Articles

Impact of loss of capacity on control of a trust

Loss of capacity is a growing area of concern in Australia. The impact upon trust relationships controlled by an affected person is significant, as loss of capacity necessitates a change of control. This is especially important in cases where the individual suffering loss of capacity is sole trustee or sole director of a corporate trustee.

Corporate Trustee

In Australia, if a trustee is a corporate entity, and the sole director and member loses capacity the Corporations Act 2001 (Cth) (‘Act’) provides that he or she may be replaced.[1] A validly appointed attorney cannot simply step in as company director;[2] but subject to the constitution of the corporate trustee a validly appointed attorney may choose a replacement director who may be the attorney him or herself.[3] As the director was the only member an attorney with the power to deal with the shares is also able to exercise the member power to appoint a director.[4] As the Act is Commonwealth legislation the law governing replacement of the sole director and member of a corporate trustee is the same in each state and territory of Australia.

Individual Trustee

If an individual trustee loses capacity, the effect upon the trust relationship initially depends upon the trust deed. Many deeds include provision for transition of control on the death of a trustee; dealing with transition of control on loss of capacity is less frequently provided for. At general law the position of trustee is a personal fiduciary position. If a natural person trustee loses capacity he or she must be replaced in accordance with the provisions of the deed, the trust legislation applicable to the relevant state or territory of Australia[5] or order of the Court.

Although legislation governing powers of attorney is differently drafted in each state[6] and territory, all maintain the general law position that a personal fiduciary role may not be assumed by an attorney.

If a trust instrument does not provide for replacement of a trustee on loss of capacity then a person with power to remove and appoint a trustee under the deed (where such exists) may do so in all Australian jurisdictions. If no competent person has power to appoint a trustee under the deed state and territory legislation provides no power to do so. Each jurisdiction’s trust legislation does allow a representative or personal representative of a last trustee to appoint a replacement but in each case this term is defined to mean the executor or administrator of a deceased trustee.

The Powers of Attorney and Agency Act 1984 (SA) is among the most broadly drafted legislation. Subject to the terms of the actual power the South Australian legislation states that what is done by the donee of an enduring power is considered to have been done by the donor as if he or she were competent and not incapacitated.[7] However, it is still specified that the donee of a general power may not act as trustee or personal representative in the place of the donor.[8]

If a trust instrument does not provide for replacement of a trustee on loss of capacity then a person with power to remove and appoint a trustee under the deed (where such exists) may do so in all Australian jurisdictions.[9]  If no competent person has power to appoint a trustee under the deed state and territory legislation provides no power to do so. Each jurisdiction’s trust legislation does allow a representative or personal representative of a last trustee to appoint a replacement but in each case this term is defined to mean the executor or administrator of a deceased trustee.

Unfortunately, many Australian discretionary trusts, created and utilised for the benefit of a particular family, have a sole trustee who also holds the power to appoint a new or additional trustee under the trust instrument. In such circumstances, on loss of capacity there is no trustee able to act and no person able to appoint a replacement. The only option here is to apply to the Supreme Court of the relevant state or territory. Each Supreme Court has, besides the inherent jurisdiction to appoint or remove a trustee,[10] powers under relevant legislation to do so in the interests of the beneficiaries or to further the objects of the trust.[11] A Court may also remove a trustee to further the welfare of the beneficiaries.[12]

Duties

Having determined how the trustee who has lost capacity may be replaced, the potential impost of federal tax and state duties must be considered. Replacement of a trustee involves a transfer of legal title to trust property. A transfer that takes place under the terms of the trust instrument or by order of the court is not subject to capital gains tax as under federal legislation the taxpayer in respect of trust property is the person or persons being the trustee at any given time. 

Duties are imposed separately by each state and territory of Australia. Each jurisdiction provides either exemptions or concessions for a change of trustee; however each imposes different criteria for accessing these. In the event the concessional conditions are not met duty is imposed on the value of the dutiable property[13] transferred to the replacement trustee.

State Legislation Notes
SA Stamp Duty Act 1923 s 71(5)(d) No duty provided the Commissioner is satisfied the transfer is not part of a scheme for conferring a benefit, in relation to the trust property, upon the new trustee or any other person.
NSW Duties Act 1997 s 54 Duty of $50.00 is chargeable provided no new or continuing trustee is or can become a beneficiary under the trust and the transfer is not part of a scheme to avoid duty.
Vic Duties Act 2000  s 33   No duty provided the Commissioner is satisfied the change is due to retirement of a trustee, the appointment of a new trustee or other change in trustees and in order to vest the property in the trustees for the time being entitled to hold it.
Qld Duties Act 2001 s 117                                     No duty on a change of trustee provided there is no change in the rights of a beneficiary and no connection with terminating the trust.
Tas Duties Act 2001 s 37                                              Duty of $50.00 is chargeable provided the Commissioner is satisfied the change is due to retirement of a trustee appointment of a new trustee or other change in trustee and in order to vest the property in the trustees for the time being entitled to hold it.
WA Duties Act 2008 s 119                                                Nominal duty is chargeable provided the transfer is not a scheme or arrangement, or part of a scheme or arrangement, for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person.
NT Stamp Duty Act Schedule 2 No duty provided no change of beneficial interest occurs as a result and the required duty was paid by the trustee being replaced.
ACT Duties Act 1999 s54                 No duty on a change of trustee provided no new or continuing trustee is or can become a beneficiary under the trust and the transfer is not part of a tax avoidance scheme.

Conclusion

Australian practitioners drafting deeds should consider providing for succession on loss of capacity. If appropriate succession clauses are drafted into the original deed this can ameliorate what is otherwise a complex and potentially expensive process. Where there is an appropriate variation clause available the addition of comprehensive succession clauses to existing deeds is a valuable client service. In either case compliance with the relevant state law and the conditions for the application of concessional duties on the change of trustee require close attention.



[1] Section 201F Corporations Act 2001 (Cth).

[2] Mancini v Mancini [1999] NSWSC 799, [30], Cheerine Group (International) Pty Ltd [2006] NSWSC 1047, [10] and In the matter of Ledir Enterprises Pty Limited [2013] NSWSC 1332).

[3] Section 201F(4) Corporations Act 2001 (Cth).

[4] Provided, of course, that this is in the best interests of the donor.

[5] Trustee Act 1936 (SA); Trustee Act 1973 (Qld); Trustee Act 1925 (NSW); Trustee Act 1925 (ACT); Trustee Act 1893 (NT); Trustee Act 1898 (Tas); Trustee Act 1958 (Vic); Trustees Act 1962 (WA).

[6] Powers of Attorney Act 2006 (ACT); Powers of Attorney Act 2003 (NSW); Powers of Attorney Act 1998 (Qld); Powers of Attorney and Agency Act 1984 (SA); Powers of Attorney Act 2000 (Tas); Instruments Act 1958 (Vic); Powers of Attorney Act 1980 (NT) and in Western Australia the Property Law Act 1969 (WA) and Guardianship and Administration Act 1990 (WA) combined.

[7] Sub-section 6(3) Powers of Attorney and Agency Act 1984 (SA).

[8] Sub-section 5(4) Powers of Attorney and Agency Act 1984 (SA).

[9] Trustee Act 1936 (SA)s 14; Trustee Act 1925 (NSW) s 6; Trustee Act 1958 (Vic) s 41; Trusts Act 1973 (Qld) s 12; Trustee Act 1898 (Tas) s 13; Trustees Act 1962 (WA) s 7; Trustee Act 1983 (NT) s 11; Trustee Act 1925 (ACT) s 6.

[10] Miller v Cameron (1936) 54 CLR 572,580.

[11] Trustee Act 1936 (SA) s 36; Trustee Act 1973 (Qld) s 80; Trustee Act 1925 (NSW) s 70; Trustee Act 1925 (ACT) s 70; Trustee Act 1893 (NT) s 27; Trustee Act 1898 (Tas) s 32; Trustee Act 1958 (Vic) s 48 and Trustees Act 1962 (WA) s 77.

[12] Porteous v Rinehart (1998) 19 WAR 495, 507.

[13] Generally a defined term: Duties Act 1997 (NSW) s 11; Duties Act 2000 (Vic) s 10; Duties Act 1999 (ACT) s 10; Duties Act 2001 (Tas) s 9; Duties Act 2001 (Qld) s 10; Duties Act 2008 (WA) s 15; Stamp Duty Act 1978 (NT) s 4