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I have heard that ASIC treated the assets of a discretionary trust as the personal property of a beneficiary recently. Is this true?

In essence, yes, although the case was specific to its own facts and the specific parts of the Corporations Act 2001 that ASIC was relying on. However, the case has created a lot of concern.

The case, Richstar, was a Federal Court decision in Western Australia (regarding the ongoing saga of the Westpoint collapse). The court held that where:

  • a defendant in the action was a beneficiary of a discretionary trust; and
  • that beneficiary was the effective controller of the trust;
  • then it was arguable that ASIC was able to appoint receivers over the assets of that discretionary trust

This is a substantial change from the accepted application of trust and property law. In fact, the judge acknowledged that, in the ordinary case, a beneficiary does not have an interest, not even a contingent interest, in the assets of the trust. However, he went on to hold that:

" where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because 'it is as good as certain' that the beneficiary will receive the benefits of distributions either of income or capital or both."

Examples where the beneficiary was an 'effective controller' included where:
  • the beneficiary was the director and secretary of the trustee company, and the original appointor (with his wife being the current appointor);
  • the beneficiary was current trustee and the current appointor was his wife; and
  • the beneficiary was the appointor.
Although this is a concerning development, it should be remembered that this is a decision of a single judge in an interlocutory matter (the decision freezes the assets until the substantive issues, such as whether the beneficiaries truly own the assets in question, have been determined). Also, the decision relates to the broad definition of 'property' in the Corporations Act 2001, which is very different from, for example, the definition of divisible 'property' in the Bankruptcy Act 1966.

Nonetheless, it would be worthwhile to seriously consider which of the beneficiaries, if any, should also be trustees and/or appointors of the trust.