Discretionary trusts are extremely common in Australia, both for the holding of assets, and from an international perspective, more unusually, to carry on business. Such trusts resident in Australia may have non-resident beneficiaries, or non-resident trusts set up by Australian clients, may have Australian resident beneficiaries.

Recent Australian cases on sham loans and sham trust resolutions started to sound a warning about the way Australians needed to be more careful about how they form and administer legal structures. See an earlier article by the author at: http://pointonpartners.com.au/sham-loans/

The recent English decision in the Pugachev case [2017] EWHC 2426 (Ch) really confronts practice in Australia, where it is common for the economic settlor to be a beneficiary, to own the shares in a private trustee company of which he/she is sometimes the only director, and also to hold the office of protector/guardian.

tt, a judge of the English High Court has found that five New Zealand trusts settled by Mr Pugachev were either bare trusts for him, as given the extent of his powers, he remained beneficially entitled to the assets. Alternatively they were shams.

The trustees were professional trustees. The judge held they shared the settlor’s shamming intention, being reckless as to his true intention that the assets basically remained his. In this case, that had obvious outcomes for Mr Paguchev’s creditors, but it would also mean that the income from the assets was taxable to Mr Paguchev.

The case clearly has grave implications both were there is too much client control, and for findings of sham against professional trustees, and potentially advisers who create such trusts.

In order to minimize the risks of an adverse outcome, the case points in favour of the protector/guardian best to not being able to exercise their power in their own interests, but only in the interests of the beneficiaries as a whole i.e. the power is a fiduciary power.

The case points to restricting the power of the protector/guardian to removal of the trustee only “with cause” as favourable. Where the powers include that of veto of trustee decisions, where the settlor or economic settlor is also a beneficiary, may give the holder of the power too much control.

Having a non-beneficiary independent director would be useful, as would actually paying income from the trust to beneficiaries other than the settlor or economic settlor client, or making advances of capital to those other beneficiaries. However, in the Australian context, that would normally be the case as the Australian tax law penalises accumulation of income.

Contributed by: Robert Gordon, of Pointon Partners E: rmg@pointonpartners.com.au, W: www.pointonpartners.com.au