Why is it important to hold the original trust deed?

 

Trustees should hold the stamped original trust deed for the following reasons:

 

1. if there is a dispute as to the terms of the trust deed (for example, what they are or how they operate), then there will be difficulties if any party to the dispute wants to rely on an unstamped copy of the trust deed to settle the dispute out of Court. This is because the unstamped trust deed cannot be used as evidence in a Court: s 304 of the Duties Act 1997 (NSW). It is like a blank piece of paper as far as the judge is concerned. It is true that an unstamped trust deed can be used for certain purposes but the prima facie position is that an unstamped trust deed cannot be tendered in evidence;

 

2. where dutiable property is held by a trust and there is a need or desire to change the trustee, then the NSW Office of State Revenue (‘OSR’) will call for production of the stamped trust deed before it will stamp the “transfer of trustee” instrument with nominal stamp duty of $50. Section 54(3) of the Duties Act 1997 (NSW) and Revenue Ruling DUT 37 deal with this issue. If the stamped trust deed (or sometimes a clear copy of it) is not produced, full ad valorem duty can be imposed;

 

3. third party financiers (including banks) often request the production of the trust deed so that they can check to see that the trustee is authorised to borrow the funds and enter into the proposed security documents.

 

Trustees should hold a copy of the trust deed even if it is unstamped for the following reasons:

 

1. under case law going back to the 19th century, a trustee has a duty to ascertain the terms of the trust and to administer the trust in accordance with the terms of the trust deed. Failure to do so can expose the trustee to claims by the beneficiaries that the relevant trustee actions are void and that the trustee must make good any loss incurred as a result of the trustee’s invalid actions;

 

2. nineteenth century and early twentieth century cases show that a trust can only carry on a business (or do anything else for that matter) if it is permitted (either expressly or impliedly) by the trust deed. How do you prove that the trustee is authorised to carry on a business or do whatever else is in dispute, if there is no trust deed? Queensland and Western Australia (but no other States or Territories) give limited rights to a testator under a will or the settlor of a trust to carry on a business for a period of up to 2 years but only for the purpose of winding it up. See the Trusts Act 1973 (Qld) and the Trustees Act 1962 (WA);

 

3. in the event of an audit, it will be difficult to satisfy the ATO as to certain aspects of the trust – for example, who the beneficiaries are, who is “presently entitled” to the income of the trust, and whether the trustee has a power to stream income or to reclassify income – if a signed copy of the trust deed is unavailable;

 

4. the trust deed cannot be varied unless the trustee knows the terms of the variation power. It is likely that the trustee and the appointor will not be able to be changed without access to a signed copy of the trust deed because the trustee will not know the rules pertaining to these changes.

 

What to do when a copy of the stamped trust deed is located

 

If the trustee has found a copy of the stamped trust deed, then the way forward is relatively easy.

 

It is generally a good idea to create a “replica original” trust deed. You never know when a financier wants to sight the stamped original for financing or refinancing purposes.

 

In NSW, a replica trust deed can be created by the settlor and the trustee executing a new trust deed the terms of which are exactly the same as the old trust deed. The trustee then completes the Replica Instruments Form (ODA 019). A copy of the stamped original trust deed has to be annexed to the Form.

 

The Form requires details of the OSR receipt number for the stamp duty paid when the trust deed was originally stamped. This will appear within the stamp duty on the copy of the stamped trust deed. Where this can be made out, then only $50 duty is payable on the replica deed: s 272 of the Duties Act 1997 (NSW). The duty is payable by any party to the replica deed. The Commissioner of Stamp Duty will stamp a replica deed in a way which denotes that it is a replica.

 

Unstamped signed copy of the trust deed is found

 

In NSW, an original trust deed can be stamped out of time (after 3 months from date of first execution).

 

The procedure is that the trust deed is lodged at the OSR together with a statutory declaration verifying the assets in the trust when the trust was established. This is a reference to the settlement sum which is generally $100 or so.

 

Duty on the trust deed is likely to be the stamp duty on the initial declaration of trust. In NSW, this is $500 on and after 1 January 2009, plus interest on that sum. If the trust deed was established before the Duties Act 1997 (NSW) came into effect, then the duty will likely be $200 plus a $200 penalty.

 

Where only an unstamped copy of the trust deed is found, the practice of the OSR is to stamp the copy under s 299 of the Duties Act 1997 (NSW). Section 299 is to the effect that the unstamped copy will be stamped as if it were an unstamped original.

 

The OSR often requires evidence to prove the date that the trust was established. Evidence that can be used to satisfy the Commissioner includes a statutory declaration from the trustee or settlor as to the date the trust deed was signed, and attaching the financial accounts and bank statements of the trust from its inception.

 

Unstamped unsigned copy of trust deed found

 

If the parties (i.e. the settlor and trustee) sign an unstamped and unsigned copy of the trust deed after it is discovered as such, then ad valorem stamp duty will be likely to be payable. This is because an acknowledgment of a pre-existing trust can constitute a declaration of trust. Under section 8 of the Duties Act 1997 (NSW), a declaration of trust is dutiable as such, regardless as to whether any trust interests are created.

 

Is the declaration regarded as a declaration over the $10 or $100 settlement sum referred to in the trust deed or is it over the current ad valorem value of dutiable property in the trust? There is no guidance on this point from either the stamp duty legislation or the stamp duty rulings.

 

It is always important to check whether the trust has any dutiable property. For example, it may be a family investment trust holding only listed shares. If that is the case, then there may be no stamp duty issue on the signing the trust deed now, other than the stamp duty outstanding on the initial declaration of trust plus interest.

 

There would only be a capital gains tax issue if this causes a resettlement of the trust under CGT Event E1. Where there is strong external evidence to show that the unsigned copy of the trust deed was in fact the terms of the trust, then this risk is mitigated because no new trust is being declared. All that is taking place is that the terms of the trust deed are being affirmed.

 

An alternative way of proceeding is to arrange for the settlor (if they are still alive) or the trustee to sign a statutory declaration affirming that the unsigned unstamped copy comprise the whole of the trust deed. The unsigned unstamped copy of the trust deed would be annexed to the statutory declaration.

 

The NSW OSR will stamp the statutory declaration as a copy under s 299 of the Duties Act 1997 (NSW) provided that the Commissioner is convinced that the annexed unsigned copy is wholly or substantially the same as the original signed trust deed. Annexing the financial accounts and bank statements to the statutory declaration to show the establishment date of the trust will be of great assistance in this regard.

 

The duty payable would be the duty for the declaration of trust (i.e. $200 or $500 depending on when the trust was established) plus outstanding interest or a $200 penalty depending on when the trust was established.

 

No copy of the trust deed can be found

 

If no copy of the trust deed can be found, then the trustee is operating blindfolded and it has no guidance like that which the Corporations Act gives to a company which has mislaid its constitution.

 

There are essentially two options. The trustee:

 

1. continues to operate the trust in accordance with the limited powers contained in the Trustee Act 1925 (NSW). The Trustee Act is over 90 years old and contains what in 2017 is regarded as minimalist requirements regulating the day to day operation of trusts. In addition, the powers conferred by the Trustee Act are stated to be subject to the provisions of the trust deed but if no one knows what the trust deed says on the particular power being exercised, uncertainty is the result. And if the trust carries on a business then there are other problems because a trustee cannot carry on a business without being expressly empowered to do so. Accordingly, this alternative is really only available for investment trusts. If the trust is not an investment trust it is a dangerous and imprudent course of action for any trustee to pursue this alternative.

 

2. applies to the Supreme Court under s 81 of the Trustee Act for an order that the trustee be able to adopt a new restated trust deed. This is usually only resorted to where the trustee is virtually totally ignorant of the detailed terms of the trust. It is the most costly option. Accordingly, best efforts should be made to find the stamped trust deed before the application is made. Enquiries ought to be made of banks, lawyers, accountants and other advisers. Essentially the trustee has to try to find out at least the general terms of the trust deed. One obvious way might be to identify a similar trust deed from the same provider which was supplied at or around the time the trust was established. Key identifiers which indicate an identical or similar trust deed include the beneficiaries, trustees, settlor and the date of establishment of the trust.

 

The trustee as plaintiff initiates the application and the settlor (if alive) consents to the application. The principal beneficiaries should also be plaintiffs to the application.

 

Affidavit evidence from the settlor (if alive), the trustee or the original and current directors of a corporate trustee and the principal beneficiaries are then filed in support of the originating motion.

 

The Court will want to know about the trust, its terms, its administration and its assets.

 

Whilst the Court is not usually interested in whether the trustee is facing any emergency, it must be satisfied that granting the order is expedient in all the circumstances. But the Court cannot alter the substantial nature of the trust, or terminate it or generally alter its objects.

 

Where the trustee has no knowledge whatsoever of the terms of the trust deed and in particular as to whether it contained a variation power, s 81 may be of doubtful assistance.

 

The complete absence of the original trust deed will, very frequently, render adducing evidence as to its contents difficult. A successful application under s 81 is not likely to be an easy exercise.

 

The law in this area is far from settled. Case law indicates that where the original trust deed has been lost and secondary evidence is tendered in court to establish the contents of the lost trust deed, there must be clear and convincing proof not only of the existence of the trust but also the relevant contents of the trust deed.

 

If the application is successful, a restated trust deed ordered to apply under s 81 will provide certainty for the administration of the trust moving forward.

 

No resettlement of the trust occurs where either of these options is undertaken.

 

Other Options

 

Other options which could be suggested but which are problematic include:

 

1. executing a Restatement Deed or Deed of Confirmation;

2. having all the beneficiaries agree to vary the rules of the trust to incorporate a new written trust deed.

 

Restatement Deed or Deed of Confirmation

 

There are two ways that this approach is implemented:

 

(i) having the trustee and settlor execute the Restatement Deed; or

 

(ii) having a person connected with the trust (eg. settlor or the trustee) sign a statutory declaration affirming the terms and existence of the trust and attaching to the declaration a summary of those terms as far as they can be related. For example, one could attach a copy of any unsigned trust deed which is likely to outline the terms of the trust. The same version of a trust as that which was provided by the same trust provider at the relevant time could suffice in this regard.

 

Whether a Restatement Deed or statutory declaration is adopted, both would involve similar terms. That is, the documents would recite:

 

1. the details of the trust as far as it is known (e.g. date of establishment and who the trustee, appointor and settlor and beneficiaries were);

 

2. the efforts that the trustee and others have made to locate the original; and

 

3. that to the best knowledge of the person signing the Restatement Deed or statutory declaration, (i.e. the trustee, appointor or settlor) that the terms of the lost trust deed are similar to the terms outlined in the new restated trust deed.
Unfortunately, whilst the Restatement Deed or statutory declaration may provide a trust deed for the trustee and beneficiaries to follow, neither of these alternatives address the stamp duty issue as to whether the original declaration of trust was ever stamped.

 

So unless you can prove that the terms of the new restated trust deed are the same as those which applied in the lost trust deed, then there is always a risk of the OSR considering the arrangement as a resettlement. The cases of Commercial Nominees and Clark outlined a broad view of when a resettlement occurs, but they will not help in arguing against a resettlement occurring in these circumstances. This is because in those cases the variation to the trust was in accordance with the variation power in the trust deed. But where the trust deed is lost, it is impossible to prove that this is the case.

 

What is more – even though the variation might not amount to a resettlement, there is a risk that the Restatement Deed or statutory declaration are ineffective because the trustee will be unable to prove that the variation (effected by the Restatement Deed or statutory declaration) was within the variation power. Moreover, you can never be entirely sure that the trustee is acting within its powers when it is doing anything.

 

In addition, even though the parties agree amongst themselves on their contractual rights and obligations, such an agreement does not bind third parties like the Commissioner of stamp duties. Therefore if the Commissioner disputes the terms of the trust deed or the existence of the trust, the trustee and beneficiaries will need to prove that the terms of the restated trust deed are the same as the lost trust deed to avoid ad valorem duty being applied.

 

The NSW OSR may stamp the Restatement Deed or statutory declaration as a copy under s 299 of the Duties Act 1977 (NSW) if they can be convinced that the terms of the restated trust deed are substantially the same as the original deed.

 

Having all the beneficiaries agree to the Restated Deed

 

All the beneficiaries – if they are sui juris, absolutely entitled and unanimous – may direct the trustee to depart from the strict terms of the trust and the trustee will not incur a liability if their directions are followed. Beneficiaries can therefore band together and adopt the restated trust deed.

 

To invoke this rule, you need to identify all the beneficiaries in the trust. This may be possible in a fixed unit trust, but for a superannuation fund and discretionary trust, it may be difficult to determine all the beneficiaries and also obtain their consent. Some of the beneficiaries may as yet be unborn and often may not be sui juris and therefore cannot consent to the variation. In Kafataris v DCT [2008] FCA 1454, it was held that a beneficiary of a superannuation fund can be anyone who might one day receive death benefits upon the death of a member.

 

Conclusion

 

Most of the above options are risky and unpalatable. The take home message is to keep the original fully signed and dated trust deed under lock and key and make as many copies of it as you may need.

 

28 September 2017

 

Leigh Adams
Special Counsel
Owen Hodge Lawyers