We have previously written about carefully reading the clauses of a trust deed when seeking to make variations. The recent Federal Court decision of Advanced Holdings once again exemplifies the adverse outcomes that can arise when protocols prescribed in a trust deed are not followed.

In Advanced Holdings, the Federal Court decided that the sole corporate unitholder (Advanced Holdings) of a unit trust (Unit Trust) held its units in its personal capacity rather than in its capacity as a trustee of a family discretionary trust (Family Trust). This is because the documentation in evidence did not substantiate that Advanced Holdings was validly appointed as trustee of the Family Trust. Specifically:

The principal of the Family Trust looked to rely on a specific clause under the Family Trust Deed to appoint Advanced Holdings as the trustee of the Family Trust.

However, the Federal Court held that clause empowered the removal of a trustee in office and to appoint a new trustee in substitution of the removed trustee. It was not, conversely, a power to appoint an additional trustee or trustees. That is, removal was a pre-condition of appointment.

Accordingly, the purported appointment by the principal was ineffective because resolutions had not been made to remove the current trustee at that time, Demien Holdings (Demian).
In addition, Demian did not retire as trustee in conformance with the terms of the Family Trust deed. The trustee retirement clause required Demian to give at least two months’ written notice before resigning from office.

Despite minutes of directors’ meetings of Demian and Advanced Holdings and references to a “Deed of Retirement and Appointment,” there was no evidence of a resignation notice being executed by Demian, or an adherence to the two months’ requirement under the Family Trust deed. One notice recorded the trustee’s resignation as “effective immediately,” which was in contravention of the Family Trust Deed.

Accordingly, the trustee of the Family Trust remained Demian.

Because of failing to observe the requirements under the trust deed, Advanced Holdings held its units in its personal capacity, rather than as trustee, meaning any distributions received from the Unit Trust were subject to corporate tax and not eligible for trust taxation treatment.

In summary, to vary a trust deed or seek to remove or appoint officeholders, make sure you carefully read the trust deed as the consequences of non-compliance can be significant. Or, as the saying goes, read the deed!

If you would like to discuss this article or require help with your trust deed, please contact one of our experts:

Edward Hennebry
Associate
T +61 3 9611 0113
E: ehennebry@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au