FEDERAL COURT OF AUSTRALIA

Oswal v Commissioner of Taxation [2013] FCA 745

THE COURT ORDERS THAT:

1.    Question 1:

Whether Mrs Radhika Pankaj Oswal and Mr Pankaj Oswal became “absolutely entitled” within s 104-75 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) in the income year ended 30 June 2007 to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust.

Is answered: No.

2.    Question 2:

Whether either CGT event E1 or CGT event A1 happened in relation to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust at any time during the income year ended 30 June 2007, pursuant to either s 104-55 or s 104-10 of the ITAA 1997.

Is answered: Yes; CGT event E1 happened in relation to 902 shares in Burrup Holdings Pty Ltd during the income year ended 30 June 2007 pursuant to s 104-55 of the ITAA 1997.

3.    At the next directions hearing, the parties bring in short minutes of order by way of a schedule for preparing the outstanding issues in the proceedings for hearing.

4.    The proceedings be listed for further directions on 7 August 2013 at 9:30 a.m.

5.    Costs to date, be costs in the cause.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    On 19 December 2012, the Court ordered, pursuant to an interlocutory application filed by the applicants on 3 September 2012, that the following question be determined as a separate and preliminary question under Rule 30.01 of the Federal Court Rules 2011:

Whether Mrs Radhika Pankaj Oswal and Mr Pankaj Oswal became “absolutely entitled” within s 104-75 of the Income Tax Assessment Act 1997 (Cth) in the income year ended 30 June 2007 to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust.

2    Section 104-75 is concerned with when CGT event E5 happens.

3    At the same time, the Court granted the respondent (“Commissioner”) liberty to apply to the Court by 28 March 2013 for an additional preliminary question to be so determined. By interlocutory application dated 28 March 2013, the Commissioner proposed that the following additional question be determined as a separate and preliminary question under Rule 30.01:

Whether either CGT event E1 or CGT event A1 happened in relation to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust at any time during the income year ended 30 June 2007, pursuant to either s 104-55 or s 104-10 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

4    The separate and preliminary questions proposed by the applicants and the Commissioner arise in proceedings which concern appeals by the applicants pursuant to Pt IVC of the Taxation Administration Act 1953 (Cth) (“TAA”) in respect of :

Mrs Radhika Oswal (“Mrs Oswal”):

(1)    The objection decision dated 20 April 2012 disallowing in full an objection to an assessment of income tax and an assessment of penalty (both dated 22 February 2011) in respect of the income year ended 30 June 2007 (“2007 income year”); and

(2)    The objection decision dated 20 April 2012 disallowing in full an objection to an assessment of penalty dated 22 February 2011 in respect of the income year ended 30 June 2010 (“2010 income year”).

Mr Pankaj Oswal (“Mr Oswal”):

(3)    The objection decision dated 20 April 2012 disallowing in full an objection to an “alternative” amended assessment of income tax and an assessment of penalty (both dated 22 February 2011) in respect of the 2007 income year.

Mr Oswal as trustee of the Burrup Trust:

(4)    The objection decision dated 24 April 2012 disallowing in full an objection to an “alternative” assessment of income tax and an assessment of penalty (both dated 22 February 2011) in respect of the 2007 income year.

5    Each of the separate questions referred to in [1] and [3] above concern only the 2007 income year.

6    The appeal in relation to the 2010 income year will need to be determined by the Court irrespective of the outcome of its determination of the separate and preliminary questions concerning the 2007 income year.

7    In relation to the 2007 income year the Commissioner contended that:

(1)    Mrs Oswal was presently entitled to 100% of the income of a trust fund called the Burrup Trust, by virtue of a resolution made by Mr Oswal as trustee of the Burrup Trust in respect of the 2007 income year on 26 June 2007.

(2)    The net income of the Burrup Trust in the 2007 income year for the purposes of Div 6 of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) included a capital gain that arose under CGT event E1 and/or CGT event A1 or, alternatively, CGT event E5.

(3)    CGT event E1 and/or CGT event Al, or alternatively, CGT event E5, happened as a consequence of a resolution made by Mr Oswal as trustee of the Burrup Trust on or about 13 March 2007 in respect of part of the corpus of that trust fund, said to be 1,148 shares in Burrup Holdings Pty Ltd (“Burrup Holdings”).

(4)    In the alternative to para (1), if Mrs Oswal was not presently entitled to 100% of the income of the Burrup Trust in the 2007 income year pursuant to the resolution of the trustee of the Burrup Trust of 26 June 2007, then she was instead presently entitled to one-third of the income of the Burrup Trust pursuant to certain default income provisions contained in the deed pursuant to which the Burrup Trust was established. Under those provisions, Mr Oswal and Miss Vasundhara Oswal (being the daughter of Mr and Mrs Oswal who was under a legal disability in the 2007 income year) would also have been entitled to one-third each of the income of the Burrup Trust in the 2007 income year. “Alternative” assessments have been issued to Mr Oswal and Mr Oswal as trustee (on behalf of Vasundhara Oswal) to cover this possibility and these are the subject of the proceedings NSD 851 and 852 of 2012.

8    The applicants contend that none of the CGT events upon which the Commissioner relies happened as a consequence of the 13 March 2007 resolution in respect of part of the corpus of the Burrup Trust, being the 1,148 shares in Burrup Holdings.

9    If the Court agrees with the applicants’ contention, the applicants’ Pt IVC appeals must be allowed. If not, further questions will arise for determination – including whether the shares in Burrup Holdings were in the 2007 income year “taxable Australian property” pursuant to s 855-15 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), Item 2(a) of the table – an indirect Australian real property interest (see s 855-20). These further questions raise valuation issues which are likely to call for extensive expert evidence from both sides. Depending on how the preliminary questions are answered, this could be avoided.

Factual Context

10    The facts relevant to a resolution of the separate questions may be shortly stated.

11    By deed dated 22 June 2001 (“Burrup Trust Deed”), the Burrup Trust (then known as the Vasundhara Trust) was established. Mr Oswal was, in the 2007 income year, the “Trustee”, the “Guardian” and the “Appointor” of the Burrup Trust. The “Primary Beneficiaries” of the Burrup Trust were Mrs Oswal, Mr Oswal and Vasundhara Oswal.

12    Burrup Holdings was incorporated on 14 June 2001. By the beginning of the 2007 income year, the shareholders in Burrup Holdings were:

(1)    Mr Oswal, as trustee of the Burrup Trust, held 902 shares, which was equal to 55% of the total issued capital of the company;

(2)    Yara Australia Pty Ltd (“Yara”) held 492 shares, which was equal to 30% of the total issued capital of the company; and

(3)    Mr Rambal, as trustee of the Vikas Rambal Family Trust (“VRFT”), held 246 shares, which was equal to 15% of the total issued capital of the company.

13    On 12 January 2007, certain legal proceedings brought by Mr Rambal on behalf of the VRFT were resolved pursuant to a heads of agreement. Under the heads of agreement, in consideration for payment of a sum of $75 million, Mr Rambal was to deliver duly executed share transfer forms and share certificates to Mr Oswal in respect of shares in certain companies, including VRFT’s 246 shares in Burrup Holdings.

14    On or about 13 March 2007, Mr Oswal, as trustee of the Burrup Trust, resolved as follows:

I, Pankaj Oswal, being the Trustee of the Burrup Trust and having obtained consent of the Guardian of the Burrup Trust, do hereby resolve pursuant to Clause 17.1 of the Deed of Trust, to appoint for the absolute benefit of the named beneficiaries below, a part of the corpus of the trust as detailed below. Henceforth the corpus so appointed and income or accretion of capital there from shall be held on separate trust and for the absolute benefit of the named beneficiaries in their own individual capacities.

Mr Pankaj Oswal – 574 shares in Burrup Holdings Pty Ltd

Mrs Radhika Oswal – 574 shares in Burrup Holdings Pty Ltd.

15    Mr Oswal signed an instrument dated 13 March 2007 containing a resolution in the terms set out in [14] above. It is not clear whether this instrument constitutes the resolution or whether it is merely evidence that a resolution in these terms was made, but nothing turns on this so far as the efficacy of the appointment and declaration, if any, made by the resolution is concerned. Both parties accept that a resolution in the terms of that contained in the instrument of 13 March 2007 occurred on or about that date and that the appointment and declaration, if any, referred to therein took effect according to their terms save that, as at 13 March 2007, Mr Oswal, as trustee of the Burrup Trust, held only 902 shares in Burrup Holdings. In referring to 1,148 shares, the 13 March 2007 resolution apparently included the 246 shares which Mr Oswal, as trustee of the Burrup Trust, had agreed, pursuant to the heads of agreement with Mr Rambal, to purchase from VRFT.

16    On 26 April 2007, as contemplated by the heads of agreement, Mr Oswal and Mr Rambal entered into a deed by which, inter alia, the shares in [12(3)] above were to be transferred to Mr Oswal, as trustee of the Burrup Trust. The share transfer was registered in the share register of Burrup Holdings on a date between 26 April 2007 and 18 September 2008, probably around 22 May 2007.

17    However, the shares in Burrup Holdings the subject of the 13 March 2007, resolution were not transferred to either Mr or Mrs Oswal in 2007. Nor did Mr Oswal make, or cause to be made, any change to the register of members of Burrup Holdings in 2007. It was not until on or about 18 September 2008 that Mr Basil Lenzo, General Counsel for Burrup Holdings, made the following entries in the register of members of Burrup Holdings:

(1)    An entry recording Mr Oswal as trustee as having transferred 1,148 shares in Burrup Holdings on 13 March 2007 and 26 April 2007.

(2)    an entry recording Mr Oswal as having acquired 574 shares on 26 April 2007; and

(3)    an entry recording Mrs Oswal as having acquired 574 shares in 26 April 2007.

18    Mr Lenzo formed the view that the entries should be dated 13 March 2007 and 26 April 2007 without reviewing the Burrup Trust Deed, without any direction from Mr Oswal and without a share transfer form. The entry dated 13 March 2007 was later amended to bear the date 26 April 2007.

19    The making of entries in the share register of Burrup Holdings was the subject of findings of fact made by Martin J in Oswal v Yara Australia Pty Ltd [No 3] [2011] WASC 255. His Honour found that the entries showing a transfer of shares from the trustee to Mr Oswal and Mrs Oswal in accordance with the 13 March 2007 resolution were made on 18 September 2008 (at [251], [252]). The entry made on 18 September 2008 in relation to the trustee was backdated to 13 March 2007, and was subsequently “whited out” and changed to 26 April 2007 (at [251], [252], [274–276]). The entries made on 18 September 2008 in relation to Mr and Mrs Oswal were backdated to 26 April 2007 (at [251], [252]).

20    On 26 June 2007, Mr Oswal as trustee of the Burrup Trust, resolved that the net income of the Burrup Trust for the 2007 income year be dealt with as follows:

The said income shall be applied for the benefit of the beneficiaries listed below, for the amount shown by setting the same aside and by crediting the same beneficiaries in the books of the Trust. Such sums shall, upon being so credited, rest in and become the absolute property of these beneficiaries and shall be held by them separately as Trust Funds. The Trustee shall distribute the net income of the trust as follows:

Beneficiary            Allocation

Mrs Radhika Pankaj Oswal    100%

and the necessary book entries to give effect to the foregoing to be made as soon as practicable.

21    At all times between 13 March 2007 and 30 June 2007, the trustee of the Burrup Trust:

(1)    Owed legal fees to Maxim Litigation Consultants (now Lavan Legal); and

(2)    owed approximately $340 million to ANZ Bank and other lenders under outstanding facilities, although the Commissioner puts in issue an amount of $75 million said to be owed to ANZ Bank.

The 13 March 2007 Resolution and its effect

22    The 13 March 2007 resolution is expressed as an appointment of part of the corpus of the Burrup Trust, identified as being shares in Burrup Holdings, for the absolute benefit of Mr Oswal as to 574 shares and for the absolute benefit of Mrs Oswal as to 574 shares; it further provides that the corpus so appointed shall be held on separate trust for their absolute benefit in their individual capacities. The appointment is expressed to be made pursuant to cl 17.1 of the Burrup Trust Deed.

23    Clause 17.1 of the Burrup Trust Deed provides:

17    APPLICATION OF CAPITAL BEFORE VESTING DAY

17.1    Capital of Fund

If:

(a)    a Guardian is then in office, clause 27 does not apply, and the Guardian consents; or

(b)    no Guardian is then in office;

the Trustee may from time to time before the Vesting Day whether or not the Trustee has made an appointment under clause 16.1, appoint, apply, or distribute, the whole or any part of the capital of the Fund to or for a General Beneficiary for the Beneficiary’s own use and benefit or for the maintenance, education, advancement, or benefit, of a General Beneficiary.

24    Clearly the appointment made by the 13 March 2007 resolution is authorised by cl 17.1. The appointment is confined to an identified part of the corpus of the trust fund, and later references in the resolution to “income” and “accretion of capital” are declaratory of the consequences of the appointment of that part of the corpus of the trust fund so identified.

25    The applicants contended that the effect of the appointment made by the 13 March 2007 resolution was to establish a separate fund of assets under the “umbrella” of the Burrup Trust, but that the appointment did not create a new trust in respect of the Burrup Holdings shares. In support of this contention they relied on three matters: the provisions of the Burrup Trust Deed, especially cl 12; the reasoning and conclusion of Martin J in Oswal v Yara Australia [No 3] at [210]–[213]; and what fell from Lord Wilberforce, with whom the majority of their Lordships agreed, in Roome v Edwards [1982] AC 279. I shall deal with each of these matters before moving on to my analysis of whether CGT event E1 happened in consequence of the appointment and declaration, if any, made by the 13 March 2007 resolution.

26    It may well be the case that the appointment established a separate fund in respect of the Burrup Holdings shares, but if it did, I am not persuaded that cl 12.1 of the Burrup Trust Deed contributed to, or has anything relevant to say about, that result, nor am I persuaded that any separate fund so established was a “Beneficiary’s Fund” for the purposes of the Burrup Trust Deed. It is necessary that I explain my position on this point.

27    Clause 12 of the Burrup Trust Deed is headed “INCOME HELD AS A SEPARATE FUND”. Clauses 12.1 and 12.2 provide:

12.1    Separate fund

An amount set aside for a Beneficiary under clauses 7 and 10 or 17 will be held by the Trustee as a separate fund on trust for the Beneficiary and until payment to that Beneficiary or any person in trust for that Beneficiary, the accretions to and income from that investment will belong to that Beneficiary.

12.2    Trustee’s Powers and Indemnities

The Trustee’s Powers and the indemnities granted by clauses 19 to 26 apply to a Beneficiary’s Fund.

28    Like cl 12, cll 7 and 10 are concerned with income of the “Fund”. Like cl 12, cll 7.2, 7.3 and 10.1 refer to income of the Fund being “set aside” for a “Beneficiary” and the term “Beneficiary’s Fund” used in cl 12.2, is defined in cl 1 as meaning “a fund separate from the Fund held on trust by the Trustee for a Beneficiary under clauses 10 and 12”. Clauses 10 and 12 are not concerned with the capital or corpus of the Fund. The reference then in cl 12.1 to cl 17 cannot be a reference to cl 17.1 for three reasons: first because cl 17.1 is not concerned with income of the Fund, but capital or corpus; second, because cl 17.1 empowers the “Trustee” to “appoint, apply, or distribute, the whole or any part of the capital of the Fund”, but does not have anything to say about the “setting aside” of income or of an “amount” which is income for the benefit of a Beneficiary; and third, and fundamentally, any appointment of corpus pursuant to cl 17.1 need not be on terms consistent with a trust of the kind described in cl 12.1. The reference in cl 12.1 to cl 17 is a reference to a Beneficiary’s Fund in cl 17.2.

29    So if the appointment made pursuant to cl 17.1 of the Burrup Trust Deed does establish a separate fund in respect of the Burrup Holdings shares, this is not a separate fund of the kind contemplated by cl 12.1, nor is it a “Beneficiary’s Fund” within cl 12.2 to which the Trustee’s powers and indemnities under cll 19 to 26 of the Burrup Trust Deed extend.

30    The second matter upon which the applicants relied for the contention referred to in [25] above, was the reasoning and conclusion of Martin J in Oswal v Yara Australia [No 3]. At [210], [211] and [213], his Honour said:

[210]    I assess the terms of this resolution, in overall context, as merely envisaging a separate fund being set aside within the Burrup Trust for the benefit of Pankaj and Radhika to the extent of 574 BHL shares for them each, rather than as a new or ‘separate trust’ being established that was distinct from the Burrup Trust. That is so notwithstanding the resolution does use the term ‘separate trust’. But the reference in cl 12.1 of the Burrup Trust Deed to cl 17 and setting aside of a fund thereunder to be a separate fund that is ‘held by the Trustee as a separate fund on trust for that Beneficiary …’ seems to better fit the overall circumstances of what eventuated more comfortably than a ‘separate trust’ (see also cl 39.1 of the Burrup Trust Deed referring to a ‘discrete trust fund’).

[211]    Essentially then, the BHL shares which were assets of this discretionary trust were now being carved out of the trust assets and specifically allocated to Pankaj and Radhika beneficially. The allocated and separate asset fund was still held under the terms of the Burrup Trust Deed. But the arrangement for a separate fund meant that, as regards these BHL shares, Pankaj and Radhika’s entitlement was no longer exposed to the discretion of the Burrup Trustee as regards allocations amongst beneficiaries of the discretionary Burrup Trust.

…

[213]    The 13 March 2007 resolution, in my assessment, merely effected an establishment of a separate fund comprising these shares within the overall continuing trusteeship of the Burrup Trust, rather than the establishment of a new or separate trust. The separate fund, albeit no longer exposed to discretionary allocation to others by the Trustee, still remained vulnerable to some possible indemnification recourse under the Burrup Trustee’s rights under that trust deed (see cll 12.2 and 25).

31    With respect, I am unable to so easily draw a line between the establishment of a separate fund on the one hand and the creation of a new trust on the other. Indeed, one might more readily infer the coming into existence of a new trust if, as a consequence of the appointment made by the 13 March 2007 resolution, a separate fund of the Burrup Holdings shares was established, than if those shares remained part of the Burrup Trust Fund, subject, or exposed, to the powers of discretionary allocation vested in the Trustee. Certainly, a finding that a separate fund of those assets was established is no impediment to a conclusion that a new trust in respect of those assets came into existence. This is not to say that the assets of any separate fund subject to any new trust were no longer available to meet any right of indemnity the Trustee had to meet liabilities properly incurred by the Trustee as trustee prior to the separate fund and new trust coming into existence. Other considerations may bear on that issue including: whether the balance of the corpus not so appointed is sufficient to meet such liabilities (see Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576 at 587 per McPherson J), and whether, in all the circumstances, an intention to release, abandon or waive any such right of indemnity in respect of the appointed assets might be drawn even though they are not being transferred or distributed to the objects of the appointment c.f., Burns v Leda Holdings Pty Ltd [1988] 1 Qd R 214 at 225–227 per Dowsett J, where the entirety of the trust funds were transferred or distributed without any reservation in respect of the right of indemnity.

32    In coming to the conclusion that there was the establishment of a separate fund but not the creation of a new trust in the present case, his Honour’s reasoning relies heavily on the terms of cl 12.1 of the Burrup Trust Deed. As I have endeavoured to demonstrate in [22] to [29] above, cl 12.1 is not relevant to an appointment of the whole or part of the capital of the Fund pursuant to cl 17.1. In my view, in deciding the effect of the appointment of part of the corpus of the Fund pursuant to the 13 March 2007 resolution, regard only should be had to the terms of the empowering provision, namely, cl 17.1 of the Burrup Trust Deed, and, in particular, the terms of the appointment itself, namely, the 13 March 2007 resolution. Such an approach to the ascertainment of intention would seem to be more consistent with the views expressed in Byrnes v Kendall (2011) 243 CLR 253 at [46]–[66] per Gummow and Hayne JJ, with which French CJ, at [17], agreed.

33    The third matter relied on by the applicants for their contention in [25] above is a passage taken from the speech of Lord Wilberforce in Roome v Edwards at 292, 293:

The first question. The Finance Act 1965 contains no definition of “settlement”. As to “settled property” section 45 merely states that the words mean, subject to subsection (8) (concerned with unit trusts), any property held in trust other than property to which section 22 (5) applies (property held by a nominee). So a “settlement” must be a situation in which property is held in trust. But when is a settlement a separate settlement?

There are a number of obvious indicia which may help to show whether a settlement, or a settlement separate from another settlement, exists. One might expect to find separate and defined property; separate trusts; and separate trustees. One might also expect to find a separate disposition bringing the separate settlement in existence. These indicia may be helpful, but they are not decisive. For example, a single disposition, e.g., a will with a single set of trustees, may create what are clearly separate settlements, relating to different properties, in favour of different beneficiaries, and conversely separate trusts may arise in what is clearly a single settlement, e.g. when the settled property is divided into shares. There are so many possible combinations of fact that even where these indicia or some of them are present, the answer may be doubtful, and may depend upon an appreciation of them as a whole.

Since “settlement” and “trusts” are legal terms, which are also used by business men or laymen in a business or practical sense, I think that the question whether a particular set of facts amounts to a settlement should be approached by asking what a person, with knowledge of the legal context of the word under established doctrine and applying this knowledge in a practical and common-sense manner to the facts under examination, would conclude. To take two fairly typical cases. Many settlements contain powers to appoint a part or a proportion of the trust property to beneficiaries: some may also confer power to appoint separate trustees of the property so appointed, or such power may be conferred by law: see Trustee Act 1925, section 37. It is established doctrine that the trusts declared by a document exercising a special power of appointment are to be read into the original settlement: see Muir (or Williams) v. Muir [1943] A.C. 468. If such a power is exercised, whether or not separate trustees are appointed, I do not think that it would be natural for such a person as I have presupposed to say that a separate settlement had been created: still less so if it were found that provisions of the original settlement continued to apply to the appointed fund, or that the appointed fund were liable, in certain events, to fall back into the rest of the settled property. On the other hand, there may be a power to appoint and appropriate a part or portion of the trust property to beneficiaries and to settle it for their benefit. If such a power is exercised, the natural conclusion might be that a separate settlement was created, all the more so if a complete new set of trusts were declared as to the appropriated property, and it if could be said that the trusts of the original settlement ceased to apply to it. There can be many variations on these cases each of which will have to be judged on its facts.

34    The “spin” which the applicants seek to gain from what his Lordship said in this extract from his speech gets no traction or “bite” to support their contention that the 13 March 2007 resolution only establishes a separate fund of the relevant assets (the shares in Burrup Holdings) and not the creation of a new trust over them, when the issues in that case are properly understood in the factual and statutory contexts with which the House of Lords was there concerned.

35    The case concerned a settlement made in 1944. In 1955 a distinct fund (described as “the 1955 fund”) was appointed, in exercise of a fiduciary power, on trusts which were distinct from the trusts of the main fund but which were not exhaustive of the beneficial interests, and at the same time the life tenant surrendered her life interest in respect of the 1955 fund. In 1972 the trustees of the 1955 fund (the respondents) were distinct persons from the trustees of the main fund, the respondents being resident in the United Kingdom and the latter being resident in the Cayman Islands. In the 1972–73 year, a gain was realised on the deemed disposal of assets comprised in the main fund, and the respondents, as trustees of the 1955 fund, were assessed for capital gains tax on that gain. There were two issues for decision, the first of which was whether the respondents and the Cayman Islands trustees were, on 12 April 1972, trustees of a single settlement for the purposes of the capital gains tax (in which case the assessment would stand) or whether the respondents were trustees of a separate settlement from the settlement of the main fund.

36    The House of Lords held that the respondents and the Cayman Islands trustees were trustees of a single settlement; in other words, while the 1955 appointment created a distinct fund, it did not create a “settlement” separate from the original settlement.

37    In the context of the issue under consideration in the present case, it needs to be understood that there was never any issue in Roome v Edwards that the appointment of the 1955 fund became subject to trusts which were distinct and different from the trusts of the main fund, the only question being whether a new “settlement” was created for the purpose of s 25(1) of the Finance Act 1965 (UK). That is a very different question to the one with which we are here concerned, namely, whether a trust was created over an asset, and for that reason, what his Lordship had to say in the passage from his speech extracted in [33] above, does not assist the applicants’ case contended for in [25] above. Its relevance to the question of whether any trust so created, was created by “settlement” is another matter, and is considered below in the context of my analysis of whether CGT event E1 happened in consequence of the appointment and declaration, if any, made by the 13 March 2007 resolution.

CGT Event E1

38    The provisions of the ITAA 1997 dealt with CGT event E1 in the following terms in the 2007 income year:

104-1    Creating a trust over a CGT asset: CGT event E1

(1)    CGT event E1 happens if you create a trust over a *CGT asset by declaration or settlement.

(2)    The time of the event is when the trust over the asset is created.

(3)    You make a capital gain if the *capital proceeds from the creation are more than the asset’s *cost base. You make a capital loss if those *capital proceeds are less than the asset’s *reduced cost base.

Cost base rule

(4)    If you are the trustee of the trust and no beneficiary is absolutely entitled to the asset as against you (disregarding any legal disability), the first element of the asset’s *cost base and *reduced cost base in your hands is its *market value when the trust is created.

Exceptions

(5)    CGT event E1 does not happen if:

(a)    you are the sole beneficiary of the trust and:

(i)    you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and

(ii)    the trust is not a unit trust; or

(b)    the trust is created by transferring the asset from another trust, and the beneficiaries and terms of both trusts are the same.

(6)    A *capital gain or *capital loss you make is disregarded if you *acquired the asset before 20 September 1985.

39    A CGT asset is defined in s 995-1 and s 108-5 and includes shares.

40    For CGT event E1 to happen:

(1)    A trust must be created over a CGT asset;

(2)    the trust must be created by declaration or settlement.

Neither of the terms “declaration” or “settlement’ is defined for the purposes of s 104-55 or in the ITAA 1997 generally.

41    I propose first to consider whether the appointment made by the 13 March 2007 resolution, and the words which follow, constitute a “declaration” of trust or a “settlement”. If they constitute neither, then that is the end of the matter because, in the absence of there being a transfer of property, and it is common ground that there was no transfer of property in the 2007 income year, no trust could be created. On the other hand, if the appointment made by the 13 March 2007 resolution, and the words which follow, do constitute a “declaration” of trust or a “settlement”, then it is difficult to see why a trust over the relevant assets then vested in Mr Oswal, as trustee of the Burrup Trust, was not thereby created.

A Declaration of Trust?

42    The 13 March 2007 resolution is not, in express terms, a declaration of trust by Mr Oswal. Mr Oswal, as trustee of the Burrup Trust, does not “declare” that he holds the shares in Burrup Holdings, as to 574 shares on trust for himself, and as to 574 shares on trust for Mrs Oswal. In that regard, it is to be contrasted with the instrument in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 436; and the instrument in Commissioner of State Revenue v Lam & Kym Pty Ltd (2004) 10 VR 420 at [8], both of which were declarations of trust in express terms.

43    On the other hand, following the words of appointment in the first sentence of the resolution, the resolution continues:

“Henceforth the corpus so appointed…shall be held on separate trust and for the absolute benefit of the named beneficiaries in their own individual capacities.

Mr Pankaj Oswal – 574 shares in Burrup Holdings Pty Ltd

Mr Radhika Oswal – 574 shares in Burrup Holdings Pty Ltd”

and it is signed by Mr Oswal and dated.

In other words, Mr Oswal is not only making the appointment but resolving (declaring) that he will henceforth hold that part of the corpus (shares in Burrup Holdings) on separate trust for the absolute benefit of himself (as to 574 shares) and of his wife (as to 574 shares).

44    Does the fact that Mr Oswal is exercising a special power of appointment under cl 17.1 of the Burrup Trust Deed mean that the 13 March 2007 resolution cannot be a declaration of trust within ordinary concepts, as distinct from being liable to stamp duty under a particular statute, because the methods of creating a trust by declaration and creating a trust by exercise of a power of appointment are mutually exclusive acts? This was an argument that was put to the Victorian Court of Appeal in Lam & Kym and, correctly in my view, rejected (at [36]–[45]); it involved, according to Nettle JA (with whom Vincent JA and Hansen AJA agreed), a misconception of treating the exercise of a power of appointment as a method of creating an inter vivos trust, in addition to the two methods of transfer of property and declaration of trust, and as mutually exclusive of both of them. At [37] and [41], his Honour said:

[37]    Mr Merralls took us first to passages from Jacobs’ Law of Trusts in Australia [6th ed, pp 75–7]; Sir Frederick Jordan’s Selected Legal Papers (Chapters on Equity in New South Wales) [(1983), pp 23–4]; Ford and Lee, Principles of the Law of Trusts; Lewin on Trusts [at [2000]–[2015] and [5050]–[5110]]; Underhill and Hayton, Law Relating to Trusts and Trustees [15th ed, pp 20–3 and 124–6]; Parker and Mellows, The Modern Law of Trusts [7th ed, (1998), pp 128, 129 and 163–90]; Pettit, Equity and the Law of Trusts [9th ed, pp 83 and 84]; the American Law Institute, Restatement 3d., The Restatement of the Law Trusts [(2003), vol 1, Pt 2, Ch 3, § 10]; and Scott and Fratcher, The Law of Trusts [4th ed, vol 1, § 17.1-§ 17.3]...

…

[41]    …Each of the texts records that a non-testamentary trust may be created by transferring property to the proposed trustee to hold upon trust for the proposed beneficiary or, without transfer of property, by declaration of trust. Those methods of creation are mutually exclusive in the sense that one cannot effectually transfer property to another to hold upon trust and at the same time declare that one holds it oneself on trust. They are also exhaustive because, as the texts make clear, they are the only methods for the inter vivos creation of trusts. [(Of course excluding resulting and constructive trusts and trusts otherwise arising by operation of law.)] Consequently, when then the texts later go on to discuss the creation of trusts in exercise of a power of appointment, they are not concerned with methods of creation — for, as has been stated, the only methods of creation are transfer and declaration — but rather with power to create a trust, and in particular with power to create a trust in respect of property of another in exercise of a power of appointment. The point which is made in those later sections of the texts is that a general power of appointment impliedly empowers the donee to appoint to a trustee to hold on trust for the object chosen in exercise of the power and that, according to the terms of a special power of appointment, a special power of appointment may also empower the donee of the power to appoint to a trustee for the benefit of the chosen object, as opposed to appointing directly to the chosen object.

45    At [44]–[46] his Honour continued:

[44]    Self evidently, the power of a donee of a power of appointment to constitute a trust in exercise of the power is dependent upon the terms of the power. As has been seen, if the power is general, it imports power to appoint to trustees for the benefit of the intended beneficiary of the power, and subject to the language of the power, it may equally empower the donee to declare that he or she will henceforth stand possessed of the subject matter of the power on trust for the benefit of the intended beneficiary. In the case of a special power, the extent to which the donee may go in the creation of trusts in exercise of the power is bound to be circumscribed more closely by the terms of the power, but even then there will be cases in which the donee is authorised to exercise the power either by transfer to a trustee to hold on trust for the benefit of the intended beneficiary of the power or to declare that the donee will henceforth stand possessed of the subject matter of the power on trust for the intended beneficiary.

[45]    According to the ordinary meaning of the English language, if in exercise of a power of appointment the donee of the power constitutes a trust by transfer of property to a trustee for the benefit of the object of the power, the trust thereby constituted is aptly described as a trust created by the transfer of property to a trustee. Equally, if in exercise of a power of appointment the donee of the power declares that he or she will henceforth stand possessed of the subject matter of the power on trust for the object of power, the trust thus constituted is aptly described as a trust constituted by declaration of trust. Contrary to the argument which was advanced on behalf of the respondent, there is in my opinion nothing in legal principle or in the texts to which we were referred or in common sense to suggest that any other view of the matter should be taken.

[46]    I consider that the Declaration was a declaration of trust according to the conventional meaning of that conception and that it was a declaration of trust within the meaning of [the statute].

46    Does the fact that Mr Oswal was only a trustee and not a person who had a beneficial interest at least commensurate with the beneficial interest to be brought into existence, prevent the appointment made by the 13 March 2007 resolution, and the words which follow, from being within the ordinary conception of a declaration of trust?

47    In DKLR Holding Co (No 2) at 454, Mason J (as his Honour then was) said:

When a statute speaks of a declaration of trust it is naturally taken as referring to a declaration of trust in its technical sense, that is, to an instrument which is effective to create a trust by operating upon property then vested in the declarant or, in the case of property thereafter vested in the declarant, at the time when it becomes so vested.

48    A little later, at 459, his Honour relevantly said:

Ordinarily a declaration of trust signifies a declaration which operates to create a trust — it is made by a person who holds or will hold a beneficial interest at least commensurate with the beneficial interest sought to be brought into existence by the trust. There is the possibility here that the declaration is made by the appellant as a person who will acquire no more than a legal estate and who will quite apart from the declaration be a bare trustee for 29 Macquarie.

49    In Lam & Kym, the Victorian Court of Appeal considered an argument, on behalf of the respondent, based on Mason J’s observation concerning the ordinary conception of a declaration of trust. The argument was summarised by Nettle JA at [28] as follows:

Mr Merralls’ argument was that it was implicit in what Mason J said about the conception of a declaration of trust that an equity lawyer would simply not ascribe the appellation “declaration of trust” to a declaration of trust executed by a person who did not and would not have a beneficial interest at least commensurate with the beneficial interest sought to be brought into existence.

50    Nettle JA, at [29], was able to deal with the argument by reference to the terms of the statute with which the Court was there concerned, and by reference to earlier authority (A & G Lamattina & Sons Pty Ltd v Commissioner of State Revenue (1996) 96 ATC 4474) which held, correctly in Nettle JA’s view, that the relevant provision of the statute, in its pre-amended form, was capable of applying to a declaration of trust executed by a trustee of an existing trust in respect of land that was vested in that trustee.

51    But his Honour, at [30], did proffer a further answer to the argument by suggesting that it:

[R]eads too much into what Mason J said about ordinary conceptions of a declaration of trust. If I may say so with respect, his Honour should be understood as saying no more than that because the only thing conveyed to the declarant was a bare legal estate, the conveyance of itself constituted the declarant as trustee for the conveyor — by reason of the equitable estate retained by the conveyor. In that event any “declaration of trust” executed by the conveyee could be no more than an acknowledgment of the existing resulting trust and so not a declaration of trust according to ordinary acceptation.

52    Indeed, his Honour gave a third answer to the argument, namely, that it was founded upon the fallacy identified by Lord Radcliffe in Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694, that for all purposes and at every moment of time the law requires the separate existence of two different kinds of estate or interests in property, the legal and the equitable. At [32]–[33], his Honour said:

[32]    …As his Lordship said, there is no need to distinguish between the legal and equitable interests in property in which the whole right is in the one person as it is in an executor or, it may be added, the trustee of a discretionary trust. Brennan J made a similar point in DKLR [at 474] by emphasising that an equitable interest is not carved out of a legal estate but impressed upon it. Consequently, where an executor or trustee has dispositive power over the property the court recognises and controls the power by calling into existence and protecting equitable rights and interests in the property. The power of disposition and the rights and interests thereby created are correlatives of each other.

[33]    In the same way in this case, the respondent had sufficient dispositive power to subject the land to new trusts by means of a declaration that it would thenceforth stand possessed of the land upon those trusts. By the execution of the declaration, that is what it did. Equity would unquestionably recognise and give effect to the new trusts thus created. In those circumstances, I do not accept that the respondent’s lack of beneficial interest is reason to exclude the declaration from the range of what an equity lawyer would ordinarily describe as a declaration of trust.

53    I respectfully agree with his Honour’s analysis. In applying that analysis to the present case, I would conclude that the fact that Mr Oswal was a trustee does not preclude the resolution of 13 March 2007 from being within the ordinary conception of a declaration of trust. As his Honour himself recognised at [34], his analysis is supported by the analysis of the High Court in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at [37] where the High Court said:

In the present case, under the Deed of Settlement as it stood before the Supplemental Deed, no interests in corpus had vested. The Trust Fund was vested in the trustee, impressed with such trusts as were created by or pursuant to the Deed of Settlement. There was no hiatus or gap as to any outstanding beneficial interest in the Trust Fund. The assets comprising the Trust Fund were not impressed with trusts which gave rise to equitable interests therein which were so extensive as to leave the trustee with no more than the bare legal title. The trustee might accurately be described as the owner of those assets [see DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 463, 474; Commissioner of Stamp Duties (Q) v Livingston [1965] AC 694 at 712-713; (1964) 112 CLR 12 at 22-23], but as subjected to the equitable obligations imposed by the Deed of Settlement [see DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 519]. The second and third respondents had no vested interests in corpus but they did enjoy rights to due administration of the trusts of the Deed of Settlement which a court of equity would protect [see Garside v Inland Revenue Commissioners [1968] AC 553 at 605-606, 617-618; Spellson v George (1987) 11 NSWLR 300 at 316; Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 313-314; Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 274].

54    I am therefore of the view that the resolution of 13 March 2007 is a “declaration” of trust within the ordinary conception of a declaration of trust. As such it is difficult to see why it does not create a trust over the assets the subject of the declaration and not merely, as the applicants contended, a separate fund of them. That is a matter to which I will return after first considering whether the resolution of 13 March 2007 is also a “settlement’.

A Settlement?

55    In Buzza v Comptroller of Stamps (Vic) (1951) 83 CLR 286 at 300, Dixon J (as his Honour then was) said:

It is notoriously difficult to define a settlement, but that does not mean that it is difficult to recognize one.

56    The indicia of a settlement as enunciated by Palles CB in Massereene v Commissioner of Inland Revenue [1900] 2 Ir R 138 at 146 is:

It is essential to such an instrument that there shall be – 1, such free property, by which I mean property which then is not, according to our jurisprudence, subject to the trusts in question; 2, a settlor, who either is, or appears on the face of this instrument to be, competent to subject that free property to trusts which, until the execution of the instrument, did not bind it; and 3, an imposition by the instrument of such trusts upon such property.

57    In Commissioner of Stamp Duties (Q) v Hopkins (1945) 71 CLR 351 at 378, Dixon J said:

An instrument is a settlement because it creates trusts and contains limitations which restrict or affect alienation and transmission, according to the course provided by law for estates in fee simple or a full ownership: See Micklethwait v. Micklethwait [(1858) 140 ER 1302 at p 1331]; Hubbard v. Hubbard [(1901) P 157 definition cited arguendo, at p 159]; Chirnside v. Collector of Imposts [(1908) VLR 433 at pp. 447 et seq]; per Cussen J.; Wedge v. Acting Comptroller of Stamps (Vict.) [(1941) 64 CLR 75 at p 79], per Rich A.C.J. It is true that trusts cannot come into operation until the trustee obtains title to a control of the trust property. But the vesting of the trust property in the trustee may be regarded as a condition of the operation of the settlement, rather than as an essential characteristic of the “settling” of the property. Apparently that was the view taken in Davidson v. Chirnside [(1908) 7 CLR 324]…

58    In Davidson v Armytage (1906) 4 CLR 204 it was held that a deed exercising a special power of appointment created by a settlement, which was executed at a time when no ad valorum duty was payable thereon, was a “deed of settlement” within the meaning of Pt VIII of the Schedule to the Stamps Act 1892 (Vic). In delivering the judgement of the Court, Griffith CJ at 210, 211 said:

It was contended by Mr. Weigall for the respondent that these instruments are not settlements, and in support of that contention he used various arguments. He maintained, amongst other things, that the term “settlement” necessarily connotes either restriction of power of disposition or a succession of interests. Restrictions alone cannot be the test, for a deed conveying land to trustees for uses for various persons in succession, might be a settlement, although there might be no restriction on the power of disposition of the beneficiaries. The case of Kane v. Kane [16 Ch D, 207] is a case showing that there may be a settlement without any succession of interests.

In the case of Moffat v. Collector of Imposts [22 VLR 164; 18 ALT 144] the Court held, and in my opinion correctly, that an instrument was a settlement although it was an appointment of a sum of money to the appointee absolutely for his own use. So that this cannot be the test.

In the case of Wiseman v. Collector of Imposts [21 VLR 743, at p 748; 17 ALT, 251], Madden C.J., speaking of the term “settlement,” said :—“It must create a beneficial interest in some person in whom it did not previously exist.” That is, of course, not an exhaustive definition, but that condition is fulfilled in the present case, because, although in default of these deeds of appointment the same persons would have taken a share of the property as tenants in common in fee, it is settled by Sweetapple v. Horlock [11 Ch D 745], the authority of which has not been disputed, that the interests taken under the deeds are new interests.

In Moffat v. Collector of Imposts an executrix had under the will power to revoke the trusts declared in the will as to a sum of £5,000, with the consent of the person for whose benefit that sum had been given, and to make a new appointment. She did exercise that power with the consent of that person, and appointed the same to him absolutely. The Full Court, reversing the judgment of Williams J., held that that was a settlement. The learned Judges in the present case thought that there might be a distinction between that and the present case, because in that case the power of appointment was general. It was general in one sense, but it could only be exercised with the consent of the person in whose favour it was ultimately exercised. But whether it was a general or a special power cannot make any difference in the nature or character of the instrument by which the power is executed. In other words, the question whether the appointment is a settlement or not cannot depend upon whether the power is special or general. We are unable to distinguish the case of Moffat v. Collector of Imposts from the present case, and, for reasons which I will give directly, we think that case was rightly decided.

59    In the case of personalty, with which we are concerned in the present case, it is not necessary for the settlement to be in writing: Thomson v Federal Commissioner of Taxation (1949) 80 CLR 344. If the instrument of 13 March 2007 does not constitute the resolution, but is no more than evidence of an oral resolution in the same terms, that is no impediment to the resolution constituting a settlement.

60    Having regard to the authorities to which I have referred in [55]–[59] above, in particular to what the High Court said in Davidson v Armytage in the passage extracted in [58] above, I am of the view that the 13 March 2007 resolution does constitute a “settlement” notwithstanding it involved the exercise of a special power of appointment; notwithstanding that it creates no succession of interests beyond Mr and Mrs Oswal; and notwithstanding that they take absolutely. Moreover, I do not think anything said by Lord Wilberforce in Roome v Edwards mitigates against that view. Indeed, what his Lordship said in the third last and second last sentences of the passage extracted in [33] above, supports the view. As his Lordship said in the very last sentence of the extract, each case “will have to be judged on its facts”.

Was a trust created over the shares in Burrup Holdings or were they merely made the subject of a separate fund?

61    In the face of my conclusion that the 13 March 2007 resolution constituted both a “declaration” of trust and a “settlement”, I am of the view that the resolution did create a trust over the shares in Burrup Holdings that were vested in Mr Oswal, a trustee of the Burrup Trust, at the time of the resolution. I hasten to add, however, that the trust so created, did not extend to the 246 shares in Burrup Holdings which were not vested in Mr Oswal at that time. No trust was created over those shares by the 13 March 2007 resolution until such time as they were vested in the trustee in September 2008, notwithstanding the date of vesting was backdated to 13 March 2007, and subsequently to 26 April 2007.

Conclusion on CGT event E1

62    It follows, in my view, that CGT event E1 happened in respect of 902 shares in Burrup Holdings in the 2007 income year.

CGT Event A1

63    In the 2007 income year, CGT event A1 was in the following terms:

104-10    Disposal of a CGT asset: CGT event A1

(1)    CGT event A1 happens if you *dispose of a *CGT asset.

(2)    You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:

(a)    if you stop being the legal owner of the asset but continue to be its beneficial owner; or

(b)    merely because of a change of trustee.

(3)    The time of the event is:

(a)    when you enter into the contract for the *disposal; or

(b)    if there is no contract—when the change of ownership occurs.

Example:    In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.

The gain is made in the 1998–99 income year (the year you entered into the contract) and not the 1999–2000 income year (the year that settlement takes place).

Note 1:    If the contract falls through before completion, this event does not happen because no change in ownership occurs.

Note 2:    If the asset was compulsorily acquired from you: see subsection (6).

(4)    You make a capital gain if the *capital proceeds from the disposal are more than the asset’s *cost base. You make a capital loss if those *capital proceedings are less than the asset’s *reduced cost base.

Exceptions

(5)    …

(6)    …

(7)    …

64    The Commissioner’s reliance on CGT event A1 was put in the alternative to his reliance on CGT event E1 and was limited to the appointment of that part of the corpus of the Burrup Trust to Mr Oswal for his absolute benefit, namely, 574 shares in Burrup Holdings. The Commissioner’s case was predicated on the basis that the Court found, contrary to the Commissioner’s primary submission, that the 13 March 2007 resolution created two separate trusts, one over 574 shares to be held for Mr Oswal and one over 574 shares to be held for Mr Oswal; the Commissioner’s argument being that in that event, the 13 March 2007 resolution did not create the second trust (for Mr Oswal) but resulted in a merger of the legal and equitable interests in “his” 574 shares giving rise to a disposal by Mr Oswal as trustee of the Burrup Trust to Mr Oswal in his personal capacity, resulting in the happening of CGT event A1.

65    In the event I concluded that the 13 March 2007 resolution resulted in the happening of CGT event E1 in the 2007 income year, the Commissioner did not press this alternative and it is therefore not necessary to consider it further.

CGT Event E5

66    In the 2007 income year, CGT event E5 was in the following terms:

104-75    Beneficiary becoming entitled to a trust asset: CGT event E5

(1)    CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Note:    Division 128 deals with the effect of death.

(2)    The time of the event is when the beneficiary becomes absolutely entitled to the asset.

Trustee makes a capital gain or loss

(3)    The trustee makes a capital gain if the *market value of the asset (at the time of the event) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset’s *reduced cost base.

Exception for Trustee

(4)    A *capital gain or *capital loss the trustee makes is disregarded if it *acquired the asset before 20 September 1985.

Note:    There is also an exception for employee share trusts: see section 130-90.

Beneficiary makes a capital gain or loss

(4)    The beneficiary makes a capital gain if the *market value of the asset (at the time of the event) is more than the *cost base of the beneficiary’s interest in the trust capital to the extent it relates to the asset.

(5)    The beneficiary makes a capital loss if that market value is less than the *reduced cost base of that beneficiary’s interest in the trust capital to the extent it relates to the asset.

Exceptions for beneficiary

(6)    A *capital gain or *capital loss the beneficiary makes is disregarded if the beneficiary:

(a)    *acquired the *CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or

(b)    acquired it before 20 September 1985.

Expenditure can include giving property: see section 103-5.

Note:    There is also an exception for employee share trusts: see section 130-90.

67    The Commissioner’s reliance on CGT event E5 is by way of further alternative in the event that CGT event E1 did not happen. Again, it is not necessary to consider it in the face of my conclusion that CGT event E1 did happen in the 2007 income year in respect of 902 shares in Burrup Holdings. However, the issue of whether or not CGT event E5 happened in consequence of the 13 March 2007 resolution was the subject of comprehensive argument from both parties and, in deference to those arguments should this matter go further, I set out below my views.

68    The term “absolutely entitled” is not defined in the ITAA 1997; nor is the expression “absolutely entitled to a CGT asset of a trust … as against the trustee”. In Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242, Lindgren J at [61] accepted the Commissioner’s submission that, taking into account relevant extrinsic material; English authorities such as Stephenson v Barclays Bank Trust Company Ltd [1975] 1 WLR 882; and what Gummow J (when his Honour was a judge of this Court) had to say about a “bare” trust when distinguishing between “active” and “passive” trusts in Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281, “the expression ‘absolutely entitled to the asset as against the trustee’ in subs (5) of 104-55 and s 104-60 of the Act is intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust properly as the beneficiary directs”.

69    In my view, and the parties did not submit otherwise, his Honour’s description is equally apt to describe the expression in s 104-75(1), “absolutely entitled to a CGT asset of a trust … as against the trustee”. So described, the question to be determined may be framed: whether the 13 March 2007 resolution resulted in Mr and Mrs Oswal having a vested, indefeasible and absolute entitlement to the shares in Burrup Holdings then vested in the trustee such that they are entitled to require the trustee to deal with those shares as they direct.

70    As it was in respect of CGT event E1, it was at the forefront of the applicants’ argument in respect of CGT event E5 that no new trust was created in respect of the shares in Burrup Holdings as a result of the 13 March 2007 resolution; all that was established was a separate fund of those shares of a kind contemplated by cl 12.1 of the Burrup Trust Deed; a “Beneficiary’s Fund” within cl 12.2 and therefore subject to the Trustee’s powers and rights of indemnity conferred by cll 19 to 26 of the Burrup Trust Deed in respect of the Burrup Trust Fund. For reasons I have already detailed at [22] to [37] and [42] to [61] above, I reject that analysis. The 13 March 2007 resolution did create a new trust over the shares in Burrup Holdings vested in the trustee, at the time of the resolution, for the absolute benefit of Mr and Mrs Oswal; and any separate fund thereby established was not a separate fund for the purposes of cl 12.1, nor a “Beneficiary’s Fund” within the terms of cl 12.2 of the Burrup Trust Deed. It is in the face of that conclusion as to the effect of the 13 March 2007 resolution in the context of the terms of the Burrup Trust Deed that the question as framed in [69] above falls to be determined, namely, whether, in consequence of the resolution, Mr and Mrs Oswal were not only absolutely entitled to the Burrup Holdings shares, but indefeasibly entitled to them and, as well, entitled to require the trustee to deal with them as they directed. If both limbs of that question are answered in the affirmative in consequence of the 13 March 2007 resolution, then CGT event E5 happened in the 2007 income year.

71    The applicants advanced two reasons as to why the question so framed should be answered in the negative. The first assailed the nature of Mr and Mrs Oswal’s interest as being indefeasible, by reference to what was said by Lindgren J in Kafataris at [65] concerning the existence of a power, reposed in the trustee, to sell the “Property”. His Honour, relevantly said:

The Trustees had power to sell the Property, as they did only six days after the Trusts were established. Even if Helen had an interest in the half interest the subject of Helen’s Trust as at 28 June 2002, the Trustees’ power of sale would have made it a defeasible interest: see Kent v SS “Maria Luisa” (No 2) (2003) 130 FCR 12 at [71]. It would cease to be defeasible only when the half interest ceased to be part of Helen’s Fund and subject to the Trustees’ power of sale.

72    There can be no doubt that the exercise by a trustee of a power of sale, either expressed in the instrument creating the trust or conferred by statute, of an asset vested in the trustee for the absolute benefit of a beneficiary would defeat that beneficiary’s interest in the asset (albeit giving rise to an equivalent interest in the proceeds of sale). In that sense, the beneficiary’s interest in the asset is defeasible, as referred to by his Honour by reference to what was said by Tamberlin and Hely JJ in Kent v SS “Maria Luisa” (No 2) at [71], even though, until the power is exercised, the beneficiary’s entitlement to call for a transfer of, or a dealing with, the asset exists.

73    On the other hand, having regard to my conclusion that the 13 March 2007 resolution created a new trust over the Burrup Holdings shares separate and distinct from the trusts upon which the balance of the corpus of the Burrup Trust Fund continued to be held, and not just a separate fund, a “Beneficiary’s Fund” for the purposes of cl 12 of the Burrup Trust Deed, the powers vested in the Trustee to deal with the Burrup Trust Fund conferred by cl 19 of the Burrup Trust Deed no longer applied to the Burrup Holdings shares the subject of the resolution. This would include the power of disposal conferred by cl 19.3 of the Burrup Trust Deed, which relevantly provides:

The Trustee may … dispose of, property, an interest in property, or rights in relation to property, whether real or personal, whether or not income producing, and whether as a tenant in common or a joint tenant.

The references to “property” in this clause have to be read and understood by reference to the provisions of cl 19.1 which provides:

The Trustee may deal with the Fund, and in any manner, and exercise the powers given by this clause, for the purpose or benefit of the Trust as if the Trustee were the beneficial owner of the Fund.

In my view, the power of disposal conferred by cl 19.3, when read and understood in this context, does not extend to the Burrup Holdings shares the subject of the 13 March 2007 resolution.

74    That, however, is not the end for the first reason relied on by the applicants. Clause 18 of the Burrup Trust Deed provides:

18    STATUTORY POWERS

Unless inconsistent with this Document, the powers conferred on the Trustee by law are in augmentation of the Trustee’s Powers under this Document.

75    Section 28(1) of the Trustee’s Act 1962 (WA) expressly indicates that a power of sale can co-exist with beneficiaries that are already absolutely entitled to the trust property. It provides:

Where the instrument creating a trust to sell property or a power to sell property does not expressly limit the duration of the trust or power, then, notwithstanding any lapse of time or that all the beneficiaries are absolutely entitled to the property in fee simple or full ownership in possession and are not under any disability the trustee may sell the property; but in all other respects the authority conferred by this section is subject to any restrictions to which the trust or power created by the instrument is subject.

(Emphasis added.)

76    The Trustee would be entitled to rely on this statutory power of sale to sell the Burrup Holdings shares notwithstanding that the new trust created over them by the 13 March 2007 resolution was for the absolute benefit of Mr and Mrs Oswal. In this sense, their interests in the shares while absolute were defeasible. It follows that on the test adopted by Lindgren J in Kafataris and embraced by both parties in this case, Mr and Mrs Oswal were not absolutely entitled to the Burrup Holdings shares, the subject of the 13 March 2007 resolution, as against the Trustee; it further follows that CGT event E5 did not happen in the 2007 income year.

77    Whilst it is not strictly necessary to consider the second reason advanced by the applicants for their contention that the question framed in [70] above should be answered in the negative, I propose to do so, more or less for the same reasons given in [67] above. The second reason advanced relates to the Trustee’s right to be indemnified out of the Burrup Trust Fund in respect of liabilities and expenses properly incurred as trustee of the Burrup Trust Fund prior to the 13 March 2007 resolution. The applicants contended that despite the 13 March 2007 resolution, the shares in Burrup Holdings continue to be available to satisfy the Trustee’s right of indemnity or, strictly so called, the Trustee’s right to reimbursement or exoneration, for liabilities properly incurred in the administration of the Burrup Trust Fund; the Trustee cannot, say the applicants, be compelled to surrender the Burrup Holdings shares until the claims for such liabilities have been satisfied. It follows, according to the applicants, that Mr and Mrs Oswal are not absolutely entitled to the shares in Burrup Holdings as against the Trustee.

78    Buckle confirmed that a trustee’s right to reimbursement and exoneration confers on the trustee, to that extent, a proprietary interest in the trust property; that the trustee cannot be compelled to surrender the trust property to the beneficiaries until the trustee’s claim has been satisfied; that the trustee’s right to exoneration or recoupment takes priority over the rights in or in reference to the assets of beneficiaries; and that the entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them.

79    At [47]–[50] the Court relevantly said:

47    The entitlement of a trustee who has borrowed moneys for application to trust purposes has been described as follows [Scott on Trusts, 4th ed (1988), vol 3a, §246. See also the discussion by Dixon J in Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335]:

“Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person in the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.”

In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied [Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; Re Exhall Coal Co Ltd (1866) 35 Beav 449 at 452–453 [55 ER 970 at 971]; Scott on Trusts, 4th ed (1988), vol 3a, §244.1]. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust [Pettit, Equity and the Law of Trusts, 8th ed (1997), pp 458–459]. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority [Dodds v Tuke (1884) 25 Ch D 617].

48    Until the right to reimbursement or exoneration has been satisfied, “it is impossible to say what the trust fund is” [Dodds v Tuke at 619]. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the “property” to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them [Kemtron Industries at 587]. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not “trust assets” or “trust property” in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries [Octavo Investments at 370].

49    The entitlement to reimbursement and exoneration was identified by Lindley LJ as “the price paid by cestuis que trust for the gratuitous and onerous services of trustees” [In re Beddoe [1893] 1 Ch 547 at 558]. The right of the trustee has been described as a first charge upon the assets vested in the trustee [Staniar v Evans (1886) 34 Ch D 470 at 477], as one upon the “trust assets” [Octavo Investments at 367. See also Re Exhall Coal Co Ltd at 452–453 (55 ER 970 at 971)], and as conferring upon the trustee an “interest in the trust property [which] amounts to a proprietary interest” [Octavo Investments at 370].

50    However, the starting point in the class of case under consideration is that the assets held by the trustee are “no longer property held solely in the interests of the beneficiaries of the trust” [Octavo Investments at 370]. The term “trust assets” may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not “encumbered” by the trustee’s right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment “takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation” [Vacuum Oil at 335]. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the “trust assets” which may be enforced in the same way as any other equitable charge [see Hewett v Court (1983) 149 CLR 639 at 663]. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them…

80    In Kemtron Industries, McPherson J (with whom Andrews SPJ agreed) said (at 587) it was not correct to say, as was submitted on behalf of the Queensland Commissioner of Stamp Duties –

that the trustee’s lien at all times attaches to all of the assets. That would have the consequence that the trustee could, as against the beneficiaries, insist upon retaining all the assets in the exercise of his right of indemnity even though the liability in respect of which that right was exercised was trivial in amount. Such a conclusion would be surprising particularly where, for example, the assets consisted entirely of cash and the liabilities were fixed and their amount capable of precise and immediate determination in money.

81    But what his Honour there said is not this case. While the evidence of the assets and liabilities of the Trustee of the Burrup Trust as at the beginning and end of the 2007 income year was not a model of clarity, and was limited to balance sheets and trial balances at the beginning and end of that year without the benefit of contemporaneous asset valuations, it is clear from the evidence that the liabilities were not “trivial in amount”, but were, even on the Commissioner’s reckoning (which excluded a balance sheet liability of $75 million to the ANZ Bank), in excess of $300 million; that the liabilities were not “fixed” but growing with interest accruals; that the assets did not consist “entirely of cash” but were diverse in nature; that the book value of those assets approximated the amount of the liabilities and, if it exceeded them, only by a marginal amount. Moreover, there had been no quarantining of assets with respect to particular liabilities nor provisioning by way of reserves to meet such liabilities whether in the financial accounts of the Burrup Trust or otherwise. In these circumstances, it could not seriously be suggested, nor was it, that the Trustee’s lien in respect of its right of indemnity did not attach to all of the assets of the Burrup Trust Fund. The difficult question under this head is whether it also extended to attach to the shares in Burrup Holdings following the 13 March 2007 resolution.

82    I have already rejected the underlying basis of the applicants’ principal contention under this head, namely, that, in consequence of the 13 March 2007 resolution, the Trustee’s lien for its right of indemnity in respect of liabilities properly incurred as trustee extended to the shares in Burrup Holdings by reason of the interaction of cll 12.1, 12.2 and 25 of the Burrup Trust Deed.

83    The issue here must be determined essentially by reference to the intention of the Trustee in exercising the power of appointment, such intention to be drawn or discerned from all the circumstances of the exercise of the power including, in particular, the manner of its exercise.

84    The Commissioner contended that in making the 13 March 2007 resolution appointing for the absolute benefit of Mr and Mrs Oswal that part of the corpus of the Burrup Trust represented by the Burrup Holding shares and declaring that henceforth the corpus so appointed and income or accretion of capital therefrom be held for their absolute benefit, without any reservation in respect of the right of indemnity, Mr Oswal as trustee acted inconsistently with the continued existence of (i) any right of exoneration or recoupment enforceable against those shares, or (ii) any beneficial interest on the part of the trustee in those shares commensurate with such a right.

85    In this regard, reliance was placed on cases involving an instrument or transaction which operated in such a way that a power cannot thereafter be exercised without interfering with the operation of the earlier instrument or transaction. Thus, it was submitted, if there be an appointment of the whole of a fund in favour of one person, this operates to destroy an unexercised power to appoint the fund to another: Inland Revenue Commissioner v Cookson [1977] 2 All ER 331 at 335 (Stamp LJ with whom Scarman  LJ and Show LJ agreed). This depends upon the identification of words having that effect or conduct which shows by necessary implication an intention to do so: Cookson at 335.

86    Reference was also made to cases involving a dealing with the trust estate by the donee of a power which is inconsistent with the further exercise of the power so as to put an end to it: accordingly, an exercise of a power of appointment without reserving a power of revocation produces the consequence that there has been a release of any power to make a future appointment in favour of another: Foakes v Jackson [1900] 1 Ch 807 at 810–811 (Farwell J); In re Hancock [1896] 2 Ch 173 at 183 (Lindley LJ).

87    I do not find these cases particularly helpful to the issue at hand.

88    Had there been an outright transfer of the shares to Mr and Mrs Oswal in their individual capacities in consequence of the resolution, one may more readily discern an intention on the part of the Trustee to release or abandon any right of indemnity that attached to the shares as part of the Burrup Trust prior to the resolution. For example, in Burns v Leda Holdings Pty Ltd, Dowsett J proceeded on the basis that the transfer or distribution by a trustee to the beneficiaries of the entirety of the trust funds, without any reservation in respect of the right to indemnity, operated as a release or waiver of the trustee’s right of indemnity.

89    This is consistent with the following proposition from Underhill and Hayton: Law Relating to Trusts and Trustees (18th ed, LexisNexis, 2010) at [81.34] (citations omitted):

Where a trustee exercises discretionary powers of appointment or discretionary trusts and appoints an asset in favour of an object, whether the asset will be released not only from the equitable interests of (default) beneficiaries designated in the trust instrument but also from the equitable interest commensurate with any right of indemnity of a trustee must be a matter of intention to be gathered from the circumstances. In the ordinary case where the trustee distributes funds to an object knowing that the object is intending to change his position in reliance on them (eg by spending them on living expenses etc.) it is implicit – if not made explicit – that the distribution is of assets freed and discharged from the trusts affecting them, unless otherwise stipulated.

(Emphasis added.)

90    But this is not the ordinary case, nor does it have any resemblance to the facts which came before the Court in Burns v Leda Holdings. Here the appointment is exercised by declaration of trust by the Trustee of the Fund over shares in a company, not by a distribution of funds to an object knowing that the object is intending to change its position in reliance on them. The shares remain vested in the Trustee and under his administration albeit on a new trust. Moreover, while I am of the view that the Trustee’s right of indemnity does not attach to the Burrup Holdings shares by virtue of the interaction of cll 12, 12.2 and 25, those provisions clearly indicate an intention that assets, other than assets of the Fund, such as assets representing the capital of a Beneficiary’s Fund to which the beneficiary in question is absolutely entitled, are assets to which the Trustee’s lien in respect of the Trustee’s right of indemnity attaches.

91    I have no doubt that a Court faced with the prospect that the assets of the Fund may not be sufficient to satisfy and discharge all liabilities properly incurred by the Trustee in the administration of the Burrup Trust, would not allow the Trustee to defeat the claims of creditors by repudiating an entitlement to be indemnified out of the shares in Burrup Holdings on the ground that the appointment worked a release, abandonment or waiver of that right.

92    For these reasons, I am of the view that the Trustee’s lien in respect of its right of indemnity continues to attach to the shares in Burrup Holdings subsequent to the making of the 13 March 2007 resolution; for that reason Mr and Mrs Oswal did not become, in consequence of the resolution, absolutely entitled to those shares as against the Trustee; and therefore that CGT event E5 did not happen in the 2007 income year.

Conclusion

93    For the foregoing reasons, the questions should be answered:

(1)    Question 1:

Whether Mrs Radhika Pankaj Oswal and Mr Pankaj Oswal became “absolutely entitled” within s 104-75 of the Income Tax Assessment Act 1997 (Cth) in the income year ended 30 June 2007 to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust.

Answer: No.

(2)    Question 2:

Whether either CGT event E1 or CGT event A1 happened in relation to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust at any time during the income year ended 30 June 2007, pursuant to either s 104-55 or s 104-10 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

Answer: Yes; CGT event E1 happened in relation to 902 shares in Burrup Holdings Pty Ltd during the 2007 income year pursuant to s 104-55 of the ITAA 1997.

Associate:

Dated:    31 July 2013