Ruse vs sham - circumstances in which a deed designed to deceive will not be upheld as a sham

Vicki Amundsen Png                 Allegations of sham trusts, although relatively commonly made, are rarely successful. The case of Glover Trust Limited v Glover Trust Corporation & Ors ([2013] NZHC 545, [2013] NZCA 608, [2013] NZHC 2056) introduces an unusual twist on the sham argument where it was the trust’s settlor who alleged that the trust was a sham rather than, as is more commonly the case, a third party.

The genesis of the case was a relationship breakdown and a purported distribution of certain trust assets onto a new trust in an attempt to better protect assets for the benefit of the wife and her children.

The more unusual aspect of the transaction was that, in an effort to avoid a potential GST liability, the documents prepared to effect the transaction also included a Deed of Bare Trust that provided that the properties in question were held on a bare trust for the original trustee proprietor.

The logic behind the arrangement derived from the fact that a GST liability would arise on an outright transfer of the trust assets. As noted by Allan J in the High Court “the Deed of Bare Trust was created for the purpose of production to the revenue authorities as required”.

What was intended was an outright transfer of trust assets for the ultimate benefit of one party to the relationship. However, the transaction was structured to look in part as if nothing had happened in order to avoid tax consequences. Transfer documents were signed, and held un-registered for a period of time.

The question for the Court was whether the Deed of Bare Trust was valid, despite its design characteristics of a “ruse”. One might presume the Court would be quick to shoot down such a document as the sham that it was contended to be.

However, the High Court took the view that the fact that the Deed of Bare Trust was prepared for a limited purpose of deception does not necessarily provide that it is invalid or ineffective.

In fact, finding the contrary, Allan J noted that the deed: “had to be effective in order to achieve its objective, namely that of avoiding a significant tax liability. The Deed of Bare Trust could not be valid and effective for some purposes but not for others.”

The reason for this was that as the bare trust had been effective (the tax liability was avoided), it met its purpose. 

A similar conclusion was reached in a recent New South Wales case where a trust for an improper purpose (hiding property from a party to relationship property proceedings and the Australian Tax Office and, by inference, from the Court hearing the relationship property proceedings), was found not to be
a sham.

The Court stated, whether or not it was clear  that the Court hearing the property claim, the revenue and the husband were deceived, that
“ ... even if deception occurs in fact, [this] does not suffice to conclude that the ... Trust was a sham” (Lewis v Condon [2013] NSWCA 204).

The result in Glover Trust Limited v Glover Trust Corporation & Ors was that the trustees of the new trust were required to return the properties to the first trust, to which they remained subject.

The decision was upheld on appeal. In its decision, delivered in December 2013, the Court of Appeal, referring to the fact the trust’s settlor was seeking to impugn the validity of a document prepared in accordance with her instructions, noted at [29] that:

 “On this approach, Ms Sparks’ interests would be able to profit from her own wrong given that she executed the documents on behalf of the settlor and trustee.

“That is because a finding of a sham would likely result in the trust property reverting back to the settlor but allowing it to be retained rather than being available for creditors. Such a result would be inequitable.”

Vicki Ammundsen is a partner at Ayres Legal. She blogs on all things trust-related at www.mattersoftrust.wordpress.com

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