 30th of June.
Now, that does not answer and which in my view is a nonsense because it requires every trustee in the country to breach its trust because it has got to guess before it knows what it is. But assuming that to be so, we have a situation where the trustee, we are not dealing with an absolute discretion, we are just dealing with an ordinary one, where the trustee genuinely has failed to take into account a consideration and has appointed the property, income, to a particular beneficiary three months later realises “Oh my God, I didn't consider the pressing needs of this beneficiary. I received a letter, which I misread. Reading it now, really the money should go to that beneficiary. I haven't given it to the first beneficiary. And so, I'm setting aside the discretion.” In those circumstances, we have a real problem because forget about tax for trust law purposes, there will be a fight between the two beneficiaries, saying “Who's going to get the money?” It is going to be the second one. Again, not dealing with a trust with these words of [inaudible]. So, the second beneficiary is going to get the actual money. The problem for tax purposes is that the first beneficiary might have already been taxed on it. Or, if no one is entitled at the 30th of June, the default clause of the trust might suggest that the default beneficiaries are presently entitled to the 30th of June, so they are taxed on it. And you cannot explain.
Now in the good old days, when John Howard was the Treasurer of Australia and he was the default beneficiary. He never got any money but he got all these tax bills because of this situation. I am wondering what would happen if some mischievous settlor made as the default beneficiary the seven justices of the High Court who decided Kargar's case because Kargar's case says you cannot disclaim. If they were presently entitled under the trust deed, it does not matter if they get nothing, they have the tax liability.
So, answer, tax liability might not change but tax is a tale. Trust law is the dog. Always start with trust law and work out who is entitled by reference to trust law and then try and get to the best tax outcome you can afterwards.
1:00:30
Question up here?
1:00:35
Audience: [in audible].
1:00:44
MR: Oh, is that right? Oh, there you have it. If there is a breach of the TFN obligation, then that would not avail our poor beneficiary though.
OWIES & WAREHAM’S EFFECT ON TRUSTEE EXPOSURE
1:01:01
Next question? Yes, Chris.
1:01:03
Audience: I imagine a number of people in this room are at some stage going to be asked to be an individual trustee of an evidentiary trust. So, being selfish for a minute, these cases, do you think, they will affect us in terms of exposure?
1:01:27
MR: Greatly. That is why I am saying, okay, this is exactly the situation. I am only going to be a trustee if I am not dragged into court, by the kids or the grandkids. I don't want my…You have selected me because you trust me, that is the only reason. I am not a professional trustee. You have selected me because you have trusted me. I will do my best for you. I will do my honest best for you but I do not want to be dragged into court. So purely selfishly, you would go to someone like me and brief an absolute uncontrolled discretion clause to make it crystal clear that except in the case of actual fraud, your decisions cannot be challenged.
Audience: So, look at amending the deed?
1:02:26
MR: Well, that is the problem because a trustee, if it has a limit on its power cannot amend its own deed to remove that limit.
1:02:37
Audience: So you are saying, with the prospect of discretionary testamentary income trusts, maybe change the typical wording?
1:02:45
MR: Exactly. That is what the words mean everywhere in the common law world except in Victoria. You could make the proper law of the trust the law of Queensland or the law of the UK or something.
Well, that is it. Thank you online audience and thank you all here as well. There are some refreshments and hope you stay and have a bit more of a discussion.
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