Analysis
The claimant, a Swiss corporation, was the sole trustee of three discretionary trusts named as the Gabri, Puyol & Xavi trusts (the trusts) which had been created via a British Virgin Islands (BVI) company by Hyman Sofer (the settlor) in 2006. The trusts, though expressed to be governed by English law, were set up in Australia and a holding vehicle called the Jordi Unit Trust was used to channel the investments. Neither the settlor nor his children or remoter issue originally figured as settlor and beneficiaries, though they were later added to the classes of ‘Specified Beneficiaries’ and ‘General Beneficiaries’.
A dispute between the settlor and the Australian Taxation Office (ATO) as to whether he was a resident of Australia for income tax purposes and whether he was liable to pay such tax on amounts paid from the Jordi Unit Trust was settled by a deed dated 18 July 2012 (the settlement). This provided, inter alia, that the settlor would pay the ATO a fixed sum within a certain timescale and that no further assessments would be issued to him or any ‘related entity’. By clauses 3.6 and 3.7 of the settlement the Commissioner acknowledged that the amount of corpus of the trust estate was AUD 59,245,591 (the original amount) and that any amounts in the future paid to or applied for the benefit of the settlor or any related entity from the corpus, which would otherwise be included in assessable income by virtue of s99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936), would not be so included to the extent that they were attributable to, or expressly paid from, the original amount. By deeds of amendment dated 8 October 2012 the claimant, in exercise of powers of variation and with protector consent, amended the trusts by the insertion of new provisions, including:
‘(1a) On the Corpus Vesting Day, the Corpus of the Trust Fund (being one third of the balance of the “Original amount“ as defined in the [settlement]… but in no event must that amount exceed one third of the corpus of the trust estate and within the meaning of Section 99(B)(2)(a) of the [ITAA 1936] when applied to this Trust)…’
The ‘Corpus of the Trust Fund’ was also defined in each unit trust by reference to:
‘… the amount held on trust pursuant to clause 8.9 of the Trust Deed governing the Jordi Unit Trust, but in no event will that amount exceed the “Corpus of the Trust Estate“ within the meaning of that term in Section 99B(2)(a) of the [ITAA 1936], when applied to this Trust.’
The problem was that the explanatory words in brackets were inconsistent with the definition of the ‘Corpus of the Trust Fund’; the draftsman, having identified the corpus, nominally subdivided it again by using the words ‘in no event must that amount exceed one third of the corpus of the trust estate within the meaning of that term in Section 99B(2)(a) of the [ITAA 1936], when applied to this Trust’. On the face of it, therefore, this second subdivision reduced the tax-free corpus to one third of its original size under the settlement. That made no commercial or fiscal sense and the claimant, supported by the beneficiary defendants, brought a construction claim that those words were meaningless and should be ignored.
Held (allowing the claim):
The well-known principles of interpretation for commercial documents similarly applied to trust instruments. The court was concerned to find the intention of the parties by identifying the meaning of the relevant words in the light of:
- (i) the natural and ordinary meaning of those words;
- (ii) the overall purpose of the document;
- (iii) any other provisions of the document;
- (iv) the facts known or assumed by the parties at the time that the document was executed; and
- (v) common sense,
while ignoring subjective evidence of a party’s intentions. It was not necessary to determine whether an approach based on a commercial contractual right would lead to a different conclusion than an approach based on property rights though, in this case, they led to the same conclusion.
A curious feature of the provision to be construed was that, though expressed to be governed by English law, it included an express reference to a foreign law, namely the ITAA 1936, and the claimant had obtained an opinion from an Australian tax barrister that those provisions in effect established a tax-free corpus. Ordinarily, this would be regarded as evidence of opinion though in this case, so far as relevant to the issues, it was treated as evidence of fact.
As to the question of construction itself, it was clear that the purpose of the document was to amend the trusts to take account of the tax-free corpus established by the settlement. Aside from the words in parenthesis, it was equally clear from each definition that they were intended to deal with the same thing, namely the tax-free sum for each trust produced by dividing the original trust corpus into three equal parts. First, it was clear from the actual words used that the words in parenthesis were not on the same ordinal level, being an explanation by the way rather than itself a definition and, as such, would not normally be expected to cut down the formal definition. Common (commercial) sense indicated that those explanatory words were inserted in error and should be ignored as superfluous. Accordingly, as the claim for construction succeeded, there was no need to consider an alternative claim for rectification.
JUDGMENT HHJ PAUL MATTHEWS: Introduction [1] These are the reasons for my decision on the trial of the first part of a Part 8 claim, dealing with an issue of construction of certain trust instruments expressed to be governed by English law. The claimant is the sole trustee of all the trusts from inception, and …Continue reading "SwissIndependent Trustees SA v Sofer & ors [2023] WTLR 329"