The three rules of interpreting trust deeds: interview with Ken Schurgott

‘I've got a very large collection of beer labels, some of them going right back to the 19th century some of them quite valuable. But my interest more recently has been on craft breweries, because the number of craft breweries in Australia has burgeoned in the last 10 years, from about a dozen to probably about 600. And once upon a time, myself and a few other people sought to collect them all, but it's impossible. Totally, totally impossible. Now I collect South Australian beer labels because I'm from South Australia. But I try to collect an example of two beer can or bottle labels for each new brewery. And that in itself is pretty difficult.’

Ken Schurgott, CTA (Life), Solicitor and Director of Schurgott & Co Lawyers, knows what it means to commit to collecting – be it beer labels or tax knowledge. Ken is a member of the Beer Can Collectors Association in South Australia and the Victorian Beer Label Collectors Association and proud owner of 15,000 beer labels.

He’s also a member of The Tax Institute and even more dedicated to his work in the trusts space as beer labels. And that’s saying something.

‘I've been practicing tax law now for over 40 years and the bit I've enjoyed most is dealing with the interplay between trusts and taxation. Of course it’s also been the most frustrating,’ Ken told us, when we caught up with him ahead of his session at the Tasmanian Convention this September.

‘The whole concept of a trust and its relationship is quite fascinating. I suppose the problem with that is I often get over-fascinated and questions keep coming up and I go, “I don’t know what the answer to that is”, but one needs to explore. The problem with exploring is that if you do it in very considerable depth, the cost can become out of control. So, while I've enjoyed it and I've often done the work – I often haven't charged for it either. Because it's been a bit of a pastime, as it were, to get to an answer even though you know that it's going to take you a very long time to explore the case law.’

Clients often aren’t concerned with ‘the finest legal reasoning’ and are simply looking for the quickest way to a result. But it’s important for practitioners to impress upon clients that abiding by correct trust law is a requirement for smooth dealings in terms of tax and other areas. And it’s not just tax regulators who will be looking at trust structures. Trust law also intersects with other areas including family law, disputes, bankruptcies and family provision disputes.

‘I think one of the things that practitioners don't sell to their clients particularly well about trust law is that tax law follows on from trust law. So, if you don't get the trust law right, then you are often going to run into a problem with complying with the tax laws.’

In run of the mill day-to-day practice, the minutiae of compliance requirements for creating entitlements to income, or to capital gains, may not attract that much scrutiny from the ATO, Ken says. But if a client case comes under dispute or escalates to the Administrative Appeals Tribunal or Federal Court, you’ll need to have your trust ducks in a row.

‘That is when the real compliance is necessary, did we make the proper distribution? Did we do it in an appropriate fashion? Did we comply with the trust deed? That's when the focus is really on those issues and in part, in a significant part, that's what my workshop's about, making sure that you, as best possible, get it right. So, should it all unravel in a compliance review, or an audit, then you can rest assured that you've dotted the Is and crossed the Ts,’ Ken says.

In his session Pre-Convention Workshop: The Devil is in the detail – Difficult Trust distribution decisions, he’ll discuss issues many practitioners come across in their practice, including playing by the rules in a trust deed and the consequences of not doing so.

‘It is trite, but there's only three rules about interpreting trust deeds,’ he says, ‘Read the deed, read the deed and read the deed.’

Ken’s session will also cover:

• What tax agents can and can’t do
• What if the vesting date is about to arrive?
• Capital gains, complying with the Deed terms to create a specific entitlement
• Distributions in the light of section 100A concerns
• Conditional distributions
• Ineffective distributions
• Non-resident beneficiaries

Ken plans to share examples from his experience that demonstrate a failure to properly consider the deed and how that can impact client outcomes. One very recent example he is currently working through concerns a deceased estate and its status as a trust.

‘When does it become a trust? And that plays out in the context of, if you make a distribution from another trust to a deceased estate, assuming that the deceased estate can be a beneficiary, do the executors receive that in their capacity as trustees or in a different capacity? There is a body of law, which suggests that it's not a trust until the estate has been sufficiently administered.

And then it becomes a trust, because prior to that point in time, the executors simply hold the property to carry out their duties, which is to give effect to the will. So, what follows on from that from a tax law perspective, is: does the 45-day rule apply to the receipt of frank distributions from the other trust, should that estate make an interposed entity election or a family trust election to be brought within the family group of the transferor or trust?

The third issue is perpetuity. In other words, if you transfer from a trust, which has a limited perpetuity period, to an estate with an unlimited perpetuity period, does the rule of perpetuities prevent you from making the distribution. And that all turns on whether or not at a particular point in time, the estate is actually a trust.

It becomes a trust, ultimately if it holds property for beneficiaries, but until you determine who the beneficiaries are and what their entitlement is, then the body of law suggests it's not a trust. This is the sort of thing that fascinates me.’

Join Ken at The Tasmanian Convention this 8-9 September 2022 at the Hotel Grand Chancellor in Hobart.