LegalTalk - PwC

LegalTalk – Electronic Bulletin of Australian Legal Developments
Corporate and Commercial
prevails in legislation derived from the
Judicature Act 1873 (UK). In particular,
section 10 of the Conveyancing Act
1919 (NSW) states:
“There shall not, after the
commencement of this Act, be
held or deemed to be any merger
by operation of law only of any estate,
the beneficial interest in which would
not be deemed to be merged or
extinguished in equity…”
Under the equitable rule, the sub trust
in the scenario above may be saved
from merger and extinguishment by
establishing the requisite intention
for the creation and existence of
a separate sub trust.
Establishing the
requisite intention
(ie without exposure to or interest in
the activities of the head trust or any
other sub trusts). Another reason may
be the possible incentivisation of the
management team of the sub trust
business through the issue of units
in the sub trust to those persons.
In this scenario, the equitable
rule protects the sub trust from
extinguishment during the initial period
when the trustee entity, in its capacity
as trustee of the head trust, is also
the sole unit holder of the sub trust.
If the intention is clearly for potential
investors to subscribe for additional
units in the sub trust, then there is
strong argument for the intention of
no merger, otherwise, the commercial
advantages of setting up the sub trust
would potentially be defeated by the
operation of the doctrine of merger.
Where such a structure has already
been established, careful analysis of
the overall business or investment
structure and the material facts on a
case by case basis will be necessary
to determine whether requisite intention
can reasonably be established under
equity in order to determine whether
the sub trust exists at law. Alternatively,
a reorganisation of the trustee
arrangements may be necessary.
1. DKLR Holding Co (No 2) Pty Ltd v Commissioner of
Stamp Duties (NSW) (1982) 149 CLR at 463-4 and 474
2. DKLR Holding Co (No 2) Pty Ltd v Commissioner of
Stamp Duties (NSW) (1982) 149 CLR at 463-4 and 474
3. ‘Ford’s Principles of the Law of Trusts’ at [5013]
4. Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd
& Ors [2006] WASC 63 at 51
LegalTalk
Editor
Elly Parker
Phone: +61 3 8603 6273
elly.parker@au.pwc.com
Sydney
Tower 2, 201 Sussex Street
Sydney NSW 2000
DX 77 Sydney
Phone: + 61 2 8266 0000
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Melbourne
Freshwater Place,
2 Southbank Boulevard
Southbank, VIC 3006
DX 77 Melbourne
Phone: + 61 3 8603 1000
Facsimile: + 61 3 8613 5555
Establishing intention is a construction
of fact and must be determined on
a case by case basis.
An example where the requisite
intention may be established is where
it is contemplated that additional
units in the sub trust will be issued
to third parties in the future. One
commercial reason for separating
trusts in such a structure may be
to enable future investors to invest
in the activities of the sub trust in
isolation from the rest of the structure
Conclusion
The doctrine of merger can have
material unintended consequences on
the assets held by sub trusts in certain
circumstances. It may also affect the
validity of the dealings in relation to
sub trust property by the trustee.
Unless there are clear commercial
reasons for appointing the same entity
as the trustee of a head trust and a
sub trust, it is prudent not to do so.
For further information please contact your
usual PricewaterhouseCoopers adviser or:
John Cannings, Partner
Phone: +61 (2) 8266 6410
john.cannings@au.pwc.com
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