Controlled Trusts

The AAT has upheld a Veterans’ Affairs assessment of a trust as a controlled private trust for the purposes of applying the Veterans’ Affairs means test to the principal of the trust.  The trust was a non-discretionary family trust with the, the principal’s daughter as was the sole director of the corporate trustee.  The, the principal settled property on the trust and was  the principal was a beneficiary of the trust.  Consequently, the income and capital of the family trust was attributable to the principal for means test purposes on the basis that the principal controlled the trust.  The AAT upheld the assessement of the family trust as a controlled private trust as the principal could appoint and remove the trustee, an associate of the principal controlled the trustee and the principal and his associates could vary the terms of the trust deed.

The case is of interest as the AAT also upheld the argument of Veterans’ Affairs that the attempt to amend the trust deed of the family trust – by removing the power of the principal to appoint and remove the trustee - was ineffective.  The amendment power was conferred on the corporate trustee of the family trust and could only be exercised by the corporate trustee by means of a deed executed by the corporate trustee.  Additionally, a valid exercise of the amendment power required the trustee to give three months’ notice of the proposed amendment to the principal.  Unfortunately, the proposed amendment was effected as a written resolution of the sole director of the corporate trustee and not as a deed executed by the corporate trustee.  The AAT held the amendment was, therefore, ineffective.

The AAT did, it seems, hold that the notice requirement for any amendment did not amount to a veto power over amendments and therefore the principal (being the individiual to whom notice was required to be given) did not, by reason only of the notice requirement, have control over the family trust.

Unfortunately, the AAT did not consider the issue as to whether the notice period requirement could be waived by the principal.  Also, the AAT did not consider the issue as to whether the removal of the role of the principal (assuming the amendment was otherwise valid) would have been invalid as altering the substratum of the trust.  These interesting points were not considered by the AAT as it had found that the attempted amendment was invalid on other grounds.    

Case reference – Franke v Repatriation Commission [2015] AATA 733.