It is not uncommon to discover an error within a deed establishing a trust.
The recent decision of the Federal Court in Trustee for the Michael Hayes Family Trust v Commission of Taxation[1] provides some helpful guidance on resolving such errors.
What was the issue?
A Trust was established with two key beneficiaries being named in the deed, one of which was a family trust and the other of which was a self managed superannuation fund.
Unfortunately, in preparing the trust deed, the prior trustee company for the self managed superannuation fund was named rather than the current trustee company.
The settlor and trustee entered into a deed to rectify this issue. However, during an audit investigation the Commissioner sought to argue that the prior trustee company named in the trust deed was in fact the key beneficiary of the trust.
What did the Federal Court decide?
The Commissioner argued that there was no ambiguity present in the trust deed, therefore the company named in the deed should be construed to be the key beneficiary of the Trust. However, the Court held that a broader approach should be taken. Against the background to the arrangement that was being put in place, the reference to prior trustee company as a key beneficiary made no sense. Accordingly, the Court concluded that the key beneficiary of the Trust was in fact the current trustee company for the self managed superannuation fund.
The Court also considered the effect of a deed of rectification, and concluded that such a deed would be effective if it recorded the fact that the parties were under a mutual mistake. However, where the deed of rectification was questioned by a third party, such as the Commissioner, there was utility in making a Court Order.
What can we learn?
Where a mistake exists in the trust deed:
- The first thing to consider is whether the mistake can be addressed by adopting an appropriate construction of the trust deed.
- If the issue cannot be overcome by construction, the relevant parties should consider entering into a deed of rectification.
- If a third party, such as the Commissioner, disputes the deed of rectification a Court Order may then become necessary.
In recent times, one of the most common error we have seen in trust deeds is the incorrect execution of the deed by the trustee company. Without rectification, this error could lead to the deed being invalid, as was the case in Re Narumon.[2]
Should you encounter any issues in relation to errors in trust deeds, please do not hesitate to contact us.
[1] [2019] FCA 426
[2] Re Narumon Pty Ltd [2018] QSC 185