Words and Phrases - "beneficial owner"

On September 21, 2010 the Australian Family Court made orders by consent between Mr and Ms Ellison that joined Sandini Pty Ltd (“Sandini”) as trustee for the Ellison Family Trust (of which Mr Ellison was a beneficiary) to the Family Court proceedings and required it within 7 days to do all things necessary to transfer 2.1M shares in an Australian publicly listed company (“MIN”) to Ms Ellison. However, Sandini was not the trustee of the Ellison Family Trust, but it did own 35M shares of MIN in its capacity as the trustee of a unit trust (“KRUT”) of which the sole unitholder was another company (“Wabelo”) as trustee for the Ellison Family Trust. In response to a request by Ms Ellison, Sandini transferred 2.1M shares of MIN, nine days later, to a company controlled by Ms Ellison (“Wavefront”) rather than to her. Mr Ellison then sought a declaration that Sandini was entitled to rollover relief under s. 126-15 of the Income Tax Assessment Act 1997 (Australia) on the basis that there was a transfer of the 2.1M shares under the consent orders that “involved” a trustee (as transferor) [i.e., Sandini] and a spouse or former spouse of an individual as transferee [i.e., Ms Ellison] “because of a court order under the Family Law Act 1975” (Australia). (A direct transfer from Sandini to Ms Ellison’s company (Wavefront) would not have engaged rollover relief.)

Whether there was a “disposal” of 2.1M shares under the consent orders turned on whether there was a transfer by virtue of the order of their beneficial ownership. In this regard, Jagot J stated (at para 99):

1. …there is no change of ownership if a person continues to be a “beneficial owner” of an asset…;
2. a “beneficial owner” of an asset has more than a mere proprietary interest in the asset. To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset; and
3. if the original owner continues to enjoy rights to deal with the asset, including rights of disposal, then it could not be said that another entity is the beneficial owner of the asset, even if the other entity may have a beneficial interest in the asset.

In rejecting Mr Ellison’s submission that the order instead rendered Sandini a trustee for 2.1M shares, so that Ms Ellison became their beneficial owner, Jagot J stated (at para 148):

… [T]he weight of authority is that there can be a valid trust over a fungible pool of assets provided the assets and relevant proportions for the different beneficiaries are identified with sufficient certainty. The better view is that for the requirement of certainty to be satisfied the trust must be over all of the fungible assets in the pool, the beneficial co-ownership proportions reflecting the respective interests of the beneficiaries. … [I]t may be accepted that the beneficiary obtains a proprietary right in a proportion of the asset pool. If, given the terms of the declaration and the nature of the property, the trustee is constituted as nothing more than a bare trustee on behalf of the beneficiary in respect of the beneficiary’s proportional interest, it may well be that there has been a change of ownership within the meaning of [the definition of disposal]. For this to be the case, however, the rights vested in the beneficiary must be capable of supporting the grant of equitable remedies the equivalent of ownership, including preventing the trustee from dealing in the relevant proportion of the asset pool other than in accordance with the beneficiary’s directions. ...

However, she stated (at para. 149) that this test of fungibility appeared not to be satisfied, on the basis that “shares may have a different cost base for the purposes of capital gains tax and thus, in this sense, may not be interchangeable,” and then stated (at paras. 151-152):

As the party seeking the declarations, it was for Sandini to answer any questions about its capacity and obligations to the KRUT in respect of the MIN shares. Sandini’s inability to do so satisfactorily, weighs against its contention that the orders should be construed as it proposes, that is, as in White v Shortall [[2006] NSWSC 1379], by creating a trust over the whole of Sandini’s shareholding as to some shares on trust for the KRUT and as to 2,115,000 on trust for Ms Ellison, Sandini thereafter being nothing more than bare trustee for Ms Ellison as the beneficial owner of that proportion of the pool.

These considerations tend to support the doubt that has been expressed as to the fungible character of shares … [then citing an article that] the essence of fungibility is “a choice between legally interchangeable units”. If all shares in the company are of the same class, there is but a single asset, being the issued share capital. On this basis, as Professor Goode proposes, a single asset cannot give rise to the capacity for selection which defines a fungible asset.

In essentially returning to and concluding on the beneficial ownership issue, she stated (at para. 164):

[T]he orders vested statutory rights and a beneficial interest of some kind in Ms Ellison but … I do not consider that interest can be characterised as beneficial ownership … .

In finding that, in any event, the consent orders did not apply to the 2.1M shares, Jagot J stated (at para 168):

[T]he orders are to be construed on their own terms without reference to extrinsic material. The fact that Sandini is the trustee of the KRUT, which owned shares in MIN, is all extrinsic material. So too is the fact that Sandini was not and is not the trustee of the Ellison Family Trust. None of those matters arise on construction of the orders. … In short, on their own terns, the orders have no operation and cannot be enforced.