​​Why jurisdiction matters when it comes to trusts​

​​Why jurisdiction matters when it comes to trusts​

Trusts are used extensively in Australian business and investment structures. So you would think everyone would have a really good idea about how they work. As it turns out, most people, including most professionals, only know the basics. Unfortunately, the basics are not enough.

One of the ‘less-than-basic’ aspects of trusts is their ‘governing law’ or the ‘jurisdiction’ (i.e. body of laws) in which the trust and its activities are regulated. Let us tell you why…

Each State and Territory in Australia has its own case law and legislation that apply to the trusts that fall within their jurisdiction. To put this in context, there is no such thing as an ‘Australian trust’. There are only ‘NSW trusts’, ‘South Australian trusts’, etc.

The main way a trust comes to fall within the laws of a particular State or Territory is by the settlor of the trust (i.e. the person setting it up) specifying the ‘governing law‘ of the trust in the trust deed (i.e. the written document that outlines how the trust operates). 

The governing law of your trust determines:

  • The things you need to do to create the trust; 
  • The rules that govern the operation of your trust; 
  • The powers and responsibilities of the trustee and how they must be exercised by the trustee; 
  • The relationships between the parties involved in the trust, including the beneficiaries; and   
  • The laws that will be applied, and the courts that will hear a dispute, relating to the trust. 

To better understand how to successfully use trusts in your business and investment structures contact us on 1300 654 590 or email us.

Which laws apply to my trust?

As noted above, when you create a trust you nominate in the trust deed the jurisdiction whose laws you want to govern the trust. The trust deed may nominate an exclusive jurisdiction, a non-exclusive jurisdiction, or in some instances, a hybrid of both.

Usually, parties nominate the governing law to be the State the trustee and trust assets are based in. However, there are many circumstances where a court may find that the nominated jurisdiction is not the governing law. For example: 

  • The trust’s connection with the chosen jurisdiction has diminished. This may arise when you have trust assets, or a trustee, based in a different state or territory than the one specified to be the governing law; or  
  • The jurisdiction of a trust was chosen to evade the application of a law (for example, taxation law) that would have applied had the parties not chosen some other governing law. 

When choosing the jurisdiction, courts will look at: 

  • the express or implied law of the trust. The starting position is that whatever governing jurisdiction expressly stated in the trust deed will be the law that governs the deed; or 
  • in cases where the governing law is not specified or it is uncertain, the jurisdiction to which the trust has its closest and most substantial connection.  The following factors may be considered when determining this connection: 
  • The place of administration; 
  • The place where the assets of the trust are located; 
  • The place of business or residence of the trustee; and 
  • The object or purpose of the trust and the places where they are to be fulfilled. 

All the above factors have equal weighting when determining the closest and most substantial connection with the trust. 

Can you change the jurisdiction of your trust?

You may have identified several reasons why it may be useful to change the jurisdiction of your trust, for example: 

  • you are the trustee of a trust and are moving out of the jurisdiction; 
  • the trust’s assets are owned in a different jurisdiction to the one stated in the trust deed; 
  • there are tax efficiencies available to your trust if you change jurisdictions; or 
  • your trust is about to ‘expire’. 

It is possible to change the governing law of your trust, but this is something you must get advice about. 

Changing the governing law of your trust poses the risk of ‘resettling’ the trust.  A resettlement is generally caused by a change to the terms of the trust so significant that it amounts to transferring all the assets of your trust to an entirely new trust.  Such an event has significant tax implications, amongst other risks. 

If, for example, a trustee based in New South Wales wants to change the jurisdiction of a trust holding land assets in New South Wales to South Australia, because in South Australia, trusts do not have an expiry date, it is unlikely a court will find there is any degree of genuine connection with South Australia for the trust to justify being governed by that State’s legislation. 

This can be more complex when a trust holds property in multiple States.  This is still an unsettled area of the law. However, our view generally is that: 

  • If the trust has all its assets in one State, then those assets will be subject to the governing law of the State where the assets are based; 
  • If the trust has most of its assets in one State (specified in the trust to be its’ jurisdiction) and otherwise a real connection to the same State (for example the trustee lives there), but also has assets in other Australian States, there is an argument that out of jurisdiction assets should be subject to the governing law of the trust; and 
  • If the trust attempts to change the jurisdiction of the governing law of the trust but has no assets in that jurisdiction, then it is very likely that those assets will be subject to the laws of the relevant State in which they are located. 

How we can help

Trust deeds and their laws can be confusing.  If you are unsure what laws apply to your trust, Call us on 1300 654 590 or email us to discuss how we can help you effectively manage your business or investment strategy using trusts.

 

The information contained in this post is current at the date of editing – 30 January 2024.

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