As a solicitor or FDRP it is not unusual to be faced with clients wanting to discuss property settlement, where they are seeking to obtain the benefit of assets that are held in a company or trust. This presents particular legal dilemmas that are often poorly understood by at least one of the parties and can impede negotiations until there can be clarity around such assets.

In many cases, one of the parties has obtained advice regarding asset protection or tax advantages, and accountants and financial advisors have constructed complex structures to achieve these goals. Often the other party has not been aware of these arrangements and within the family the assets have been treated as joint assets like any other acquired by them during their relationship. The question that arises is-to what extent can this structure be disregarded when negotiating and then implementing a property settlement?

This paper discusses whether assets contained in a company or trust would be regarded as property for the purposes of the Family Law Act, so that in property settlement proceedings, the court could make an order requiring that money or assets contained in these structures can be paid out to one of the parties. How can clients get the money out of trusts and companies in family law property settlements?

The Law

The court’s power to alter the rights of parties to property is contained in s79 for married couples, and s90SM in relation to de facto relationships. These sections both refer to the property of the parties to the marriage and of the de facto relationship. Property refers to that which one or both of the parties are entitled, whether in possession or reversion[i].

In considering a property settlement, the court will consider where it is just and equitable to make an order to alter the property interests of the parties[ii], and if so, apply the 4 step process that has been explored in the case law[iii]. The first step requires that the property available for sharing between the parties be identified and quantified. It is at this stage of the process that the asset pool is determined as the total of all of this property.

What is a company?

A company is a separate legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights which are usually only reserved for individuals, such as to sue and be sued, own property, hire employees or loan and borrow money.

What is a trust?

A trust is a relationship where property is held by one party or entity for the benefit of another. A trust is created by a settlor, who transfers property to a trustee. The trustee holds that property o behalf of the beneficiaries of the trust.

Rules and Regulations

Both companies and trusts provide a vehicle for the management of assets for taxation advantages and the distribution of income. They are both highly regulated, with various legal rights and obligations, and specific rules of law and liabilities.[iv]

Structures disregarded as artificial

It is easy to imagine a family enjoying the benefit of trust or company assets in the form of perhaps a beach house, or distributions from a trust or company by way of the payment of private school fees or holidays.

On separation, one party may be wanting to view these assets or income stream like any of the other items that they have accumulated during their relationship. The other may be arguing that these benefits are owned by a third party, or have been at the discretion of the trustee or the person controlling the trust, and cannot be assumed to be an ongoing interest that should feature in negotiations about future entitlements or the sharing of assets.

Regardless of the structure, one of the spouses may appear to have control of the assets and the power to distribute these. If the trust or company is in effect a “sham” and operates as the “puppet” of that spouse, then the well established rule in Ascot Investments Pty Ltd V Harper[v] would result in the structure being disregarded and the benefits being treated as property available for distribution between the parties under s 79 of the Family Law Act..

Financial resource

But what if the assets came from someone else; or there are other beneficiaries or share holders from outside the relationship; neither spouse has an equitable proprietary interest in the trust fund; or it is under the control of a third party? It may not be possible to get the assets out of the trust or company unless one of the parties has an equitable proprietary interest in the trust, or the power to appoint or remove the trustee of the fund and take control.

In these cases, the interests of third parties outside the relationship must be taken into account, and any orders must be just and equitable.[vi]

If there are other directors, shareholders and beneficiaries beyond the parties of the relationship and their children; or if they are established by another member of the extended family (such as grandparents), and the assets have come from them; or if the trustee or company is not controlled by a spouse; then the interest may be regarded as a financial resource and not property of the relationship.[vii] This information is important when considering step 3 of the 4 step property process, but these interests would not be regarded as property.

Required investigation

There are three important steps required in these investigations:

1. What is the nature of the interests of the parties in these entities? Do they come within the notion of “property” for the purposes of the Family Law Act?
2. If so, what is the appropriate sharing of these assets between the parties?
3. What are the issues that impact on the implementation of this sharing? What accounting and taxation implications need to be considered?

Corporations

In family law financial proceedings there are generally three types of categories of companies:

1. A corporation whose only function is as a trustee of a trust. Generally the spouses are each directors and each hold an equal number of shares. In this case the company structure would be no impediment. If there were third parties who were also directors or other shareholders of the trustee company, then this would require further investigation as to issues of control and entitlement.
2. A corporation where the parties to the marriage or relationship are the sole or major shareholders and through which one or both of them conduct the family business. In this case the company structure would not of itself impact on the ability of the court to alter the interests of the parties.
3. A corporation in which one of the parties holds shares, but there are other shareholders outside the immediate family, and these other shareholders are majority shareholders and therefore have control over the business. Examples of this category are where one of the parties has business activities with other persons, or there is a family business with other extended family members of the family. In these cases there needs to be a thorough investigation as to the establishment and management of the business, to determine the nature of the parties interests and how this impacts on the property proceedings.

To obtain clarity around these issues the following steps must be undertaken:

1. Discovery of all relevant financial documentation including documents establishing the company including constitution, ongoing minutes of meetings and resolutions, ongoing accounting and reporting records, bank statements, Loan agreements and statements as to any credit or debit loan accounts, agreements, and any key contracts
2. Expert opinion from accountant or tax expert

Even if the structure is regarded as a sham and the puppet of one of the parties, there may still be restraints on access to assets within the company due to the rules and regulations applicable to these entities, and the accounting and taxation ramifications. Expert opinion and advice is crucial to ensure that parties do not unwittingly accept assets from the company and find that there are penalties and other taxation consequences that were not anticipated.

Trusts

A trust is also a separate legal entity, but can be regarded in family law property proceedings as the asset of one of the parties if they effectively control these assets.

Commonly this will be the case where:

• One of the parties is the trustee of the trust and is able to manage how the trust assets are dealt with
• One of the parties is the appointor of the trust, and can determine who the trustee is who manages the trust assets.

In either of these cases, the trust structure will be seen as the alter ego of that party, and disregarded for the purposes of the property proceedings. The trust assets will be seen as assets of the relationship and capable of sharing under s 79.[viii]

There are situations where the facts are more complicated and will require further investigation:

1. Where one of the parties or both are beneficiaries of the trust, but there are others outside the immediate family. This can be the case where a grandparent has established a family trust to benefit his children, one of whom is a party to the relationship. That party may have an entitlement to benefit from the trust, but no effective control over the assets. This is particularly important when considering how to share benefits from the trust and get the assets out!
2. Where the trust involves a discretionary beneficiary who can use their discretion as to which beneficiary to distribute to, and how much to distribute. This is often the case with a family trust with allegations from one party that the distributions are likely to continue, should be seen as a financial resource, and should be taken into account in the property proceedings. [ix]The other party is likely to argue that they are up to the discretion of the trustee, a mere expectancy and should not affect the property settlement.[x][xi]

These questions take on greater importance when the trust assets are substantial and the non-trust portion of the asset pool are more modest!

Again, the following steps are crucial in achieving a comprehensive and accurate foundation for negotiations to proceed:

1. Discovery of all important documents including the Trust Deed, history of distributions, any documents relating to the establishment of the trust, all reporting documents, financial documents including Loan agreements, details of credit or debit loan accounts, bank statements;
2. Expert opinion from an accountant or tax expert as to any outstanding or anticipated taxation or accounting issues

Orders affecting the rights of third parties

If there are other directors, shareholders, trustees, or beneficiaries, with an interest in the trust or corporate structure, then they will be regarded as third parties for the purposes of the Family Law Act.

Part VIIIAA was introduced into the Family Law Act to clarify how the Act is to deal with the rights of third parties. It does provide some limited powers, but this does not extend to enlarging the asset pool by ordering third parties to make payments to the parties. [xii]

There are limitations on these powers in that they may define the rights between a party of a relationship and a third party but only where this is incidental to or reasonably necessary to defining the rights as between the parties to the relationship and constitutional. [xiii] This could involve interests in companies and trusts if reasonably necessary or appropriate. .[xiv] The crucial factor from the case law appears to be the source of the funds that form the trust or company assets.

Ability to implement orders

If a court is to make an order directed to one of the parties to the relationship, then it is necessary that the court be satisfied that the party is capable of legally complying with that order. In other words, if the order is to have the effect of requiring or causing a payment to be made from the trust fund to one or other of them, then this must be something that the party can do.

In this context, this usually requires one of the parties to be trustee, or in control of the company that is a trustee-in other words, they must have de facto and beneficial ownership. This would obviously be the case if for example no person other than one of the parties has any real interest in the property or income of the trust except at the will of that party. [xv][xvi] But not the case if there was a third party who opposed the proposed actions.

At the time of the hearing, a party may not be a trustee, and so appear as if unable to act upon an order directed to the trustee of a company or trust. However, if that party has the power to make themselves a trustee in order to effect a distribution, then they would be seen as having de facto control. In such circumstances they can take these steps to replace an uncooperative third party, and this has been seen as sufficient for the trust fund to be treated as property.[xvii][xviii]

There are many examples in case law of trust funds or companies where although one party has effective control, they share this with a third party at law, such as a business man who has his accountant as co-director. [xix] In such cases the party has actual control over the trust or company, but requires the concurrence of someone else to make distributions. In other cases, a party and another person had equal shares in the trustee company looking as if there was no ability to control the trust, but the party was also the appointor and had the capacity to exercise legal control.

These cases support the proposition that where a party has the legal power to control the trustee and therefore make distributions from the trust fund but requires the concurrence of a professional employed by him who is expected to act at their direction, or has the ability to put themselves in a position of control, then the trust fund may be treated as property of that party.[xx] [xxi]

Court’s powers

The court has various powers that could be used to enable assets to be transferred out of a trust or company structure. These include:

• the injunction power of s 114 to order a party to take such steps as necessary to bring the property into existence if within their power to do so;
• The power under s80(1)(d) to order any necessary deed or instrument to be executed as necessary to carry out the order;
• The power under s80(1)(k) to make any order necessary to do justice.

The effect of an order under any of these powers could be to authorize payment out of the trust. The party could be required to fulfill an order to be appointed as trustee, thereby making himself capable of making the payment out of the trust fund to the other party. This would facilitate the exercise of the fiduciary obligations of the trustee, and provide a foundation for enforcement proceedings if these became necessary.

Other powers that could be used in this context include:

• s 85A which could be used to effect interests held by third party trustees. There have been suggestions that this section could be used to affect “settlements” being subsequent transfers into a trust fund when the trust was not established in contemplation of the marriage/relationship in question. If property is held pursuant to a nuptial settlement and neither party have a legal or equitable interest in it, then this could be within the power of the court pursuant to s 85A.[xxii]
• s 106B -the setting aside or restraining of the making of an instrument or disposition made or proposed to be made to defeat an existing or anticipated order, or likely to defeat such an order.
• S90AE(1)-power to make orders regarding a creditor substituting one party for the other, or alter the proportion of liability, or make orders for a director of a company to transfer shares from one party to the other ;

(2) direct a third party to do something, alter rights, liability or property of a third party; but only if

• reasonably necessary or appropriate to give effect to the property settlement between the parties to the marriage, would result in any debt being paid in full, procedural fairness has been ensured, and it is just and equitable

Recent example of the court’s approach to the exercise of these powers[xxiii]

Galvan & Galvan and Ors [2015] FamCA 1092 (9 December 2015)

Facts

The parties were married for 9 years, both with children from their previous marriage. The Applicant Husband sought to make provision for the two children of his first marriage, and acted on advice from his accountant in ways designed to remove the Applicant Wife’s opportunity to claim an interest. He set up a Family Trust structure designed to exclude the Wife, and engaged in a series of property transactions alone or through the trust or with the co-operation of his children essentially to provide a financial benefit to the children or himself to the exclusion of the Wife.

Corporate structure

The Husband set up the Galvan Family trust , the settlor and Trustee being Galvan Pty Ltd of which he was the Director. There were specified beneficiaries of which he and his children were members, and general beneficiaries which despite his intention to exclude her, did include the Wife.

The Husband had property of a value equal to the assets of the trust because of his position of control and his ability to distribute to himself and unbeknown to him to the wife exclusively.

Strategies considered by the court:

• That any orders made should be just and equitable and take into account the rights of the third parties.
• That on the evidence the Trust was regarded for all practical purposes by the Husband as if it were his own property, but the court did not go so far as to regard it as a sham.
• Making an order requiring the Husband to act in his capacity as Director of the Trustee company to make a distribution under the Trust in favour of the Wife of some or all of the amount that may be in the Trust. The Husband had property outside the trust sufficient to satisfy the orders to be made, so it was not necessary for him in his capacity as trustee of the trust to take any action in order to implement the orders made.
• The application of s 90 AE and s 85 A were considered and found not to be appropriate in these circumstances. The court noted that it did have the power to interfere with the terms of the trust on the basis of this being a post nuptial settlement, and that subject to s85A it also had the power to intervene and change dispositions already made or that might be made.
• s 106B the setting aside or restraining the making of the instrument or disposition made or proposed to be made to defeat an existing or anticipated order, or likely to defeat such an order. The court made orders based on findings that the first distribution was made before proceedings had commenced and could not be set aside on the basis of the powers in s 106B. In contrast, the second distribution was made after orders had been made in the proceedings and should be set aside using these powers.

Outcome regarding this part of the case:

Pursuant to s 106B of the Family Law Act 1975 the distributions made by Galvan Pty Limited as Trustee for the G Family Trust in respect of the sale proceeds of F Street, Suburb H in the Australian Capital Territory are set aside.

Summary

The overriding consideration of the court in property proceedings is to take only such action that is considered just and equitable.

Where a situation involves only the rights of the parties to the relationship, and steps have been taken to establish a trust/corporate structure that impedes the rights of one party or both to their share of the assets, then the court can disregard the structure and treat the assets like all other property under s 79.

• Disregard the trust/corporate structure as a sham/puppet of one of the parties

Where assets have been treated during the relationship as if essentially assets of the relationship, but a trust/corporate structure has been imposed to remove control of those assets from the parties, then the court may order a party to take action to regain control of those assets, and treat them as property for the purposes of s79.

• Direct one party in their capacity as director, or to use their power of appointment to take on the role as trustee so that the appropriate transfer or distribution can be made s114, s90AE
• Set aside the making of a disposition or instrument that had the effect of taking the assets outside the control of the parties, and thereby bring them into the asset pool and available for sharing s106B or s85A

If the assets have come from another source other than the parties, and others are involved in the trust and corporate structure, then they may be regarded as financial resources and taken into account at step 3 of the 4 step property process. The court could use their powers to make an order in relation to any part of those assets that the parties have a beneficial interest in, or make orders taking this into account in the sharing of other assets in the asset pool.

The gathering of relevant documents and expert information is crucial in advising and supporting clients in these situations. As solicitor and FDRP we must be aware of the court’s powers, available strategies and approach to these situations, so that we can ask the right questions at the right time to support clients and work towards the best possible outcome.

[i] S 4 Family Law Act

[ii] s79(2) of the Family Law Act and Stanford’s Case

[iii] first set out in detail in Hickey’s Case.

[iv] In relation to discretionary trusts see I Hardingham “Controlling Discretionary Trustees” (1975) 12 UWALR 91

[v] Ascot Investments Pty Ltd V Harper (1981) 33 ALR 631 The evidence given in a case may indicate that a party to the marriage is in fact the beneficial owner of property even though there was an attempt to disguise ownership by means of a purported trust. See O’Chee v O’Chee (2006) FLC 93-275

[vi] Galvan & Galvan and Ors [2015] FamCA 1092

[vii] In the Marriage of Kelly (No 2) (1981) FLC 91-108

Essex v Essex (2009) FLC 93-423

[viii] This is a fixed trust where all the beneficiaries are clearly identified and their interest in the trust assets is fixed. See Gummow J in FCT v Vegners(1989) 90 ALR 547 for a good description of these trusts at parags 551-2

[ix] In Kennon v Spry the wife was seen as having a right to be considered in the property proceedings, not a right to any share of the trust fund itself, an equitable chose in action, not an equitable interest in property

[x] see note above and the comments of Gummow J for a good discussion of the difference between fixed and discretionary trust.

[xi] The only situation in which a beneficiary of a discretionary trust might have a proprietary interest is if the class is closed (no new beneficiaries may be added or born), the discretionary trust is exhaustive (no discretion to accumulate income), and all the beneficiaries can between them call for the trust to be wound up ASIC v Carey (No 6) [2006] FCA 814

[xii] See B Pty Ltd v K [2008] FamCAFC 113 In this case the wife sought an order that the third party trustees make a payment to the husband, and that the Husband then make this payment to her.

[xiii] Hunt v Hunt [2006] FamCA 167

[xiv] Simmons v Simmons [2008] FamCA 1008 [2009] FamCA 433

[xv] Ashton v Ashton (1986) FLC 91-777

[xvi] The High Court decision of Kennon v Spry[xvi] discussed the case law up to that time.In this case a spouse was

• the trustee, with the power to appoint or remove the trustee,
• she could distribute funds to a spouse either directly or

indirectly, and

• the assets would belong to her wholly or in part, but for the existence of the trust.

The court was satisfied it could make orders directed to her having the effect of requiring her to make a payment or cause a payment to be made from the trust fund, and that she was capable of legally complying with this order. In this case the trust funds under the legal control of the wife were treated as property under the FLAct where she was a trustee and had the power to distribute the trust property to the other spouse, even though she was not a beneficiary.

In this case, the source of the assets was from someone other than a party to the marriage, there were third party beneficiaries who had rights to be considered, and neither party had an equitable proprietary interest in the fund.

This case extends the application of the proposition that trust funds under the legal control of a party should be treated as property under the FLAct to one party of the marriage is a trustee with the power to distribute trust property to the other party but not actually a beneficiary.

It is said to be binding authority for the proposition that the court cannot treat assets under the control of third party trustees as property of the parties or either of them, unless a party to the marriage has an equitable proprietary interest, or has the power to appoint or remove the trustee.[xvi]

[xvii] Goodwin v Goodwin Alpe (1991) FLC 92-192

[xviii] This may be sufficient to bring interests in a discretionary trust into the asset pool, but if the party is not in fact the trustee, then should this be regarded as “property” and how does this impact on implementation of any property orders regarding this asset? The suggestion is that this difficulty could be managed by careful distinction between “property” for the purposes of determining the asset pool (step 1 under s79), rather than “property” for the purposes of making an order under s79.[xviii]

[xix] One example is Stein v Stein (1986) FLC 91-779

[xx] see Davidson v Davidson (1991) FLC 92-197

[xxi] This approach appears inconsistent with some of the other cases regarding application of the test of “control”, as the party in these cases does not strictly have control over the assets. Perhaps a better approach would be to regard it as “contingent interest” or to consider using the power under s114 as discussed above.

[xxii] see T North “Spry v Kennon:the last word” (2010) 21 Australian Family Lawyer 15; B Pty v K {2008} FamCAFC 113 It is hard to see how this could result in the transfer of funds from a third party to either of the parties to the relationship within the constitutional constraints described in the cases!

[xxiii] Maxwell & Maxwell [2015] FamCA 1171 (7 July 2015)

Facts

This is a first instance decision of the Family Court involving a 10 year relation ship where the parties had two children. The father was engaged in farming and grazing in a rural family enterprise involving the Husband in this matter and his two brothers, his parents, and his aunt. The Husband had no direct interest in the establishment at the commencement of cohabitation but was receiving an income from the farm of $500 per week. He claimed that this consisted of his drawings, and represented a significant excess of drawings over the relationship that need to be repaid. The Wife claimed that this was his wages for working on the farm and should not be taken into account in that way.

The Husband and his brothers borrowed to buy out his aunt’s interest in the enterprise during the relationship and to purchase farm equipment and machinery to run the farm. Substantial borrowings existed, as a result of which the asset pool was small. The Husband had a minority interest in the Trust, companies and partnership assets.

A major difficulty in this matter was valuing the assets and taking into account any appropriate discount reflecting the very large borrowings and modest income. It was agreed by the Wife that she would receive a cash payment allowing the Husband to retain his interest in the farm. The nature of this payment and appropriate security were also issues before the court. The Wife agreed to accept her entitlements by instalments, and interest was ordered. The court indicated that they wished to be no more restrictive on the Husband than absolutely necessary, perhaps in response to the knowledge that this affected not only the Husband’s interest but also that of the other third parties being the Husband’s brothers and parents.