Which case won?

casea
The case for the Tax Office
  • 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.
caseb
The case for the investment company
  • 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?

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Case B won. You were right!

How people voted
a57%
b43%

Expert commentary on the court's decision

“The Court found that there was no 'alienation' of the right of indemnity by the company and therefore no intent to defraud a creditor.”
Alienation of property not undertaken with the intent to defraud creditors

The case Peter Sleiman Investments Pty Ltd as trustee for the Sleiman Family Trust v Deputy Commissioner of Taxation [2017] NSWCA 81 hinged on section 37A of the Conveyancing Act 1919 (NSW), which provides that every alienation of property undertaken with the intention of defrauding creditors will be voidable at the prosecution of a case by a party which has been disadvantaged by the alienation.

The judge noted that to satisfy the elements of section 37A, the following questions must be answered:

  • Was there an alienation of property?
  • If there was an alienation of property, was that alienation effected with the intent of defrauding a creditor?
  • If the answer to the first two questions is yes, was the transaction to the detriment of the Tax Office?
Problems with Tax Commissioner’s case

It was noted that the wording of the deeds of declaration alone suggest that the new trusts were given one property each without payment. This was not argued by the Commissioner and could well have constituted an alienation of property. However, it was common ground in the proceedings that the units were issued as payment for the resettlement of property.

The court also noted that as the litigation was commenced by summons and no pleadings were filed by the Commissioner, it was difficult to determine what constituted the relevant alienation of property and the relevant intent to defraud creditors. The judge also noted that fraud must be pleaded.

The court noted that the Commissioner’s claim did not extend to the repayment of the alleged debt to the owner of the company, Peter Sleiman, by his investment company, Peter Sleiman Investments (PSI). The judge commented that this payment may have constituted an alienation. However, the question was whether the deeds of declaration were alienations.

Alienation of property and the trustee’s right to indemnity

A trustee’s right to indemnity is the right to use the assets of the trust to cover expenses in relation to the trust. In determining that the trustee’s right of indemnity was unaffected, the judge noted that after the properties were resettled, PSI as trustee of the family trust became entitled to be indemnified out of the units issued to it and then the debt owed to it to the same extent as its former right of indemnity against the properties.

In relation to the right to indemnity, the judge stated: “The nature of the property in the estate of the Family Trust changed but the right to indemnification from the property of the estate did not alter. There was no disposition or alienation by PSI of its right to indemnification.” The judge noted that the trustee’s right to indemnity extended to current assets of a trust, not assets that have been sold for fair value.

Intent to defraud and disadvantage

It was common ground that the units were issued above the market value of the properties. As the value of the units was at least equal to the value of the properties, the court concluded that it was difficult to find that the Commissioner of Taxation had been disadvantaged.

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