If you’re involved in family law property or divorce proceedings, claims against a partner’s interest in a family trust can be complex. The Federal Circuit and Family Court of Australia (also referred to as the FCFCOA) has established principles to determine how such interests are treated.

The Federal Circuit and Family Court of Australia has significant powers to deal with family trusts in the context of family law property settlements under the Family Law Act 1975 (Cth).

Provisions under the Family Law Act which may be employed by the Federal Circuit and Family Court of Australia as a source of power to deal with trusts include the following:

• Sections 79 and 90SM of the Family Law Act (requirement that orders for the alteration of property between married couples and de facto couples be “just and equitable”);

• Section 80 of the Family Law Act (general powers of the court, including the power to appoint or remove a trustee);

• Section 106B of the Family Law Act (transactions to defeat claims);

• Section 114 of the Family Law Act (injunctions); and

• Part VIIIAA of the Family Law Act (orders and injunctions binding third parties).

Kennon v Spry

The classic application of the powers of the Family Court of Australia (as it was then known) was demonstrated in the landmark High Court case of Kennon v Spry; Spry v Kennon [2008] HCA 56.

This was a decision of French CJ, Gummow, Hayne, Heydon, and Kiefel JJ

The facts of that were as follows: Ian Charles Fowell Spry, a retired barrister, created the ICF Spry Trust in 1968, with himself as settlor and trustee. The trust was formalised in 1981, with beneficiaries including himself, his siblings, their issue, and spouses. In 1983, Spry excluded himself as a beneficiary. In 1998, amid marital difficulties, he further varied the trust to exclude himself and his wife as capital beneficiaries. After separating in 2001, Spry established trusts for his children in 2002, transferring substantial assets from the original trust. The marriage was dissolved in 2003. Mrs Spry sought a property settlement, leading to the setting aside of the 1998 and 2002 trust variations by the Family Court, which treated the trust assets as part of the marital property.

The issues for determination included the following:

• Whether the assets of the ICF Spry Trust could be considered “property” of the marriage under the Act;

• Whether the 1998 and 2002 variations and dispositions were made to defeat an anticipated order and should be set aside; and

• The extent to which the court could make orders affecting trust assets and third-party interests.

Counsel for Mrs Spry argued that the trust assets should be considered part of the marital property under the Act. They contended that Dr Spry retained control over the trust and could have appointed the assets to his wife, thus making them part of the marital property. The variations made in 1998 and 2002 were argued to be attempts to defeat an anticipated property settlement order and should be set aside.

Conversely, counsel for Dr Spry argued that the trust assets were not part of the marital property within the meaning of the Act. They contended that the variations were legitimate exercises of Dr Spry’s powers as trustee and were not made with the intention of defeating a property settlement order. They further argued that the court lacked the jurisdiction to make orders affecting the trust assets and third-party interests.

Focusing mainly on the court’s power under section 106B of Family Law Act, the majority held that the assets of the ICF Spry Trust were part of the property of the marriage. The Court found that Dr Spry had control over the trust and could have appointed the assets to his wife, making them part of the marital property. The 1998 and 2002 variations were made to defeat an anticipated property settlement order and were set aside. The Court emphasised the broad definition of “property” under the Act, which includes rights to due administration and consideration under a trust.

At [137] the High Court of Australia concluded:

“The conclusion reached by the trial judge (erroneously) that the husband could have applied the whole or part of the Trust fund to or for his own benefit is inconclusive of the outcome. The jurisdiction being exercised by the Family Court was, as earlier indicated, jurisdiction over ‘proceedings between the parties to a marriage with respect to the property of the parties to the marriage or either of them’ [85] (emphasis added). What matters in this case is that once the 1998 Instrument and the 2002 Instrument were set aside by the s 106B orders, the property of the parties to the marriage or either of them was to be identified as including the right of the wife to due administration of the Trust, accompanied by the fiduciary duty of the husband, as trustee, to consider whether and in what way the power should be exercised. And because, during the marriage, the husband could have appointed the whole of the Trust fund to the wife, the potential enjoyment of the whole of that fund was “property of the parties to the marriage or either of them”. Furthermore, because the relevant power permitted appointment of the whole of the Trust fund to the wife absolutely, the value of that property was the value of the assets of the Trust. In deciding what orders should be made under ss 79 and 80 of the Act, the value of that property was properly taken into account. Wrongly attributing its value to the husband is irrelevant to the ultimate orders made.”

Justice Heydon dissented, and was of the view that the trust assets should not be considered part of the marital property. He contended that the variations were legitimate exercises of Dr Spry’s powers as trustee and were not made with the intention of defeating a property settlement order. Justice Heydon also expressed concerns about the implications of the majority’s decision on the administration of trusts and third-party interests.

Stein & Stein

This case confirmed the approach taken by the Full Court of the Family Court of Australia, in the earlier decision of Stein, H.M. and Stein, B.A. [1986] FamCA 27, illustrating that the concept of control is likely to play a central role in any determination of the court in matters involving trusts, where the Full Court held at [29]:

“It is not open to a party to assert on the one hand that the assets acquired in a family trust are not his and at the same time deal with them as if they are. There is no doubt that for general purposes Mr Barry Stein considers the business known as Barry Stein Nissan to be his, whatever arrangement he may have made for taxation purposes. It is a regrettable fact that frequently spouses, usually husbands, come to this Court asserting on the one hand that assets placed in the wife’s name do not really belong to her but to the husband, having been placed there for taxation purposes, and asserting at the same time that assets standing in the name of a third party, such as a trustee, do not really belong to the husband.”

Goodwin & Goodwin Alpe

Similarly, in In the Marriage Of: Leonard Charles Goodwin Appellant/Husband and Angela Helen Goodwin Alpe Respondent/Wife [1990] FamCA 147at [32] and [33], the Full Court held that:

“32. If those statements of principle are applied to the facts of this case we have no doubt that his Honour was entitled to find that the trust property was, in reality, the property of the husband in the present case. The husband had the sole power of appointment of the Trustee, which was a creature under his control, and he was a beneficiary to whom the Trustee could make payments exclusively of other beneficiaries as the husband saw fit. If further evidence was needed that the husband controlled both the Trustee and the trust for his own purposes, it is to be found in the fact of the removal of the wife and her son as beneficiaries of the trust following the separation. This evidence confirms both the power of the husband and the fact that the Trustee acted as his creature. We consider that his Honour rightly disregarded the fact that the Trustee had made distributions to relatives of the husband other than himself. It is not without significance that these distributions were made following the separation and, in any event, it is apparent from the husband’s evidence that, whether these distributions were made or not, lay entirely within his control.

33. We would add that even if, contrary to our view, the trust property in this case was to be characterised as a resource of the husband as distinct from his property, we do not believe, on the facts of this case, that the result would be likely to be any different. We say this because the husband has ample assets to otherwise satisfy the judgment, and his control of the “resource” is such as to enable him to direct the income and capital from the trust entirely for his own benefit should he choose to do so, regardless of any moral obligation which he may or may not have to the other beneficiaries.”

Additionally, in appropriate circumstances, the Federal Circuit and Family Court of Australia:

• May look through a trust if it considers it to be a the “creature” or “puppet” of one of the parties or “sham”: Ascot Investments Pty Ltd v Harper [1981] HCA 1; Harris & Dewell and Anor [2018] FamCAFC 94;

• Treat the dissipation of a trust asset as “wastage”: Kowaliw, J.I. and Kowaliw, A.G. [1981] FamCA 70; or

• Treat the dissipation of a trust asset as an “addback” (notional property) or a “negative contribution”: Bevan & Bevan [2013] FamCAFC 116.

The best family lawyers and divorce lawyers in Sydney are well-versed in the above principles. At Gramelis Attorneys, we’re experienced at handling complex divorce and family law property matters, including family law property settlements involving family trusts, so if you’re involved in a family law property dispute that involves family trusts, feel free to give us a call today to speak with one of our friendly and experienced lawyers on how we can help, and arrange a consultation at one of our convenient locations across Sydney, including Bankstown, Double Bay, Bondi Junction and the Sydney CBD.

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