Is it a sham to use a discretionary trust to deceive your partner and evade tax?

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In Lewis v Condon; Condon v Lewis [2013] NSWCA 204, Is it a sham to use a discretionary trust to deceive your partner and evade tax?

Background

The appellant caused Appinville, a company controlled by her accountant, to acquire title to a property at Kenthurst as trustee of the Kenthurst Investments Trust, a discretionary trust in favour of herself, her daughters, and her grandchildren, and of which she was the appointor. The Court of Appeal said the primary judge (Rein J) found “that her purpose was to deceive her former husband, the Family Court and to avoid tax”. According to the Court, in 2005, the appellant disclaimed any interest in the trust, and purported to amend the trust so that one of her daughters was the appointor. On the same day, that daughter purported to remove Appinville and appoint the appellant as trustee.

In 2006, proceedings between the appellant, her former husband and her daughter were settled, and a declaration was made that the appellant would hold the Property as trustee of a discretionary trust, and an order was made that it be transferred to her within 30 days. Although the daughter subsequently purported to appoint another company, Robana, as trustee, the Property was not transferred to Robana before the appellant was made bankrupt in 2012. Her trustee in bankruptcy lodged a caveat and applied to have the Property transferred to it. In separate proceedings between the trustee in bankruptcy and Robana, a declaration was made that the trustee in bankruptcy was entitled to be noted on the register in respect to the Property as the registered proprietor in lieu of the appellant.


The legal proceedings

The daughter commenced proceedings against her mother’s trustee in bankruptcy, joining Robana, and seeking orders that the Property was held on the terms of Kenthurst Investments Trust and that it be transferred to Robana. The trustee in bankruptcy said that the Kenthurst Investments Trust was a sham, that the property had been the appellants beneficially, and that the declaration in 2012 gave rise to a res judicata (that is, the matter had already been decided).   The primary judge found that:

• the trust was not a sham; and

• that the declaration in 2012 did not give rise to a res judicata,

but dismissed the proceedings for want of standing (in Lewis v Condon as trustee of the bankrupt estate of Colleen Anne Rayhill (No 2) [2013] NSWSC 126). He also held that Robana had not been validly appointed as trustee because the appellant continued to be the Appointor (the purported amendment in 2005 being invalid), and favoured the view that there was no trustee.   The daughter sought leave to appeal.


Decision

On the question of whether Kenthurst Investments Trust was a sham, the Court of Appeal held that, “although the Kenthurst Investments Trust was created with an intent to deceive others, the primary judge was right to conclude that it was not a sham trust”. The Court said it did not (and could not) subsequently become a sham. In the Court’s view, in order for there to be a sham, it was necessary there be an intention that the discretionary trust created not bear its apparent legal consequence. That was not the case here, it said. While there was an improper purpose, the Court said “this was entirely consistent with the creation of a genuine discretionary trust”. “It was unsafe to rely on evidence years later that [the appellant] acted in breach of trust as evidence of a shamming intent in 2001”.

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