The Facts
Tax assessment results in $7 million tax bill
Following a tax assessment, the corporate trustee of a family trust was found to owe $7 million to the Australian Taxation Office.
The company held nine properties for the trust. After receiving the tax bill, the company implemented a complicated restructure to transfer ownership of those properties.
Nine new trusts created and ownership of properties transferred from family trust
Basically, the company became the trustee of nine new trusts (one for each property) and made declarations that each property was owned by these new trusts and not the original family trust.
The nine new trusts paid the family trust for these properties and the family trust used this money to repay a loan owing to the owner of the company.
The practical effect was that the owner of the company was now a “preferred creditor” ahead of the Commissioner of Taxation, and that the tax office would most likely not be paid.
Were the declarations an “alienation” of property?
The Commissioner brought proceedings alleging that the declarations amounted to an “alienation of property”. This term refers to the transfer of title to a property from one party to another in a process designed to defraud creditors, specifically the tax office.
If the Commissioner was right, that would mean that the property transfers could be held void.
The Court of Appeal had to determine whether the restructure was legal.
Expert commentary on the court's decision
Alienation of property not undertaken with intent to defraud creditors
The case Peter Sleiman Investments Pty Ltd as trustee for the Sleiman Family Trust v Deputy Commissioner of Taxation [2017] NSWCA 81 hinged on section 37A of the NSW Conveyancing Act 1919, which provides that every alienation of property undertaken with the intention of defrauding creditors will be voidable at the prosecution of a case by a party which has been disadvantaged by the alienation.
The judge noted that to satisfy the elements of section 37A, the following questions must be answered:
Problems with tax office’s case
It was noted that the wording of the deeds of declaration alone suggests that the new trusts were given one property each without payment. This was not argued by the Commissioner and could well have constituted an alienation of property. However, it was common ground in the proceedings that the units were issued as payment for the resettlement of property.
The court also noted that as the litigation was commenced by summons and no pleadings were filed by the Commissioner, it was difficult to determine what constituted the relevant alienation of property and the relevant intent to defraud creditors. The judge also noted that fraud must be pleaded.
The court noted that the Commissioner’s claim did not extend to the repayment of the alleged debt to the owner of the company, Peter Sleiman, by his investment company, Peter Sleiman Investments (PSI).
The judge commented that this payment may have constituted an alienation. However, the question was whether the deeds of declaration were alienations.
Alienation of property and trustee’s right to indemnity
A trustee’s right to indemnity is the right to use the assets of the trust to cover expenses in relation to the trust. In determining that the trustee’s right of indemnity was unaffected, the judge noted that after the properties were resettled, PSI as trustee of the family trust became entitled to be indemnified out of the units issued to it and then the debt owed to it to the same extent as its former right of indemnity against the properties.
In relation to the right to indemnity, the judge stated: “The nature of the property in the estate of the Family Trust changed but the right to indemnification from the property of the estate did not alter. There was no disposition or alienation by PSI of its right to indemnification.” The judge noted that the trustee’s right to indemnity extended to current assets of a trust, not assets that have been sold for fair value.
Intent to defraud and disadvantage
It was common ground that the units were issued above the market value of the properties.
As the value of the units was at least equal to the value of the properties, the court concluded that it was difficult to find that the Commissioner of Taxation had been disadvantaged.