Trust property which persons effectively control may be forfeited to the Commonwealth as ‘unexplained wealth’ unless a court is satisfied that the property was not acquired through contravention of Commonwealth law. In this scenario, the burden of proof is reversed. Merely on suspicion that an offence has been committed, trust property can be forfeited under Proceeds of Crime Act 2002 (POCA).
Unpaid tax can be recovered through the POCA trust property forfeiture regime. An authorised officer of the Commissioner’s might allege that a person who controls a trust has committed an offence against Commonwealth, state or foreign laws. The person is then required to demonstrate that their wealth was not illegally obtained and/or that they have no actual or potential tax liabilities. A court order forfeiting the trust property will be made if either the person’s wealth is not satisfactorily explained and/or their tax liabilities are not satisfactorily rebutted.
No link need be shown between the value of trust property forfeited and the triggering offence. The offence might be a trivial pretext. Nor need an assessment be raised to justify the tax liability. Persons bear the burden of disproving the Commissioner’s unsubstantiated guesswork.
The procedure is objectionable for a number of reasons.
POCA ‘unexplained wealth’ legislation is Australia’s response to the OECD Financial Action Taskforce FATF Guidance: Transparency and Beneficial Ownership (2014). OECD law reform bodies and their publications often reflect the views of OECD member jurisdictions with civil law systems that do not recognise trusts as a source of legal rights, which are different to Australia’s common law system. Australia-specific considerations are more persuasive for that reason.
Under the Australian legal system, taxation and other public laws must be consistent with the general law of trusts and settlements. The rule of law requires as much. Common law rights (including freedom from arbitrary arrest and the immunities inherent in the law of trusts) can only be legislatively displaced by clear contrary intention. POCA evinces no such intention.
The trust device is ubiquitous in Australia. With more than 900,000 economically active trusts, there are more trusts in Australia than any other country in the world. Trusts play a significant economic role. Many Australians are affected by POCA’s arbitrary trust forfeiture laws.
Analysts sometimes rank the fairness and equality of comparative legal systems according to the way that the systems regulate the trust device. Choice of economic form is a feature of many of the world’s successful free-market economies. Use of economic units which combine flow-through taxation and limited liability helps to ‘level the playing field’ for productive units in the Australian economy.
The improbable definition of wealth
Demonstration of ‘unexplained wealth amounts’ is required before ‘unexplained wealth orders’ can be made. POCA, remarkably, defines a person’s ‘wealth’ to include property owned or effectively controlled by the person at any time. That is to say, property is assumed to remain part of a person’s wealth after it has been consumed, sold at an auction, been stolen, or lost at the races.
One-time property owners may possess ‘unexplained wealth’ despite being destitute at the time of the proceedings when their ‘unexplained wealth’ is forfeited. Or an item of property can remain part of one person’s ‘unexplained wealth amount’ for POCA purposes even though the property item is sold in an arm’s length sale transaction prior to the legal hearing.
That definition does not withstand analytic scrutiny.
Conceptually, wealth is better understood as the value of a person’s property rather than the items of property which a person owns. Putting the matter differently, wealth is an outcome of property ownership, a balance sum, independent of the ownership of the specific assets by which the sum is comprised.
Anglo-Australian learning associated with the law of unjust enrichment understands wealth diachronically — in terms of value — instead of the synchronic ‘wealth equals property’ datum preferred by POCA‘s draftspersons. Andrew Lodder in Enrichment in the Law of Unjust Enrichment and Restitution states that wealth is comprised of legal enrichments resulting from ‘a change in the legal relations . . . effected by the acquisition of a right or the release of an obligation’. The value of obligations which a person owes must be subtracted from the value of property which ‘constitutes’ the person’s wealth. It follows that persons are not wealthy to the extent that they owe enforceable debts to other persons.
The ‘debts are not wealth’ proposition, though obvious, is inconsistent with the way in which the Commissioner of Taxation used POCA provisions in Commissioner of Australian Federal Police v Hart [2018] and R v Hargraves and Stoten [2010]. ‘Unexplained wealth amounts’ including unpaid tax due to the Commissioner were forfeited by the Commissioner as ‘unexplained wealth’ in each case. I contend that the wealth of tax evaders cannot be comprised of and is in fact reduced by the amount of tax debts owed to the Commissioner.
Problems with the effective control test
Another essential element of the POCA legislation applicable to trusts is that the ‘wealth’ of trust controllers includes the assets of trusts which they ‘effectively control’.
Over 80 per cent of Australian trusts are discretionary in form. Trust-like characteristics are to a large degree absent from Australia’s default form of trust. Even the name ‘discretionary trust’ is a misnomer. The Anglo-Australian and North American discretionary trust primarily functions as a power and not a trust. For over a century, the discretionary trust has challenged the Commissioner and other revenue authorities around the world.
Discretionary trustees create and confer interests in property which did not previously exist on selected members of a class of persons. No one is ever beneficially entitled to the property held on a discretionary trust. Rights to the trust property are in suspense until the discretionary trustee distributes to the property to an object of the trust. As soon as it is distributed, discretionary trust property leaves the trust. Either the property is directly paid or transferred to the persons to whom it is distributed, or the property is retained by the discretionary trustee on different trusts for the same beneficiaries.
So who is entitled to the property vested in discretionary trustee before they make distributive determinations? No one. The question is inapt. No equitable relief flows from the answer. Equity law is not a scheme of abstract entitlements. Instead, equity courts are concerned with the enforceable terms of discretionary trust deeds and with the exercise of discretionary trustees’ powers and the powers of appointors, protectors and other persons whom the deeds nominate. The moniker ‘discretionary trust’ has ‘no constant, fixed normative meaning’ in Australian law. Discretionary trusts are not part of an a priori scheme.
The ‘hands-off’ approach of Anglo-Australian equity jurisprudence towards discretionary trusts and its other creations is at odds with the OECD Financial Action Taskforce FATF Guidance. Recommendations of the Taskforce were acknowledged in the relevant Explanatory Memorandum to be the inspiration of the POCA trusts and ‘unexplained wealth order’ amendments. OECD authors borrowed the ‘beneficial owner’ idea from UK trusts law and married it to the civil law principle that all non-ownerless property must be beneficially owned by someone. Someone must be beneficially (or ‘ultimately’) entitled to every species of trust property. From a civil law perspective, the main hurdle in the way of making trusts transparent is establishing, in each case, the identity of the person who is the beneficial or ultimate owner of the trust property.
Further to the OECD trusts conception, POCA states that ‘property that is held on trust for the ultimate benefit of a person is taken to be under the effective control of that person’ [emphasis added].
However, there is a jurisprudential problem. Nothing is held for anyone’s benefit under the conventional Australian discretionary trust. Only valueless defeasible or contingent interests are held by the so-called ‘default beneficiaries’ named in some discretionary trust deeds. Persons described as ‘ultimately entitled’ to the trust property usually receive and expect to receive nothing.
There is also a practical problem. Following persons associated with Australian discretionary trusts, the ‘money trail’ often leads nowhere.
Trustees of discretionary trusts are typically ‘$2 shell companies’ — or corporate entities without economic substance. Trust property vested in trustees may be transferred out of their hands whenever trusts litigation impends.
The settlors (or creators) of discretionary trusts are typically persons without economic substance. Creation of an Australian discretionary trust is often a pantomime. A $10 note (or equivalent) passes from the hands of a clerical or junior employee in the premises of an accountant. This commonplace trusts transaction is treated as a fraud in some jurisdictions (such as, states of the USA).
Appointors, protectors and other non-trustees with controlling functions over discretionary trusts typically have no access to the trust property. They may be substantial persons, or, like trustees, they may be nominal $2 companies, against whom the money trail runs dead.
There are specific legal issues where appointors are concerned. The powers of appointors and others reserved in trust deeds in almost all cases control dispositive discretions. In other words, the thing controlled is the trustees’ power to confer the trust property on an object, not the way in which the discretionary trustee holds the trust property before that power is exercised. The immunities of appointors has been the subject of UK trust fraud litigation in the marathon Mezprom Bank v Pugachev and other recent decisions. Appointors (named protectors in the UK) are dispositive power-holders who cannot be held liable as the owners of trust property if they are fiduciaries subject to the discipline of the court.
In conclusion, trusts law in Australia and elsewhere does not fit within categories inspired by the jurists of non-trusts jurisdictions.
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