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 Tax Office. The company held nine properties for the trust and, after receiving the tax bill, the company put into effect 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" – meaning the transfer of title to a property from one party to another – 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.

case a - The case for the Tax Office case b - The case for the investment company
  • By declaring the properties to be held by the new trusts, the company effectively destroyed any right of indemnity to use those assets to cover the tax liabilities of the family trust.
  • The purpose of resettling the properties in the new trusts was to instead place the property of the family trust at the disposal of the beneficiaries of the new trusts.
  • This "alienated" the properties from the Commissioner and amounted to an intent to defraud the Tax Office.
  • There was no intent to defraud the Commissioner.
  • The restructure didn't destroy any right of indemnity held by the company, it just changed the nature of the trust assets from being a right to sell the properties to a right to recover debts owed.
  • Indeed, the properties were purchased for greater than market value so the net value of the trust assets had actually increased so there was no detriment to the Tax Office.
  • Yes, it's true that the restructure was undertaken to achieve the ultimate effect of preferring one creditor – the owner of the company - over the Commissioner. But that of itself does not amount to intent to defraud a creditor.

So, which case won?

Cast your judgment below to find out

Vote case A – The case for the Tax Office
Vote case B – The case for the investment company

Mark Joseph
Business disputes and litigation
Stacks Law Firm

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