Trusts & the Doctrine of Merger: Can a trust exist where the sole beneficiary and sole trustee of a trust are the same person?

By Jonathan Haeusler Michelle Hankey

16 May 2024

In Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd¹ (‘Adamstoun’), the Western Australian Court of Appeal considered the rationale for the extinguishment of a trust where a sole beneficiary becomes the sole trustee of a trust.

Adamstoun concerned an application by the appellants for leave to appeal against the decision of Master Newnes to dismiss the appellants’ strike-out application.² In the proceedings before the Master,³ the appellants sought to strike-out the following contentions in the respondent’s statement of claim:

that by reason of:

• • Binningup Nominees Pty Ltd (Binningup Nominees):
    • in its capacity as trustee of the Binningup Estate Unit Trust (Estate Trust), and
    • holding all of the issued units in the Binningup South Unit Trust (South Trust); and
  • Binningup Nominees having become the sole trustee of the South Trust pursuant to the deed dated 22 April 1997,

“since 22 April 1997 Binningup Nominees has held ’the property which was or is or purports to be the trust property of the [South Trust] on the trusts of the [Estate Trust]’”.

Relevantly, in earlier proceedings between Binningup Nominees and the respondent, it had been held that this was the effect of the deed dated 22 April 1997⁴ – i.e. the effect of Binningup Nominees becoming the new and sole trustee of the South Trust, as well as being the holder of all issued units in the South Trust in its capacity as trustee of the Estate Trust, was to extinguish the South Trust, with the result that Binningup Nominees holds the property of the South Trust on the trusts of the Estate Trust.

In that earlier decision, Pullin J observed (citations omitted):

“The first observation which I make is that there is no trust involved in the [South] Trust. A trustee may be one of a number of beneficiaries but cannot be the sole beneficiary. If a trustee is the sole beneficiary, there is no trust because there is no separate equitable interest vested in the beneficiary. The legal and equitable interests merge into full ownership. The result is that [Binningup Nominees] holds the trust fund of the [South Trust], including the South Land, on trust for the beneficiaries of the [Estate] Trust.“⁵ (emphasis added)

 

Decision in the proceedings before the Master

Pullin J’s conclusion was challenged by the appellants in the proceedings before the Master on two grounds:⁶

1. first, as the appellants were not parties to those earlier proceedings and the judgment was not one in rem, they are not bound by it; and
2. second, the Court’s conclusion in the earlier proceedings is inconsistent with the subsequent decision of the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (‘CPT Custodian’).⁷

In relation to the second ground, the appellants’ submitted, while it accepted the proposition that where the sole beneficiary under a trust and the trustee of the trust are the same person the equitable interest of the beneficiary merges in its legal interest as trustee and the trust is brought to an end, that was not the position in the present case.

Particularly:⁸

• that result will come about “only where the beneficiary has an equitable interest in the trust property, and where its equitable interest as beneficiary and its legal interest as trustee in the trust property are equal and co extensive”;
• in CPT Custodian, the High Court had rejected the notion that unit holders in a unit trust must be considered the equitable owner of each asset of the trust. The High Court held that “whether a unit holder is the equitable owner of the trust property depends upon the terms of the relevant trust deed”;
• in the present case, the trust deeds of the South Trust and the Estate Trust did not confer equitable ownership of the trust property on the unit holders; and
• “it followed that the South Trust was not extinguished by the appointment of Binningup Nominees as trustee but that it remained enforceable in equity”.

The Master noted “It is well established that a person cannot be the sole trustee and the sole beneficiary under the one trust. In such a case the person’s beneficial ownership is inherent in the legal ownership and there is no need to postulate a separate equitable estate”.⁹ The Master also noted Aickin J’s observation in DKLR Holding (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW)¹⁰ that the authorities for that proposition go back a long way.

The Master noted “nothing that was said in CPT Custodian was addressed to those long‑established principles”, and the issue in CPT Custodian was whether the beneficiary under the relevant unit trust deed fell within the definition of an “owner” in the Land Tax Act 1958 (Vic).¹¹

The Master concluded he did not accept that Pullin J’s conclusion that the South Trust had ceased to exist “is necessarily inconsistent with the decision of the High Court in CPT Custodian”.¹² The Master also noted he did not need to reach a concluded view as to whether the respondent’s plea is correct in law and would refrain from doing so. However, the Master concluded the respondent’s claim was arguable, therefore, the appellants’ application was dismissed.¹³

 

Decision in Adamstoun

In Adamstoun, the Court of Appeal considered whether the Master’s decision was “wrong or at least attended with sufficient doubt to justify the grant of leave”.¹⁴ Ultimately, the Court of Appeal dismissed the appellants’ application.¹⁵

The Court of Appeal held that the respondent’s contention that “the South Trust had ceased to exist upon Binningup Nominees become the new and sole trustee of the South Trust” was reasonably arguable and supported by several propositions.¹⁶

Relevantly (at [22]) (citations omitted):

• “A trustee may be one of the beneficiaries of the trust but cannot be the sole beneficiary.“
• “The termination of a trust when a sole beneficiary becomes the sole trustee is explained, in some authorities, by reference to the doctrine of merger of estates.”
• “The term merger means that, where a lesser and a greater estate in the same land come together and vest, without any intermediate estate, in the same person and in the same right, the lesser [estate] is immediately annihilated by operation of law. It is said to be ‘merged’, ie, sunk or drowned, in the greater estate.”
• “At common law, merger operates irrespective of the intention of the parties. In equity, however, a merger at common law will not be recognised if it is contrary either to the actual or the presumed intentions of the parties. By s 18 of the Property Law Act 1969 (WA), equity now prevails. As noted in Ford and Lee, Principles of the Law of Trusts, at [5012], the doctrine of merger of estates provides no more than an incomplete analogy to explain the extinguishment of the beneficiary’s equitable interest in the trust property when a sole beneficiary becomes the sole trustee. The authors advance three reasons for the incompleteness of the analogy”, being:
  • “Firstly, there is no extinguishment of the beneficial ownership if the beneficiary’s equitable ownership and the trustee’s ownership are not co‑extensive …;
  • Secondly, the doctrine of merger of one legal estate in another or one equitable estate in another operates only where the holder of the greater estate acquires the lesser estate in the same right …;
  • Thirdly, there will be no merger of one legal estate in another or one equitable estate in another if the person in whom the two estates have become vested intends that there should be no merger and there will be a presumption against merger if it is to the interest of the person who had the greater estate to prevent it … But if T holds property on trust for B and acquires all of B’s equitable interest under the trust for himself beneficially, no expression of intention can produce the result that T owes trust obligations to T …
• The true, or at least the preferable, rationale, for the extinguishment of the beneficiary’s equitable interest in the trust property, when a sole beneficiary becomes the sole trustee, is not the doctrine of merger of estates, but rather the impossibility of rights and duties, which derive from a trustee’s personal obligation, being vested in one person …”

The Court of Appeal went on to conclude it was reasonably arguable that “there were no facts and circumstances which would require equity to hold that merger did not occur upon Binningup Nominees becoming the new and sole trustee of the South Trust”. Further, it was reasonably arguable that “the South Trust has collapsed, notwithstanding that … Binningup Nominees has held all of the issued units in the South Trust upon trust for the Estate Trust, and not for itself beneficially”.¹⁷

 

Takeaways

Adamstoun follows from the earlier decisions of the Supreme Court of Western Australia that recognise it is well established that a trust can cease to exist where the same person is the sole trustee and the sole beneficiary under the one trust.¹⁸

The propositions set out by the Court of Appeal suggest that the rationale for why a trust is extinguished when the sole beneficiary is or becomes the sole trustee of a trust is “the impossibility of rights and duties, which derive from a trustee’s personal obligation, being vested in one person“. That equity would intervene to prevent estates merging in some circumstances (for example, where the parties did not intend that outcome) illustrates that the doctrine of merger is merely an analogy for why the extinguishment of trusts occurs. As eloquently noted by the authors of Ford and Lee “no expression of intention can produce the result that T owes trust obligations to T”.

More broadly, the case serves as a reminder that a trustee can be one of a number of beneficiaries but should not be the sole beneficiary: at least, not without careful consideration of the consequences.

1. Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43 (‘Adamstoun’).
2. in the main proceedings CIV 2006 of 2005. See Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd [2006] WASC 63 (‘Brogue v Binningup’).
3. See Brogue v Binningup.
4. See Binningup Nominees Pty Ltd v Brogue Tableau Pty Ltd [2004] WASC 14, Pullin J (‘Binningup v Brogue’).
5. Binningup v Brogue [5]. Also cited in Adamstoun at [11].
6. Brogue v Binningup [16].
7. CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 79 ALJR 1724.
8. Brogue v Binningup [16]-[25].
9. Brogue v Binningup [40].
10. DKLR Holding (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 464 (Aickin J).
11. Brogue v Binningup [44].
12. Brogue v Binningup [52].
13. Brogue v Binningup [49] – [52].
14. Adamstoun [19]-[20].
15. Adamstoun [19]-[20].
16. Adamstoun [22].
17. Adamstoun [23].
18. Binningup v Brogue. See also Master Newnes’ comments in Brogue v Binningup at [40].

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.