The concept of the "sham trust' and the "sham transaction" has been the subject of many Court decisions, and legal articles. This Appendix deals with the principles which apply when considering the validity of a trust, and reviews recent developments.
Problems are continuing to arise with trusts due to:
1. A lack of understanding of the legal requirements for the creation and administration of a trust; and
2. A failure by advisors to provide practical guidance for trustees on the requirements for the administration of the trust thereafter.
The areas in which trusts are facing litigation include:
In Potter and Monroe Tax Planning,1 the authors warned:
A man cannot eat his cake and have it. Moreover, it is not the function of his lawyer to devise a scheme whereby this fact of life is falsified. If a man disposes of his property for another's benefit, certain tax results may follow; but the results cannot be achieved unless the disposition is in the first place effected not as a fiction but as a fact.
If a trust is properly established by persons capable of, and intending to, create it, then it is a valid trust, and not a sham.2
The consequence of there being no trust or a sham trust will be a resulting trust back in favour of the settlor, that is, the trustees have at all times held the assets upon trust for the settlor. If a transaction, such as the sale of assets to the trust by the settlor, is set aside as a sham, the assets are held by the trustees on a resulting trust back in favour of the settlor. If a transfer of an asset to a beneficiary is set aside, the beneficiary holds the asset upon trust for the trust.
The cases examined in this article show the absolute necessity for the settlor an the trustees to act genuinely, for the trustees to record their decisions, and to retain full records showing that the trust genuinely entered into the transactions on its own account, and not as an agent or nominee of the settlor.
1 D Potter and H Monroe Potter and Monroe Tax Planning (1st ed, Sweet & Maxwell, London, 1954) p vii (Preface).
2 P Willoughby, Misplaced Trust (1st ed, Gostick Hall Publications, 1999), pp 8-9.
Invalidity resulting from a lack of intention to create a trust
Equitable recognition of a trust
If there is no intention to create a trust, there is no trust regardless of the form of words used. In such cases no question of a "sham trust" arises. The test of whether a trust has been created was stated by Megarry V-C in Tito v Waddell (No 20)1 as being "whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a true trust has been manifested."
The House of Lords in Twinsectra Ltd v Yardley 2 held, by way of obiter dicta, that when considering whether a settlor intended to create a trust, his or her subjective intention is irrelevant. The issue in that case was whether, when transferring money to a solicitor's client account to be dealt with in a certain manner, the transferor Twinsectra had created a trust. This raised the question of whether Twinsectra, acting through its "moving spirit" Mr. Ackerman, intended to create a trust. The House of Lords held that Mr. Ackerman's subjective intention was irrelevant. His intention had to be ascertained from the document. Thus Lord Hoffman said: 3
As for Mr. Ackerman's understanding of the matter, that seems to me irrelevant. Whether a trust was created and what were its terms must depend upon the construction of the undertaking. Clauses 1 and 2 cannot be ignored just because Mr. Ackerman was not particularly interested in them.
As Lord Millett observed: 4
A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.
Where a person's intention in creating a trust is to benefit only him or herself, equity will not recognise that as a sufficient intent to give rise to a trust. A trustee advising that he or she must "seek my client's instructions", or always seeking the advice of the "client" before making decisions concerning the trust assets, could provide sufficient evidence for a Court to hold there was no trust because the settlor did not intend the trustees to assume the rights of the owners of the property, with an equitable obligation to deal with the property for the benefit of the beneficiaries.
In Commissioner of Stamp Duties (Queensland) v Jolliffe5 the High Court was concerned with the effect of a man having paid a substantial sum into a savings account in the name of his wife, with his own name added as trustee. Knox CJ and Gavan Duffy J upheld the trial Judge's finding that:6
it was not the real intention of the respondent to make a gift to his wife, but that the money was placed in the account for the sole purpose of procuring interest which the respondent believed would not be procurable ... if the money were placed in his own name.
Their Honours added; there was "an insuperable obstacle" in the way of the appellant, who was seeking to show a trust. They said:
We know of no authority, and none was cited, which would justify us in deciding that by using any form of words a trust can be created contrary to the real intention of the person alleged to have created it. In our opinion the law is accurately stated in Lewin on Trusts, 11th ed, at p 85:'It is obviously essential to the creation of a trust, that there should be the intention of creating a trust, and therefore if upon a consideration of all the circumstances the Court is of opinion that the settlor did not mean to create a trust, the Court will not impute a trust where none in fact was contemplated.'
In any given case those seeking to establish the legality of the express trust must show that the alleged settlor had the intention required to constitute a trust: Herdegen v Federal Commissioner of Taxation 7. As Gummow J stated in Herdegen v Federal Commissioner of Taxation:
... if there is the necessary certainty in identity of trustee, subject matter and beneficiary, then in any given case it will be necessary for those propounding the express trust to establish on the part of the alleged settlor the presence of the necessary intention to constitute a trust. The relevant principles are explained by Herring CJ in Re Armstrong, deceased (1960) VR 202 at 205-206, and by Megarry V-C in Re Snowden (1979) Ch 528 at 536 E-H. In the present proceedings, the alleged settlors are also the alleged trustees. In divining intention from the language they employed, the Court may look to the nature of the transaction and the circumstances in order to infer intention: Trident General Insurance Co Ltd v McNeice Bros Pty Ltd (1988) 80 ALR 574; 62 ALJR 508 at 514 per Mason CJ, Wilson J.
An oral trust can be created if the settlor has the necessary intention to constitute himself, herself or itself a trustee in favour of the trustees in relation to definite property 8. In the case of land the declaration of trust must be in writing, but it is sufficient if the writing comes into existence before any action is brought 9.
In Belton v Commissioner of Inland Revenue 10 Hutchison ACJ held the intention need not be couched in any formal language; it may even be inferred from conduct taken into account along with such words as there may be 11. But in whatever way it is expressed, it must make three things certain: first that a trust is definitely intended; secondly, that ascertainable persons are to be benefited; and, thirdly, that specified property is to be bound by the trust. He held that "in case of doubt, the contemporaneous and subsequent acts of the settlor may be looked at."
1 Tito v Waddell (No 20)  Ch 106 at 111.
2 Twinsectra Ltd v Yardley  2 All ER 377.
3 Twinsectra Ltd v Yardley  2 All ER 377 at 382.
4 Twinsectra Ltd v Yardley  2 All ER 377 at 396.
5 Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178. This decision was applied by the Federal Court of Appeal in Baker and others v Official Trustee in Bankruptcy (Full Federal Court, No Qg102 of 1994, Fed No 565/95, 3 August 1995) per Burchett, Ryan and Carr JJ.
6 Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178, 181.
7 Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271.
8 Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271; Hunter v Moss  3 All ER 215 (CA); Winterton Constructions Pty Limited v Hambros Australia Limited (1991) 101 ALR 363; Belton v Commissioner of Inland Revenue  NZLR 1372, 1374 per Hutchison ACJ.
9 Mountain v Styak  NZLR 131.
10 Belton v Commissioner of Inland Revenue  NZLR 1372, 1374.
No intention to create a trust -- examples
Even though a person by the use of clear, express language purports to make him or herself or another the trustee of property for a third person, evidence that the settlor's actual intention was to retain complete control and a complete power of disposition over the whole of the property in question will prevent any trust arising. If a settlor intends to retain complete control and complete power of disposition over the trust property, there is no trust. Examples of where the Court found the trust was invalid because there was no intention to create a trust include:
Official Trustee in Bankruptcy v Baker 1 in which the Court concluded that B "was in reality asserting ownership [of the art collection], as he had always intended, and the companies, of which he was the directing mind, accepted the collection from him necessarily upon the same basis."
Commissioner of Stamp Duties (Qld) v Jolliffe 2 in which money was placed by a man in the account of his wife "for the sole purpose of procuring interest which the respondent believed would not be procurable ... if the money were placed in his own name."
In The Marriage Of: Samuel Felix Cowling v Mary Lillian Cowling 3 where "neither the husband nor his son Rex intended that the latter have any beneficial interest in any of the series of properties transferred to or acquired in the name of the latter."
The Marriage Of Ashton4 where "the assets of the trust fund have been dealt with and treated, for practical purposes, as if they were the husband's absolute property. Although he is not a named beneficiary he has been in receipt of income from the trust, the husband was in full control of the assets of the trust, and the evidence made it clear that he was applying them and income from them as he wished and for his own benefit."
Re Stephen Moor Silvia, ex Parte: Sonenco (No 77) Pty Ltd and Trustee in Bankruptcy, Brian Raymond 5 where "this bankrupt is in effective control of the trust and that the purported transfer of the property to the wife was dressed up to appear as a matrimonial agreement in favour of the trust to deprive his creditors of a valuable asset."
1 Official Trustee in Bankruptcy v Baker (Federal Court, No NB72 of 1990, FED No 530/94, 5 August 1994, Drummond J).
2 Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178, 181.
3 In The Marriage Of: Samuel Felix Cowling v Mary Lillian Cowling (Appeal No 105 of 1989, File No S2903 of 1977).
4 The Marriage of Ashton (1986) 11 Fam LR 457.
5 Re Stephen Moor Silvia, ex Parte: Sonenco (No 77) Pty Ltd and Trustee in Bankruptcy, Brian Raymond (1989, No W 670 of 1987, Fed No 105, Federal Court of Australia)
The concept of "sham"
If the scheme of a trust, including the deed, is intended to be a mere facade, behind which other activities might be carried on, the words of the deed will be disregarded, and it is referred to as a "sham" trust 1. When determining whether a trust is a "sham" or not a relevant matter to consider is did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front to conceal their real transaction.
The legal requirements for a sham in New Zealand are conveniently summarised in the majority judgment of the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue:1A
In essence, a sham is a pretence. … A document will be a sham when it does not evidence the true common intention of the parties. They either intend to create different rights and obligations from those evidenced by the document or they do not intend to create any rights or obligations, whether of the kind evidenced by the document or at all. A document which originally records the true common intention of the parties may become a sham if the parties later agree to change their arrangement but leave the original document standing and continue to represent it as an accurate reflection of their arrangement.
As the Court of Appeal held in Clayton v Clayton:1B
 This approach to the concept of sham reflected authorities in England, this Court and Australia.1C
When determining whether a trust is a "sham" or not a relevant matter to consider is did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front to conceal their real transaction.
The concept of "sham" has been defined and analysed in numerous decisions. While it is possible to set out the essence and operation of the "sham" doctrine from these decisions, it is important to bear in mind the caution that equity is a strange bedfellow -- it is not safe for advisers to rely upon words or procedures from precedents which advisers have used in previous years, even if a Court has decided that such words or procedures were used successfully in previous decades. 2
"A sham is an act done or document executed that is intended to mislead. It is where the parties resort to a form of action or document which does not fit the real facts in order to deceive a third person." 3 Put shortly, a sham exists where the parties say one thing intending another. 4
The term "sham" first appeared as slang in the 17th century. It is described by the dictionaries as being of obscure origin. In Cranstoun v Federal Commissioner of Taxation 5, Carter J referred to a definition of "sham" in the Oxford English Dictionary, which stated that a sham is:
Something devised to delude, it is a trick or a hoax, an imposture. It is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit. A 'sham' is an act done or a document executed that is intended to mislead.
Lockhart J in Sharrment Pty Ltd v Official Trustee 6 concluded that:
A 'sham' is therefore ... something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive. 7
A common intention must exist between parties (to the sham) that the acts done or documents executed do not create the legal rights or obligations which they appear to create. 8 All the parties involved must have a common intention to that effect, since the law will not allow the insincere act of a deceiver to prejudice a party who sincerely entered into the transaction in question 9. See para A.8.1 which deals in greater detail with the issue of common intention.
The most frequently cited case concerning shams is Snook v London and West Riding Investments Ltd. 10 Diplock LJ described a sham as:
... acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities ... that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
1 Scott v Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265, 279 per Windeyer J.
1B Clayton v Clayton  3 NZLR 293 at 
2 In view of the dramatic consequences which flow from a finding of a "sham", surprisingly very little has been published on the topic: P Willoughby, Misplaced Trust, 1st ed, 1999; David Hayton, "The Irreducible Core Content of Trusteeship" in Trends in Contemporary Trust Law, 1996, p 47; Paul Matthews, "How Many Shams Make Three" (1998) 4(7) Trusts & Trustees 11; John Mowbray, "Offshore trusts: Illusion and reality" (1994) 8(3) Tolley's Trust Law International 68; Shan Warnock-Smith, "Midland Bank Plc v Wyatt: Sham Trusts come to the United Kingdom" (1994) Private Client Business 410. Many text books, while referring to some of the leading cases, do not yet have chapters dealing with "shams".
3 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997), referring to Bateman Television Limited and Another v Coleridge Finance Company Ltd  NZLR 794.
4 Donald v Baldwyn  NZLR 313, 321 per FB Adams J. Followed in Antoniades v Villiers and another Antoniades v Villiers  2 All ER 309, 316.
5 Cranstoun v Federal Commissioner of Taxation (1984) ATC 4876.
6 Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530, 537, Foster J concurring.
7 The statement in Sharrment has been applied in Re State Public Services Federation, Ex parte Attorney-General for the State of Western Australia (1993) 113 ALR 385 per Toohey J; Dalco v Federal Commissioner of Taxation (1988) 82 ALR 669, 670-671, subsequently reversed by the High Court ((1990) 168 CLR 614) but not in this respect and Re La Rosa, Ex parte Norgard v Rocom Pty Ltd (1990) 93 ALR 571.
8 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
9 Re State Public Services Federation; Ex parte Attorney-General for the State of Western Australia per Toohey J; and Baker and others v Official Trustee in Bankruptcy (Full Federal Court, No Qg102 of 1994, Fed No 565/95, 3 August 1995) per Burchett, Ryan and Carr JJ.
10 Snook v London and West Riding Investments Ltd  1 All ER 518, 528 (CA). This definition of "sham" has been adopted in many subsequent cases. In New Zealand the definition has been approved in a number of cases including Bateman Television Limited and Another v Coleridge Finance Company Limited  NZLR 794 (CA); Marac Finance Ltd v Virtue  1 NZLR 586 (CA); and Laing v Lanron Shelf Company No 56 Ltd  1 NZLR 562 per Gallen J. In the United Kingdom the definition has been approved in a number of cases including Midland Bank Trust Co Ltd and another v Green and others  3 All ER 28 (CA); WT Ramsay Limited v Inland Revenue Commissioners  1 All ER 865, 881 per Lord Fraser of Tullybelton; R v Crown Court at Knightsbridge, ex parte Marcrest Ltd  1 All ER 1148 (CA); GUR Corp v Trust Bank of Africa Ltd (Government of the Republic of Ciskei, third party)  3 All ER 449 (CA); Hilton v Plustitle Ltd and another  3 All ER 1051 (CA); Gisborne and another v Burton  3 All ER 760 (CA); Antoniades v Villiers and another  2 All ER 309 (CA); Mikeover Ltd v Brady  3 All ER 618 (CA); Circuit Systems Ltd (in liq) and another v Zuken-Redac (UK) Ltd  3 All ER 748 (CA); and Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd and others and Circuit Systems Ltd (in liquidation) and another v Zuken-Redac (UK) Ltd  1 All ER 218, 225 (HL) per Lord Hoffman.
If a trust or trust transaction is genuine it cannot be a sham
If a trust or a trust transaction is genuine it cannot be a sham. A transaction which the parties intend to take effect, but which does not take effect in accordance with their tenor will not be a sham 1.
In Racing Enter-Prizes Limited v Police; Organ Bros Limited v Police 2 Haslam J stated:
... as the documents reveal the true relationship of all parties concerned, this ingenious scheme cannot be dismissed out of hand as a colourable device or mere sham.
In Mullens v Federal Commissioner of Taxation 3 an attempt to apply s 260 of the Income Tax Assessment Act 1936 (Australia) where the taxpayer had acquired shares to obtain a deduction of moneys paid towards petroleum exploration was declared not to be a sham because "it represented a genuine commercial operation with commercial consequences" 4. Stephen J rejected a contention that the transaction was a sham where "the transaction was precisely what it purported to be." 5
In Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners 6 the transactions in question were described by Lord Reid as "a bizarre series of six deeds." He nevertheless held the transactions were not shams as each had the effect it purported to have, and the parties were quite entitled to proceed in the way that they did, if they chose to.
Even if transactions which are intended to take effect have the effect of fraudulently preferring, for example, one creditor to others, and notwithstanding that they are deliberately planned with this in view, they are not a sham. 7 In this type of situation the transaction cannot be construed as giving a false or misleading impression to a third party as the act done or documentation is what was intended. 8
1 Snook v London and West Riding Investments Limited  1 All ER 518, 528 per Diplock LJ; Racing Enter-Prizes Limited v Police; Organ Bros Limited v Police  NZLR 307, 310 per Haslam J; Lai v Beem Construction Ltd  2 NZLR 278, 284 (CA).
2 Racing Enter-Prizes Limited v Police; Organ Bros Limited v Police  NZLR 307, 310.
3 Mullens v Federal Commissioner of Taxation (1976) 10 ALR 513.
4 Mullens v Federal Commissioner of Taxation (1976) 10 ALR 513 per Barwick J.
5 Mullens v Federal Commissioner of Taxation (1976) 10 ALR 513, 517.
6 Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners  2 All ER 279, 285,  AC 135.
7 Paintin and Nottingham Ltd v Miller Gale and Winter  NZLR 164.
8 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
If there is no trust there cannot be a sham
Where there is no trust there is no question of a sham. A sham is a formal legal structure actually created or utilised in circumstances which enables the Court to find the structure, or its particular utilisation, to have been an empty pretence.
Conversely as the Supreme Court held in Clayton v Clayton 1“a finding that a trust deed is not a sham does not seem to us to preclude a finding that the attempt to create a trust failed and that no valid trust has come into existence.”
Where the structure or document never existed, there can be no sham: Baker and others v Official Trustee in Bankruptcy 1A. Even where a trust deed has been prepared, if the parties to the deed (the settlor and the trustee(s)) had no intention of creating a trust, there will be no trust, As the Court of Appeal held in Clayton v Clayton:1B
 …If evidence establishes that, notwithstanding the existence of a document described as a deed of trust, the parties to the deed (the settlor and the trustee(s)) had no intention of creating a trust, there will be no trust.1C In this event any property the subject of the “trust” will be regarded as still belonging to the “settlor”. Where legal title to the property has been transferred to a purported trustee who is not the settlor, the trustee holds the property on resulting trust for the settlor, in whom the beneficial interest remains.1D The property will be available to third party claimants against the settlor.
For the creation of a trust, the intention to do so must exist at the time of its creation. If, when considering all the circumstances the Court is of the opinion that the settlor did not mean to create a trust, the Court will not impute a trust. Furthermore, when property is put in the name of a trust, there is always a question (however obvious the answer may generally appear to be) as to whether this was done with the necessary intention to subject the property to the terms of the trust.
Baker and others v Official Trustee in Bankruptcy is a good illustration of how pretending that there was a trust, and failing to keep good records of trust transactions, will inevitably fail. This case involved an application by the trustee in bankruptcy for a declaration that a collection of contemporary art works said to be worth over $3 million, and that certain moneys representing art works, were the property of the bankrupt, B. In the late 1970s B started collecting art works. B claimed that in 1977 he set up a trust, called the Modern Art Trust, to which the collection belonged beneficially from 1977 until late 1983 and that the trustee was a company, JABI, which B controlled.
However, no trust deed in respect of the Modern Art Trust could be produced, nor were any trust records. While some records of transaction were put in the name of the Modern Art Trust, generally receipts for works purchased were issued in B's name. Most of the works were purchased with funds which came from tax evasion moneys paid to B personally. The receipt of the tax sums involved was to attempt to camouflage the diversion of cheques to the bank accounts of the various companies he controlled. Funds were freely transferred between the companies.
Although on bankruptcy B arranged for a new trustee to take over the art collection, it was always his intention to maintain effective control of the collection and the various companies.
The trial Judge, Drummond J 2, concluded that the Modern Art Trust never existed. The Federal Court of Appeal upheld these findings. This finding meant that the subsequent purported transfer of the art collection by the Modern Art Trust to another trust, and its subsequent transfer to other trusts was ineffective. The Federal Court of Appeal finding that the Modern Art Trust was never constituted meant that the works of art belonged to B. JABI had no title to transfer, whether as trustee of a trust existing in name only, or otherwise. Each of the transfers through B's companies, in as far as they related to works in the original collection were ineffective. This series of transactions, which depended on a fictitious trust, clouded every other dealing with the collection. The Court also held that the settlors of other trusts, who merely gave effect to B's instructions, acted as his agents in establishing those trusts. The settlor, B, retained complete control and complete power of disposition over the whole collection. Drummond J held that the true intention was that B would himself retain full beneficial ownership, and the transfers of the collection from company to company controlled by him were shams.
1Clayton v Clayton  NZSC 29 at 
1A Baker v Official Trustee in Bankruptcy (Full Court, Federal Court of Australia, 3 August 1995, unreported)
1B Clayton v Clayton  3 NZLR 293 at 
1C R Holmes “When is a trust or trust transaction valid?” in D Breaden (ed) (online looseleaf ed, LexisNexis) at [A.5]; L Tucker and others (19th ed, Sweet & Maxwell, London, 2015) at [4–020]
1D D Fox “Private Express Trusts” in J McGhee (ed) (33rd, Sweet & Maxwell, London, 2014, 645) at [22-070]; Tucker, above n 61, at [4–27]; and G Thomas and A Hudson (2nd ed, Oxford University Press, Oxford, 2010) at [2.47]
2 Official Trustee in Bankruptcy v Baker (Federal Court, No NB72 of 1990, FED No 530/94, 5 August 1994, Drummond J) .
Sham and the creation of trusts
The requirement of common intention
The question which arises, at a conceptual level is, is the basis for holding that a trust fails if property is transferred to a trustee to hold upon trusts which that person accepts, and intends to honour fully, because of an undisclosed lack of intention to create the trust on the part of the settlor? As David Russell QC observed: 1
After all, all the settlor has to do is provide the trust property, and he not only intends to do so, but will. It is with the conscience of the recipient that equity has traditionally been concerned. Here there is no defect of conscience on the part of the trustee, and it would be an odd result if the settlor, whose misconduct is involved could be the cause of a failure of the trust with the consequence that the property was held, not on the terms genuinely undertaken, but on resulting trust for the settlor.
Is it necessary that the purported settlor and trustee have a common intention that the trust be a sham when they are not the same person?
To determine whether there is a sham, it is necessary to ascertain the genuine intentions of the parties to the transactions 2. In the case of a sham trust, are the intention of both the settlor (if there is one) and the trustee both relevant where they are not the same person?
In the case of a gift which is alleged to be a sham, the intention of both parties is relevant as decided in Chase Manhattan Equities v Goodman 3. In that case shares in a company were registered in the name of nominees. A director of the company, as the beneficial owner of the shares, which were subject to a charge, executed a deed of gift purporting to give the shares to his cohabitee. An issue subsequently arose as to whether the gift was a sham. Having quoted Diplock, L.J.'s remarks in Snook 4, Knox, J said: 5
Immediately before the deed of gift was executed Mr. Goodman was the beneficial owner in equity, subject to the rights of NatWest Bank by way of charge, of the shares in question ... On its face the transaction effected by the deed of gift was an outright gift to Mrs. Fitzgerald of that beneficial interest. The deed of gift can only be a sham in my judgment if it is shown that the parties to it intended that Mr. Goodman should remain the beneficial owner of the shares comprised in it.
Later he said: 6
I return therefore to the question of whether the deed of gift was indeed a sham in the sense that neither Mr. Goodman nor Mrs. Fitzgerald intended it to deprive Mr. Goodman of beneficial ownership or confer it upon Mrs. Fitzgerald.
In Chase Manhattan Equities v Goodman the possibility of unilateral sham does not seem to have been specifically argued, but the principle in Snook, requiring common intention, was clearly applied.
Where a settlor transfers assets to a trustee (other than expressly for the settlor as sole beneficiary in which case there is no trust) the trust will only be a sham if the settlor and the trustee have a common intention that it be a sham: Grupo Torras S.A. v Shiek Fahad al Sabah 7, which contains the most comprehensive analysis by a Court to date of the relevant legal issues. 8 In that case the plaintiffs brought an action seeking to recover the "clean assets" left in the Esteem Settlement. The plaintiff had obtained judgment against the first defendant in the English High Court in respect of fraud committed by him for US$687m, with interest accruing at a rate of US$55m per annum. Prior to the fraud, the first defendant had established the Esteem Settlement, a discretionary settlement governed by Jersey law, of which Abacus (C.I.) Ltd. was the trustee and the defendants were the main beneficiaries. The Settlement incorporated a wholly-owned company in Jersey known as Esteem Ltd. The income earned by these structures was periodically distributed to the First Defendant and then resettled by him as capital. The bodies and the resettlement procedure were legitimately designed to avoid the Kuwaiti laws of forced inheritance and to shield the first defendant's substantial assets from the impact of United Kingdom taxation. In reaching the conclusion that a trust deed was not a sham unless both the settlor and the trustee had the common intention that the true position should be otherwise than as set out in the trust deed, and that it was not sufficient for the settlor alone to have such an intention the Royal Court stated: 9
(c) The same analysis applies in relation to a gift into trust. Let us assume the transfer of assets to a trustee pursuant to a trust deed where the trustee and the beneficiaries take the settlor at his word and believe that the assets have therefore been validly contributed to the trust. However, unknown to them, the settlor secretly had an intention that he should retain beneficial ownership of the assets. Mr. Journeaux accepted that the subsequent conduct of the parties, whilst it may be evidence relevant to ascertaining intention at the time of the original transaction, is not a constituent part of sham (which depends entirely on the intention at the time of donation). It follows that a trust will still be a sham because of the settlor's secret intention even if he has been singularly unsuccessful in achieving his objective of retaining beneficial ownership. Thus it may well be the case that every time he "instructs" the trustee to deal with "his" assets, the trustee refuses to comply. On Mr. Journeaux's analysis the trustee can act as a perfect trustee applying the assets in good faith solely in the interest of the beneficiaries (who may not even include the settlor), yet the trust will be invalid as a sham because of the unknown and secret intention of the settlor. Estoppel may prevent the settlor himself (and some who claim through him) from attacking the trust but third parties may do so. It would therefore be open, for example, to the revenue authorities to seek the invalidity of a trust simply because of the secret unexpressed intention of the settlor even if it had never proved possible for that unexpressed intention to be put into effect because the trustee was unaware of it and acted throughout in good faith as a proper trustee. Such extraordinary consequences must, at the very least, raise questions as to whether Mr. Journeaux's formulation of the law can be correct.
(d) ...In our judgment, there has to be good reason not to recognize the validity of a formal legal document freely entered into by a person of sound mind. We do not think that the plaintiffs' arguments in this case provide any such good reason.
54 For the above reasons we conclude that the principles laid down in Snook 10 and Hitch v Stone 11 are applicable to settlements where there is a settlor and a trustee. Accordingly, in order to find a sham, the court must find that both the settlor and the trustee had the intention that the true position should be otherwise than as set out in the trust deed which they both executed.
The Court of Appeal considered this matter in Official Assignee v Wilson.11A In summary the relevant facts were as follows: Gary Reynold was adjudicated bankrupt in 1992. He recommenced business activities in 1995. A trust was settled by him in 1996 with his partner's mother, and his solicitor as trustees. Mr Reynolds was not a trustee or beneficiary of the trust. The beneficiaries were named children, and Mr Reynolds' children and grandchildren. It purchased a property for$64,000, with the first mortgage being guaranteed by Mr Reynolds. Mr Renolds, his partner, and their family lived in the home, and Mr Reynolds and his partner paid the outgoings. In 1997 the property was transferred back to Mr Reynolds by the trust for the same price without a written agreement. The property was then mortgaged by Mr Reynolds, and the property was renovated. The trustees gave evidence that the property was so transferred pursuant to an oral agreement made in 1996, as Mr Reynolds and his partner wished to undertake renovations to it, and the trustees did not wish to do so. In 1999 the trust purchased another property in Queenstown for $215,000, with borrowing for more than that from three lenders guaranteed by Mr Reynolds, secured over the trust's Queenstown property, and Mr Reynold's Invercargill property. Part of the borrowing was used to repay $150,000 owed by Mr Reynolds to BNZ previously secured against the Invercargill property. The trust agreed to allow Mr Reynolds and Ms Clyma to do renovations to the Queenstown home. The renovations were funded by way of an interest free loan from Ms Clyma. The trust was never administered well and there was intermingling and confusion between the affairs of the trust and Mr Reynolds, at a personal level and even in the record keeping in his solicitor's trust account. Mr Reynolds was adjudicated bankrupt again on 14 July 2001. His liability to creditors was over $500,000. The bankrupt had no assets to administer, but the Official Assignee contended that the Queenstown home was in reality the property of Mr Reynolds and the equity therein should be available for his creditors. Mr Reynolds was discharged from his second bankruptcy 3 years later.
Robertson and O'Regan JJ in delivering their judgment stated: 11B
 It is unsustainable to assert that Mr Reynolds could come before the Court and ask to benefit as a result of his own slackness, informality or perhaps even illegality. The OA does not, in these circumstances, have a different stance from that of Mr Reynolds. No matter how condemnatory the Court were to be in its assessment of the acts and omissions of the relevant players, it could never reach the point where there could be integrity or justification in allowing Mr Reynolds to seek relief which is effectively for his own benefit. The fact that the benefit might be able to be transferred to his creditors does not alter the analysis….
While that finding effectively disposed of the case, their Honours after reviewing the relevant authorities concluded: 11C
 The preponderance of overseas cases is firmly in favour of the requirement that there must be a common intention before a transaction is found to be a sham.
In determining the "common intention" the Court determined it should look behind the objective trust-appearance of an alleged sham. In the words of Robertson J: "There needs to be a nuanced approach which recognises the variety of circumstances in which sham might emerge and a blanket approach is both unhelpful and unsustainable".11D
In the Court's view, a breach did not in itself constitute a sham and caution was needed before making such a finding in light of the impact on the interests of the beneficiaries. In that case there was no direct evidence that the settlor intended the trust to be operated as a sham. While there was an absence of documentation such as minutes, resolutions and accounts: 11E
 Evidence of poor administration of the trust is insufficient, of itself, to establish a sham. This may be evidence of a breach of trust, but the fact that the trustees have acted poorly in managing the trust does not establish an intention that the trust operate as a sham.
However, the documentation that was completed was "consistent with a subjective intent to create a trust":11F
The practical effect of this judgment is to make it far more difficult to set aside a trust as a sham than had previously been the case.
Is "common intention" required for a trust to be a sham where there is no settlor or a "nominal" settlor or the settlor and the trustee are the same person?
While a common intention requirement is appropriate and desirable where the transaction in question is properly described as bilateral (ie where the "trust" involves a trustee who is separate and distinct from the settlor), this requirement fades when the trust is properly categorised as unilateral (ie where the "trust" is settled and "managed" by the same person).
In Clayton v Clayton the Court of Appeal considered that the issue of whether a mutual intention is required on the part of the purported settlor and trustee did not arise when, as in that case, they were the same person:11G
 It is unnecessary for us in this case to express a view on the first of these questions because, as Mr Clayton is both the settlor and sole trustee of the VRPT, the focus is solely on his intentions in respect of the creation of the VRPT.
In Clayton v Clayton the Supreme Court stated that 11H “the application of the Ben Nevis test requires us to determine whether the intention of Mr Clayton as settlor and Trustee was to create a trust when he entered into the VRPT deed and settled the Vaughan Road properties on the VRPT.”
In cases in which there is no settlor or a "nominal" settlor logically the common intention required should be that of the "real settlor" and the trustee, as the "nominal" settlor will always objectively intend to create a trust.
In Australia, and in countries where grantor trust or similar rules apply, the settlor is merely the initial contributor to the trust of a nominal amount. In Australia the effect of s 102 of the Income Tax Assessment Act 1936 is that where a person declares that they hold property upon trust, and that person is or becomes a beneficiary of that trust, the Commissioner may treat the trust as the "alter ego" of the trustee and subject that person to tax on all of the trust income. In Australia it is common to attempt to avoid this problem by having an independent nominal settlor, and providing in the trust deed that the settlor can receive no benefit from the trust. 12
In the offshore jurisdictions, there is either no named settlor, or the named settlor is frequently an entity through whom funds pass. In some such cases the person who funds the trust is to be "in substance a co-settlor" in the absence of evidence that the nominal settlor played any other role, as occurred in Scmidt v Rosewood Trust 13.
In cases in which a nominal settlor is named in a trust deed they invariably have no powers or future role. Their purported exclusion from future benefits (which they were never going to receive in any event) is just a pretence, which has and had no legal benefit. Invariably such nominal settlors do not intend to settle further assets on the trust.
The problem in the case of trusts with no settlor, or a nominal settlor, is that it will frequently be impossible to discern any intention on the part of the named settlor, as David Russell QC recently commented.14 In Raftland Pty Ltd v Federal Commissioner of Taxation 15 which is dealt with in paragraph A.9.3, no adverse consequence flowed from the use of a nominal settlor. However in Australia nominal settlors are the rule rather than the exception. It appears that where a nominal settlor is used the intention of those who cause the nominal settlor to act will be imputed to the nominal settlor.
In New Zealand for income tax purposes section YA 1 of the Income Tax Act 2007 defines the term "settlor" to include, inter alia, for a number of purposes:
a person who makes, or has made at any time, a disposition of property to or for the benefit of the trust or on the terms of the trust for less than market value
Section HC 28 of the Income Tax Act 2007 provides:
for the purposes of this section where any person has made any settlement to or for the benefit of a trust or on the terms of a trust, -- where such settlement is of a nominal amount made at the request of any other person, -- that other person is in relation to that settlement, deemed to be the settlor and not the first person.
Can there be the requisite intention in the case of a blind trust?
In the offshore jurisdiction "blind trusts" are sometimes used. Such trusts name an international charity such as the Red Cross as the only named beneficiary, but there is no intention to ever benefit that charity. The intended beneficiaries and not named, but there is provision for the addition of beneficiaries by the trustees or by a named appointor with that power.
Such conduct appears to make the trust a sham. However the authorities have not reached that conclusion, which shows the difficulties faced by those attempting to have a trust declared to be a sham. As stated by Lord Walker in Schmidt v Rosewood Trust: 16
One possible reaction would be that Mr. Schmidt and his colleagues have made their bed and they must lie on it; if they have deliberately entered into a web of camouflage, it is hardly for anyone claiming through them to complain that the position is not transparent ... the Board consider that that inclination must be resisted. As already noted, it has not been suggested that the settlements are shams, or tainted with illegality. It is fundamental to the law of trusts that the court has jurisdiction to supervise and if appropriate intervene in the administration of a trust, including a discretionary trust. As Holland J said in the Australian case of Randall v Lubrano 17: '... no matter how wide the trustee's discretion in the administration and application of a discretionary trust fund and even if in all or some respects the discretions are expressed in the deed as equivalent to those of an absolute owner of the trust fund, the trustee is still a trustee.
Whether the settlor's intention is to be considered subjectively or objectively?
When considering whether a settlor intended to create a trust, his or her subjective intention is irrelevant, as stated in the dicta of Lord Hoffmann and Lord Millett in the House of Lords decision in Twinsectra Ltd v Yardley. 18 In Twinsectra the settlor intended the document to take effect but simply did not appreciate that the document created a trust. In the case of a sham the settlor does not intend the document to take effect at all; he or she intends the true position to be something different.
In Grupo Torras S.A. v Shiek Fahad al Sabah the Royal Court stated: 19
(f) ...We agree that the dicta in Twinsectra were focusing on a slightly different issue but we think nevertheless that they are persuasive. It is an essential requirement of a trust that a settlor should intend to create a trust. The House of Lords held that this should be ascertained objectively from what the settlor has signed. It does not matter that, subjectively, he did not mean to create a trust. Why should a different principle be applied where the issue is whether the settlor had donative intent? He has signed a document which clearly states that he has such intent. It seems to us that the policy considerations pointing towards the desirability of ascertaining the settlor's intention objectively are just as strong in relation to the issue of whether he intended to make a gift as they are on the issue of whether he intended to create a trust. There certainly seems no good reason to concentrate on the settlor's subjective intention when he has knowingly misled all the other parties to the document into thinking that his intention is as set out in the document.
(g) It is of course true that, in the case of a bilateral sham, the court is concerned with subjective intention. But that is where there are two parties and they have both agreed that the relationship will in truth be other than as set out in the documents. In those circumstances it seems perfectly reasonable for the court to take into account their common subjective intent. The position is surely different where only one party has a secret unexpressed intention which is different from that which can be objectively ascertained from the document and where the other party proceeds in good faith on the basis of the document...
(l) We think that there is some force in Mr. Clyde-Smith's point that a settlement of the type which we have before us is not a wholly unilateral transaction. Thus the deed contains a number of matters which deal with the position of the trustee, such as its right to remuneration, the trustee indemnity, retirement and appointment and generally the terms upon which the trustee is willing to act. Clearly a trustee will consider very carefully the terms of a trust deed which is put to it and will often require some change before it is willing to execute it...
A different conclusion has been reached, in my opinion incorrectly, by the Court of Appeal in New Zealand, without the Court of Appeal referring to the above decisions. In Official Assignee v Wilson it was indicated that a subjectively assessed shamming intention is required.19A As Glazebrook J stated: 19B
… where a sham is alleged, the search is for subjective intent that the transaction is a sham. After all, the whole point of a sham is that it is intended to have an effect other than the effect it would have if looked at objectively.
In Clayton v Clayton 19C the Court of Appeal adopted “the approach of this Court in Official Assignee v Wilson” and quoted with approval Glazebrook J’s above statement. In Clayton v Clayton the Supreme Court also found, without referring to Twinsectra Ltd v Yardley that it was the settlor’s subjective intention that was relevant: 19D
In Sharrment Pty Ltd v Official Trustee 20 Lockhart J held that the subjective intention of the parties is determinative. Lockhart J made his decision because:
... logically this seems to be the correct result. In Coppleson's Case [ Coppleson v Federal Commissioner of Taxation (1981) 34 ALR 377] ... Hunt J at 381 took the view that the authorities established that it is the intention of the parties to the transaction which determines the question whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction.
There is therefore a conflict between the British and Jersey authorities and the New Zealand and Australian authorities on this issue.
Does the "common intention" require dishonesty?
(ii) The nature of the intention
55 There was some discussion between counsel as to whether an element of dishonesty on the part of the parties was required in order for a sham to be made out. Mr. Clyde-Smith submitted that it was and referred to the decision of Neuberger, J. in NatWest v Jones 22, where the judge was clearly of the view that a sham transaction involved a degree of dishonesty because the parties were doing one thing and saying another.
56 Mr. Journeaux ...contended that no element of dishonesty was required and referred to the comments of Mr. D.M. Young, Q.C. in Midland Bank v Wyatt 23, where he indicated that the transaction would be void even if entered into on the basis of mistaken legal advice. We must confess that we find it hard to follow the remark of the judge in the context of the facts of that case. On any view it would seem that Mr. Wyatt had been dishonest. He repeatedly led the banks and others to believe that he still had a beneficial interest in the house which was in the joint names of himself and his wife at a time when he had secretly executed a declaration of trust declaring that he held his share upon trust for his two minor daughters.
57 As the court pointed out to counsel during the hearing, it really depends on what one means by dishonesty. But one thing is clear from the authorities; there must be an intention to mislead. Thus in Snook itself, Diplock, L.J. defined sham as: 24 '[D]ocuments executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create.' '... The parties must have intended to create different rights and obligations from those appearing from (say) the relevant documents, and in addition they must have intended to give a false impression of those rights and obligations to third parties.' [Emphasis supplied.] ...To the extent that anything said in Wyatt was inconsistent with this, we do not think that the judge was entitled to so hold.
58 ...Mr. Young, Q.C. in Wyatt 26 said... 'I consider a sham transaction will still remain a sham transaction even if one of the parties to it merely went along with the 'shammer' not either knowing or caring about what he or she was signing.' ...
59 It follows that in our judgment, in order to succeed, the plaintiffs will need to establish that, as well as Sheikh Fahad, Abacus intended that the assets would be held upon terms otherwise than as set out in the trust deed or, alternatively, went along with Sheikh Fahad's intention to that effect without knowing or caring what it had signed, and that both parties intended to give a false impression of the position to third parties or to the court.
In the majority judgment of the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue the majority pointed out that: 21A
An allegation of sham, being akin to an allegation of fraud, should not be lightly made. Those engaging in a sham are in reality seeking to deceive others as to the true nature of what they have agreed and are intending to achieve.
Oral testimony as to the intentions of the parties
The Court may receive oral testimony as to the intentions of the parties. 27 In Hawke v Edwards28 Jordan CJ held that oral evidence is admissible in proceedings where the parties intended themselves to only be bound by a contemporaneous oral agreement and the document was brought into existence simply as a piece of machinery for serving some purpose other than that of constituting the real agreement between them.
Inferences to which the Court may have regard
The Court may have regard not only to the inferences to be drawn from its acceptance of such evidence but also those which flow from its disbelief: Baker and others v Official Trustee in Bankruptcy. 29
Reaching the conclusion that a transaction is a sham in the absence of direct evidence
To draw the inference of a sham in the absence of direct evidence is to reach a strong finding. Such a finding cannot be made if another inference is at least equally open. This warning must be borne in mind when deciding whether the transactions were shams. 30
Part only of a trust deed being a sham
The proposition that a provision contained in a deed of settlement pursuant to which a trust fund is established, but not the deed itself can be a sham, is not new. Such a submission was considered and accepted by a Full Court in Faucilles Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia. 31 This was an appeal from the Administrative Appeals Tribunal. It concerned the establishment of a discretionary family trust known as the John Kakridas Family Trust No. 2. The settlor of that trust was shown to be Julia Sztainbok, the wife of Mr Kakridas' accountant and tax adviser. What was assailed as a sham was the nomination of non-resident relatives of Mr Kakridas as primary beneficiaries of the trust, being takers in default of appointment of income of the trust fund. In the year in question, $4,000 could be derived by a non-resident individual without attracting a liability to Australian tax.
In Case W48 32 after discussing the nature of 'sham' in relation to schemes to avoid or minimize liability to taxation, the Tribunal said:
24. I have no doubt that neither [John Kakridas] nor [Sztainbok's] wife as settlor of [John Kakridas'] Family Trust No. 2 intended that the persons constituting the primary beneficiary of the trust should be entitled to have any part of the income of the trust distributed to them in default of the exercise by the trustee of its discretion. I am satisfied that they did not intend there to be any real distribution of the income of the trust to anyone other than [John Kakridas] and possibly his children. I find that [John Kakridas] meant to utilise the discretionary distribution provisions of the deed of settlement to cloak the real transactions which he intended to undertake, and that he meant the default distribution provision, if it ever purportedly took effect, similarly to disguise the real situation.
25. I have come to the conclusion, therefore, that the provision of the deed of settlement of [John Kakridas'] Family Trust No. 2 for default distribution to the primary beneficiary was a sham, that is to say that it was never intended to create legal or equitable rights or obligations. It was never intended that, if there were no distribution to any other beneficiary in accordance with the terms of the deed of settlement, there should be a real distribution to persons constituting the primary beneficiary. By contrast, however, although [John Kakridas] undoubtedly intended that bogus use should be made of the discretionary power of distribution to the secondary beneficiary, that power could be exercised in favour of himself and his children and also in favour of [Jim Kakridas] and his children and might at some time in the future have been genuinely so exercised. I have come to the conclusion, therefore, that the provision of the deed of settlement conferring that discretionary power on the trustee was intended to be available to be validly exercised if and when it became advantageous to exercise it so. Its inclusion in the deed was, therefore, not a sham.
26. I have, therefore, come to the conclusion that [John Kakridas'] Family Trust No. 2 was validly created and validly existed during the 1982 taxation year, and that there was no valid distribution of any of its income in that year either as the result of the exercise of any discretion by the trustee or as the result of any of the terms of the deed of settlement taking effect in default of the exercise of such a discretion. Consequently, sec. 99A of the Act was applicable.
On appeal, Lockhart and Neaves JJ dismissed the application. Hill J, had the following to say on the question: Whether there was evidence on which the Tribunal could have concluded that Mrs Sztainbok had the intention that the default clause was a sham?:33
Mrs Sztainbok was not called to give evidence. Although there seems to have been no evidence to support it, the Tribunal referred to Mrs Sztainbok as the wife of the accountant for the applicant. Her husband also was not called to give evidence.For a transaction to be a sham there must be an intention common to the parties to it that the transaction is a cloak or disguise for some other and real transaction, or sometimes as in Clyne v F.C. of T. 83 ATC 4508 for no transaction at all. It is, as Lockhart J. pointed out in Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 F.C.R. 449 at p. 454 something which is not genuine or true but false or deceptive. Where it is alleged that the trusts of a settlement or some of them are a sham, of necessity it will need to be proved that it was the intention of the settlor that the settlement itself be a sham, or in a case such as the present that some of the trusts of that settlement are a cloak or disguise for the real trusts intended to bind the trustee. Commr of Stamp Duties (Qld) v Jolliffe (1920) 28 C.L.R. 178 at p. 181 is clear authority, if authority be needed, for the principle that intention is a necessary ingredient in the establishment of a valid express trust.The Tribunal found, and it was open for it so to find, that the settlement was brought about by Mr Kakridas; that he "caused" it to be made. That fact, coupled with the fact that Mrs Sztainbok was the wife of the tax accountant to Mr Kakridas and could be expected to give effect to her husband's client's wishes, plus the inference which could properly be drawn from their failure to give evidence that the evidence of the accountant and his wife would not assist the taxpayer, was sufficient in my opinion to permit the Tribunal to draw an inference as to the intention of Mrs Sztainbok and thereby justify the conclusion reached by the Tribunal that Mrs Sztainbok, like Mr Kakridas, did not intend that the default distribution provision would be effective.
1 International developments in relation to sham trusts, TQR Volume 5 Issue 2 2007 pages 5 to 11, at pp. 6 to 7.
1a Clayton v Clayton  3 NZLR 293 at , where the Court of Appeal referred to “Most notably, contrast J Palmer “Dealing with the Emerging Popularity of Sham Trusts”  NZ L Rev 81 at 92 and 94; J Palmer “Sham Trusts” in AS Butler (ed),(2nd ed, Thomson Reuters, Wellington, 2009) 393 at [15.3.1(2)] and [15.3.2]; and Conaglen, above n 60, at 184.”
1b Clayton v Clayton  3 NZLR 293 at , where the Court of Appeal referred to “ , above n 45, at ;, above n 32, at  and ;  EWCA Civ 63,  All ER (D) 181 (Jan) at ; Palmer in Butler, above n 64, at [15.3.2]; Tucker, above n 61, at [4–20]; D Hayton, P Matthews and C Mitchell (18th ed, LexisNexis, London, 2010) at [4.7] .”
2 Boydell v James (1936) 36 SR (NSW) 620, 627 per Jordan CJ; Yeung v Federal Commissioner of Taxation (1988) 19 ATR 1006, 1013 per Davies J.
3 Chase Manhattan Equities v Goodman  BCC 308;  BCLC 897.
4 Snook v London & W. Riding Invs Ltd,  2 Q.B. 786;  1 All E.R. 518; (1967), 111 Sol. Jo. 71.
5 Chase Manhattan Equities v Goodman  BCC at 328.
6 Chase Manhattan Equities v Goodman  BCC at 329.
7 Grupo Torras S.A. v Shiek Fahad al Sabah (2003) JLR 188, which Professor Hayton believes "convincingly establishes" the legal position, supra, para 2.
8 The following cases (which are set out in full to aid analysis) were: Applied: Atlas Maritime Co. S.A. v Avalon Maritime Ltd  4 All ER 769;  1 Lloyd's Rep 563 dicta of Staughton, L.J.; Company, Re a,  BCLC 333; Fortex Group Ltd. v MacIntosh,  3 NZLR 171, dicta of Tipping, J; Johnson Matthey Bankers v Shamji, 1985-86 JLR N-26; Jones v Lipman,  1 W.L.R. 832; (1962), 106 Sol. Jo. 531; Letterstedt v Broers (1884), 9 App. Cas. 371;  All ER Rep. 882, dicta of Lord Blackburn; Pettkus v Becker,  2 S.C.R. 834; (1980), 117 D.L.R. (3d) 257; 34 N.R. 384; 19 R.F.L. (2d); Salomon v A. Salomon Ltd.,  A.C. 22; (1897), 75 L.T. 426; Twinsectra Ltd. v Yardley  2 A.C. 164;  2 All ER 377, dicta of Lord Hoffmann and Lord Millett
Followed: Abacus Trust Co. (IoM) Ltd. v Barr,  1 All ER 763;  W.T.L.R. 149; Hitch v Stone  STC 214;  BTC 78; Snook v London & W. Riding Invs. Ltd.,  2 Q.B. 786;  1 All ER 518; (1967), 111 Sol. Jo. 71
Considered: Adams v Cape Indus. PLC,  Ch. 433;  1 All ER 929; Barton v Bank of New S. Wales (1890), 15 App. Cas. 379; CPS v Compton, The Times, December 11th, 2002;  EWCA Civ 1720; Commonwealth Reserves v Chodar (2001), 3 IETLR 549; Cusack v Scroop Ltd., [1997-98] 1 O.F.L.R. 68; 1996-98 MLR N-20; Gilford Motor Co. Ltd. v Horne,  Ch. 935; (1933), 149 L.T. 241; Goldcorp Exchange Ltd., Re,  1 A.C. 74; Grupo Torras S.A. v Sheikh Fahad Mohammed Al-Sabah, English Queen's Bench Division, July 29th, 1994, unreported; Hastings-Bass, In re,  Ch. 25;  2 All ER 193; Intl. Credit & Inv. Co. (Overseas) Ltd. v Adham  BCC 134;  I.L.Pr. 302; Mallott v Wilson,  2 Ch. 494; (1903), 89 L.T. 522; Metall & Rohstoff A.G. v Donaldson Lufkin,  1 Q.B. 391;  3 All ER 14; (1989), 133 Sol. Jo. 1200; Milroy v Lord (1862), 4 De G.F. & J. 264; 45 ER 1185; 7 L.T. 178; Muschinski v Dodds (1985), 160 CLR 583; 60 ALJR 52; 62 Aust. L.R. 429; Natwest v Jones  BCLC 98;  B.P.I.R. 109; Polly Peck Intl. PLC (No. 2), In re  3 All ER 812;  2 BCLC 185; Private Trust Corp. v Grupo Torras S.A., Bahamian Court of Appeal, October 27th, 1997, unreported; Sharrment Pty. Ltd. v Official Trustee (1988), 82 Aust. L.R 530; 18 FCR 449; Trustor AB v Smallbone (No. 2),  1 W.L.R. 1177;  3 All ER 987; Turner v Turner,  Ch. 100;  2 All ER 745; West Deutsche Landesbank Girozentrale v Islington L.B.C.,  A.C. 669;  2 All ER 961;  CLC 990; (1996), 160 J.P. Rep. 1130; 146 New L.J. 877; Woolfson v Strathclyde Regional Council,  S.L.T. 159;  S.C. (H.L.) 90
Referred to: Chase Manhattan Equities v Goodman  BCC 308;  BCLC 897; Gibbs v Rea,  A.C. 786; 1998 CILR 16; Harris v Sharp, English C.A., March 21st, 1989, unreported; Lipkin Gorman v Karpnale Ltd.,  2 A.C. 548;  4 All ER 512; Lysaght, In re,  Ch. 191;  2 All ER 888; Ord v Belhaven Pubs Ltd.,  BCC 607; TSB Bank Intl. v Chabra,  1 W.L.R. 231;  2 All ER 245; Tjaskemolen, The  2 Lloyd's Rep. 465;  CLC 521
Distinguished: Abdel Rahman v Chase Bank (C.I.) Trust Co. Ltd., 1991 JLR 103; Foskett v McKeown,  1 A.C. 102;  3 All ER 97; Gibbon v Mitchell,  1 W.L.R. 1304;  3 All ER 338; H, In re,  2 All ER 391;  BCLC 500; LAC Minerals Ltd. v Intl. Corona Resources Ltd. (1989), 61 D.L.R. (4th) 14;  F.S.R. 441
Not followed: Midland Bank v Wyatt  FLR 697;  1 BCLC 242; Wallersteiner v Moir,  1 W.L.R. 991;  3 All ER 217; (1974), 118 Sol. Jo. 464.
9 Grupo Torras S.A v Shiek Fahad al Sabah (2003) JLR 188, pp 217 to 218.
10 Snook v London & W. Riding Invs. Ltd.  2 Q.B. 786;  1 All E.R. 518; (1967), 111 Sol. Jo. 71.
11 Hitch v Stone  STC 214;  BTC 78.
11A Official Assignee v Wilson  3 NZLR 45;  NZCA 122.
11B Ibid para 
11C Ibid para 
11D Ibid para .
11E Ibid para .
11F Ibid para .
11G Clayton v Clayton  3 NZLR 293 at .
11H Clayton v Clayton  NZSC 29 at 
12 Deacons, Graham & James, The A-Z of Trusts, (1999) Centre for Professional Development, para 1-1320; Federal Commissioner of Taxation v Hobbs (1952) 98 CLR 151; and Truesdale v Federal Commissioner of Taxation (1971) 120 CLR 353.
13 Scmidt v Rosewood Trust  2 A.C. 709 at p.716.
14 TQR Volume 5 Issue 2 2007, page 7.
15 Raftland Pty Ltd v Federal Commissioner of Taxation 8  FCAFC 4.
16 Schmidt v Rosewood Trust  3 All ER 76 (Privy Council) para 36.
17 Randall v Lubrano (31 October 1975, unreported) cited by Kirby P in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 416.
18 Twinsectra Ltd v Yardley  2 A.C. 164;  2 All E.R. 377.
19 Grupo Torras S.A. v Shiek Fahad al Sabah (2003) JLR 188, pp. 218 to 219.
19B At . Footnotes omitted.
19C Clayton v Clayton  3 NZLR 293 at 
19D Clayton v Clayton  NZSC 29 at 
20 Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530, 539 per Lockhart J.
21 Grupo Torras S.A. v Shiek Fahad al Sabah (2003) JLR 188, paras. 57-59.
22 NatWest v Jones  BCLC at paras 36-41.
23 Midland Bank v Wyatt  FLR at 707.
24 Snook v London & W. Riding Invs Ltd  2 Q.B. at 802.
25 Hitch v Stone  STC at 230.
26 Midland Bank v Wyatt  FLR at 699.
27 Buckley & Young Ltd v Commissioner of Inland Revenue  2 NZLR 485 (CA); Mills v Dowdall  NZLR 154, 159 per Richardson J; National Westminster Finance New Zealand Ltd v South Pacific Rent-a-Car Ltd  1 NZLR 646, 647 per Casey J (affirmed on appeal by the Court of Appeal); Marac Life Assurance Ltd v Commissioner of Inland Revenue  1 NZLR 694, 706, 711; Commerce Commission v Fletcher Challenge Ltd  2 NZLR 554.
28 Hawke v Edwards (1947) 48 SR (NSW) 21, 23.
29 Baker and others v Official Trustee in Bankruptcy (Full Federal Court, No Qg102 of 1994, Fed No 565/95, 3 August 1995).
30 Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530, 544.
31 Faucilles Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1989) 90 ATC 4003.
32 Case W48 89 ATC 460.
33 Case W48 (1989) 90 ATC 4003, at 4025.
"Sham" and the administration of trusts
Defective initial intention
The cases establish that direct evidence that the parties to a trust intend to achieve an outcome inconsistent with its terms is not likely to be available. The courts always look at all the evidence before reaching a conclusion that there has been a sham.
The fact that the settlor relied upon his or her advisors, and had limited knowledge of the legal ramifications of the trust structure and the terms of the trust deed do not result in a trust being a sham. As the Supreme Court held in Clayton v Clayton:1
 We do not consider that Mr Clayton’s reliance on his advisors in relation to the VRPT and his lack of knowledge of the legal ramifications of the trust structure and the terms of the trust deed itself leads to the conclusion that the VRPT deed is a sham. Mr Clayton’s reliance on his advisors does not indicate any lack of intent on his part to create a trust, nor does his lack of knowledge of the legal detail. The fact that the trust deed gives Mr Clayton powers that amount in effect, to a general power of appointment does not indicate that when entering into the VRPT deed, Mr Clayton in fact intended to create a structure different from that set out in the terms of the VRPT deed itself.
Evidence that the trustee has (with the knowledge of the settlor (or the "real" or "deemed" settlor if there is no settlor or a nominal settlor) regularly breached the terms of the trust, may provide evidence that it was always intended by the parties to the trust that this would occur.
Abdel Rahman v Chase Bank (CI) Trust Company Limited 1 is frequently cited as a case where the evidence that the trust was administered as if the funds were those of the settlor was sufficient to hold that the trust was a sham.
However Abdel Rahman was primarily concerned with the Jersey principle of donner et retenir ne vaut. The requirements for a sham were not considered in any detail. Although argument was addressed to the court concerning the required intention of the parties and Snook 2 was cited, there is no reference to this issue in the judgment and no analysis of whether the relevant intention has to be shared by both the settlor and the trustee or whether it is sufficient just for the settlor to have such intention. In a judgment which covers 60 pages of the Jersey Law Reports, the only references to the legal principles relevant to the question of sham are to be found in 1991 JLR at 147, 155 and 168. The former do not add anything material to that which is said in the last page which is as follows 3:
Therefore, having taken into consideration the whole of the evidence and documentation, we were able to reach but a single and unanimous conclusion. KAR retained dominion and control over the trust fund throughout his lifetime. The settlement was a sham in the sense that it was made to appear to be what it was not. The 'don' was a don to an agent or nominee. The trustee was never made the master of the assets. KAR intended to and in fact retained control of the capital and income of the trust fund throughout his lifetime and used the trust and the deed of appointment made under the trust to make testamentary dispositions. In our opinion, KAR's advisers and the trustee lent their services to the attainment of his wishes.
As the Supreme Court held in Clayton v Clayton1A “There is no basis to extend the sham concept to encompass a trust created under a document that was not intended to be a pretence but that the Court considers is otherwise reprehensible in some way.”
Evidence of an emerging sham
Robertson and O'Regan JJ in delivering their judgment in the Court of Appeal in Official Assignee v Wilson3A cast doubt on what previously appeared to be the law in relation to the issue of emerging shams. Following the approach taken in Marac Finance Ltd v Virtue3B they concluded that "[u]nless the later appearance of a sham can be traced back to the creation of the trust, the trust remains valid."
In the Inland Revenue's Interpretation Guideline, "'Sham' -- meaning of the term"4 the view is expressed that the trust may be bona fide at inception. However, it may become a sham if the settlor departs from the terms of the trust deed and the initial agreement transferring the assets to the trust, treating the trust assets as his or her own and allowing the original deed to conceal the new arrangement. In light of the Court of Appeal decision in Official Assignee v Wilson, this Guideline no longer accurately reflects the legal position in New Zealand.
Whenever a trust is a sham the Court will remove the cloak and give effect to the true agreement: Marac Finance Ltd v Virtue.5 In that case, the Court of Appeal held that:
Where the essential genuineness of the documentation is challenged a document may be brushed aside if and to the extent that it is a sham. There are two such situations:
(1) where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition given to their common intentions; and
(2) where the document was bona fide in inception but the parties have departed from their initial agreement and yet have allowed its shadow to mask their new arrangement.
This applies to all documents including a trust.
In Walker v Walker 6 Richardson J stated that documents may be brushed aside if and to the extent that they are shams in the sense of not being bona fide at inception or of not having been acted upon.
Sham transactions involving the trust after its formation
It is self evident that a trust which is itself not a sham, can be involved in sham transactions after its inception in the same manner as any other person or entity, and that the tests which apply in the case of sham transactions are the same regardless of those involved.
In Grupo Torras S.A. v Shiek Fahad al Sabah the Royal Court stated (by way of obiter) that even where an initial settlement was valid, later transfers could be held to be a sham if the requisite intention were present. 7 The tests which apply in such situations are those detailed in paragraph A.8.1.
This situation was considered recently in Australia in a case where a trust with substantial tax losses was "sold" to a third party whose associated parties were neither beneficiaries, or intended to be beneficiaries of the trust when it was initially formed.
In Raftland Pty Ltd v Federal Commissioner of Taxation 8 the Full Court of Federal Court of Australia held the intention to achieve a particular legal result by documentation, which was in fact achieved, was sufficient to save a conclusion of sham. In that case control of the E & M Unit Trust, a unit trust with substantial losses, had been purchased from third parties. Two new trusts were established, the Raftland Trust and the Heran Developments Trust. In each of the trusts the trustee of the E & M Unit Trust was included as a Tertiary Beneficiary. Pursuant to the terms of the two trusts in the event of a failure by the trustee to appoint income by the end of the taxation year, the income would pass to the tertiary beneficiary. On 30 June 1995 the trustee of the Brian Heran Discretionary Trust resolved to distribute all the income for that year to the Raftland Trust. Notwithstanding the Raftland Trust was established some five years after the Brian Heran Discretionary Trust, the definition of 'Primary Beneficiaries' in the Brian Heran Discretionary Trust included as beneficiaries any trust in which 'Brian Joseph Heran or any of his brothers have an interest whether vested or contingent'. On the same day two resolutions were passed by the trustee of the Raftland Trust to distribute its income to the trustee of the E & M Unit Trust. There was no payment to the E & M Unit Trust of the income it was entitled to as the Tertiary Beneficiary. The CIR asserted that the 'purported distributions' of the Raftland Trust's income for the 1995 tax year did not reflect the true arrangement or transaction between the parties, and that the resolutions to distribute were a 'sham' and should be disregarded, as should the appointment of the E & M Unit Trust as a Tertiary Beneficiary of the Raftland Trust, since they alleged it was made to facilitate the false distributions.
In the Full Court Edmonds J, with whom Conti J agreed stated:
79 In the present case, the evidence is quite clear that the Raftland Trust was established by Mr Tobin on the instructions of Mr Brian Heran and that the settlor, Ms Somerville, Mr Tobin's employee, was but a nominal instrumentality through whom he (Mr Tobin) arranged for Mr Brian Heran's instructions to be carried out. It is also clear that Mr Tobin deliberately intended that the trustee of the E & M Unit Trust be a Tertiary Beneficiary for the Raftland Trust to enable it to receive distributions of, or otherwise be entitled in default of such distributions to, income of the Raftland Trust to be absorbed by the losses of the E & M Unit Trust; and that Mr Tobin was alive to the prospect that because the unit holders of the E & M Unit Trust had the right to call up the moneys representing their respective entitlements, steps had to be taken to ensure that, if such moneys were called up, that the call could be met by transferring shares in Navygate to the unit holders...Those who advised Mr Brian Heran, notably Mr Tobin, but there were others such as senior counsel retained by Mr Tobin, were well aware that, only to the extent that the trustee of the E & M Unit Trust was presently entitled to the income of the Raftland Trust, would that income be sheltered by the losses in the E & M Unit Trust. The attainment of that fiscal objective drove the transaction from the point of view of its participants. Hence, if it was not achieved by a determination to pay to or apply or set aside the income of the Raftland Trust to the trustee of the E & M Unit Trust pursuant to cl 3(b)(i) of the Raftland Trust deed, it was to be achieved by the default provisions of the proviso to cl 3(b), reinforced by the provisions of cl 3(f), (see  supra).83 With respect to the conclusion of the primary judge on this issue, I am of the view that the nomination of the trustee of the E & M Unit Trust as a Tertiary Beneficiary of the Raftland Trust is not a sham, but rather was at the forefront of the intentions of those charged with responsibility for establishing the Raftland Trust. In other words, to establish it in such a way that the income of the Raftland Trust passed to the trustee of the E & M Unit Trust, to be sheltered by the losses of that trust, if not by distribution - in the sense of payment to, application or setting aside of such income for the E & M Unit Trust - then by the default provisions of the proviso to cl 3(b), reinforced by the provisions of cl 3(f).84 It follows, in my view, that in each of the years ended 30 June 1995, 1996 and 1997 the trustee of the E & M Unit Trust was presently entitled to the whole of the income of the Raftland Trust of those years, if not by force of resolutions to distribute such income passed by the trustee of the Raftland Trust on 30 June 1995 in the case of the 1995 year of income and by force of written determinations signed by Mr Brian Heran as a director of the trustee on 30 June 1996 and 30 June 1997 in the case of the 1996 and 1997 year of income, then by force of the default provisions of the proviso to cl 3(b), and the provisions of cl 3(f), of the Raftland Trust deed.
New settlements on the trust
In Truesdale v Federal Commissioner of Taxation 9 one of the beneficiaries settled further moneys on the trustee, but the Court held that s 102 could not be applied, drawing a distinction between the creation of the trust and the settlement of further funds on an existing trust.
In this author's opinion, each new settlement upon a trust creates a new settlement upon the terms of the existing trust. In Baldwin v Commissioner of Inland Revenue 10 Macarthur J considered the meaning of the words "a trust has been created", and stated:
The dictionary meaning of the word 'create' is 'to make, form, constitute, or bring into legal existence': see Shorter Oxford Dictionary. In my opinion the phrase 'a trust has been created' in s 84A simply means 'a trust has been brought into legal existence'. No particular method of creation of a trust is indicated by the section. I think therefore that if it is shown that trust obligations have been imposed or constituted in respect of certain property by one or more of the specified persons then a trust has been created by that person or those persons within the meaning of the section.
He then went on to consider the facts of the case and observed 11 that the appellant and his wife imposed or constituted fresh obligations in respect of the trust property under consideration. It is sufficient for the establishment of a trust if property is impressed with a trust obligation.12 In the present case a new trust was established in respect of the trust property held in the Surrey Trust.
The Baldwin decision was applied in Tucker v Commissioner of Inland Revenue13 where Woodhouse J adopted the above passages in the following terms:
With respect I agree with both these passages, and in my opinion they provide a useful basis for any examination of the question as to whether a given taxpayer has created a trust in terms of s 84A. But clearly in the first of them ... Macarthur J has not excluded the need for intention as a necessary element in the creation of the trust. Indeed his use of the words 'imposed or constituted' themselves imply that there must be a deliberate act of will on the part of the person so dealing with the property to which the words refer. On the other hand the passage explicitly recognises that no particular method need be adopted in achieving this intention.
In the present case the taxpayer's intention was effected and a trust created in respect of the property when he made use of the existing trust deed so that its terms became applicable to his own dispositions.
As a result each new settlement of assets upon a trust creates a new trust upon the terms of the old trust. It may not therefore be safe in Australia to rely upon the decision in Truesdale v Federal Commissioner of Taxation. 14
Each new settlement of assets upon a trust can be held to be a sham if it is not genuinely intended that the asset be a trust asset.
1 Clayton v Clayton  NZSC 29 at 
1A Clayton v Clayton  NZSC 29 at 
1B Rahman v Chase Bank (CI) Trust Co Ltd  JLR 103.
2 Snook v London and West Riding Investments Ltd  2 QB 786, 802;  1 All ER 518, 528 per Diplock LJ.
3 Abdel Rahman v Chase Bank (CI) Trust Company Limited  JLR 103, at page 168.
3A Official Assignee v Wilson  3 NZLR 45;  NZCA 122.
3B Marac Finance Ltd v Virtue  1 NZLR 586.
4 IRD Interpretation Guideline, "'Sham'-- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
5 Marac Finance Ltd v Virtue  1 NZLR 586, 588. These principles were also applied by the Court of Appeal in Buckley & Young Ltd v Commissioner of Inland Revenue  2 NZLR 485; Mills v Dowdall  NZLR 154, 159 per Richardson J; National Westminster Finance New Zealand Ltd v South Pacific Rent-a-Car Ltd  1 NZLR 646, per Casey J (a decision affirmed on appeal by the Court of Appeal); Marac Life Assurance Ltd v Commissioner of Inland Revenue  1 NZLR 694; and Commerce Commission v Fletcher Challenge Ltd  2 NZLR 554.
6 Walker v Walker  NZLR 560, 572-573, applying James Snook & Co Ltd v Commissioners of Inland Revenue (1952) 33 TC 244; and Marac Finance Ltd v Virtue  1 NZLR 586.
7 Grupo Torras S.A. v Shiek Fahad al Sabah (2003) JLR 188, para 60.
8 Raftland Pty Ltd v Federal Commissioner of Taxation  FCAFC 4.
9 Truesdale v Federal Commissioner of Taxation (1971) 120 CLR 353.
10 Baldwin v Commissioner of Inland Revenue  NZLR 1, 6.
11 Baldwin v Commissioner of Inland Revenue  NZLR 1, 6-7.
12 Underhill's Law of Trusts and Trustees, 11th ed, p 3.
13 Tucker v Commissioner of Inland Revenue  NZLR 1027, 1030.
14 Truesdale v Federal Commissioner of Taxation (1971) 120 CLR 353.
The legal character of the agreement which embodies the transaction
It is only where the genuineness of the agreement, as evidenced by the documents, is challenged that it is necessary to consider whether the substance of the transaction as represented by the documents is the true substance of the transaction or whether the documents themselves are a cloak to conceal the true nature of the transaction.1
"The modern trend is for the Courts to try to give business efficacy to commercial transactions. For example, if a Court is satisfied that the real intention of the parties was to enter into a binding agreement, then the Court will do its best to give effect to that intention". 2 This modern trend may be contrasted with an earlier judicial approach, when a finding of sham inevitably enabled a Court to infer the true nature of the arrangement in an 'in substance' manner. For example, in Polsky v S and A Services Ltd 3 Lord Goddard had no difficulty inferring from the fact that there had not been payment of a deposit, as set out in a hire purchase agreement used in a refinancing situation, that he was dealing with a clear case of sham. As Thorpe J said in the AGC case, "That precedent can no longer safely be followed." 4
Carelessness in the preparation of documentation
Carelessness in the preparation of documentation provides no evidence of sham intentions. In Bateman Television Limited and Another v Coleridge Finance Company Ltd 5 North P said "... carelessness in the preparation of conditional purchase agreements provides no evidence that they were not genuine documents".
Haphazard conduct or departure from the provisions of documentation
Haphazard conduct or departure from the provisions of documentation is a factor to be taken into account in determining the parties intentions. In Sonenco (No 87) Pty Limited v Commissioner of Taxation 6 the Court held that haphazard conduct or departures from the provisions of the documents may or may not indicate that the documents do not truly reflect what was intended. The crucial matter is ascertaining the parties' real intentions. If the acts and documents reflect those intentions there will not be a "sham".
Shams where each relevant document has its purported effect
It is no answer to a charge that a document or a transaction comprising or recorded in a series of documents is a sham to show only that each document has the effect that it purports to have 7. The significance of this qualification that a document or a transaction may still be a sham, even though each relevant document has its purported effect, is illustrated by Windeyer J's comments in Hancock v Federal Commissioner of Taxation 8:
It is one thing to say that the substance and nature of a genuine transaction are determined by the form in which it is cast. It is quite another to suppose that going through a form makes a pretended transaction real. An ostensible gift that was made only so that the subject of the gift might be at once given back may not, it seems to me, really cause a change of ownership even momentarily. And, in some cases, probably the same might be said of an exchange of cheques.
In Windeyer J's opinion, what would otherwise be a fully effective gift may be nullified by an intention on the part of donor and donee that there was to be no change in the ownership of the property: a document that purports to make a gift to someone may be effective in its terms to do just that. Yet, it will be regarded as a sham if the parties to the gift all along had an intention to bring about a situation inconsistent with there in fact being any gift. 9
Is the transaction legally effective because documentation is not a sham?
Even if the documentation is not a sham, it does not follow that it will be legally effective. In Re Sonenco (No 87) Pty Limited v Commissioner of Taxation Beaumont, Foster and Cooper JJ observed 10:
84. It does not, of course, follow that the dealings were legally effective. They were artificial and extraordinary in commercial terms. Moreover, some of the dealings were embarked upon in a haphazard way and in other instances, the provisions of the documents were departed from and many instruments were backdated.
It is not an intention to achieve an artificial result that makes a transaction a sham, but an intention to achieve a different result from that represented by the legal forms employed. The Court will look at all the circumstances and incidents of the ostensible transaction. Transactions may be both complex and artificial, yet intended to have precisely the legal effect apparent on their face. 11
Where the documents record the intentions of the parties, the substance of the transaction should not be interpreted so as to produce some different legal result
There is no half-way house between a sham and an effective transaction. Where the documents record the intentions of the parties, the substance of the transaction should not be interpreted so as to produce some different legal result: Re Securitibank Ltd (No 2) 12. Richardson J stated 13 that there is no half-way house in the class of case where the documents record the intentions of the parties but which the Court considers do not express the "pith and substance" of the transaction. It is a matter of first ascertaining the true nature of the transaction by considering the legal nature of the agreement embodying the transaction. Only where the genuineness of the agreement evidenced by the documents is challenged, is it then necessary to consider whether the substance of the transaction as represented by the documents, is not the true substance of the transaction and the documents conceal its true nature. 14
As Woodhouse J stated 15:
There can be no doubt that if the outward form given to a transaction is shown to be a mere facade to disguise the real transaction intended by the parties the Court will not hesitate to describe it for what it really is ... But when the parties have succeeded in every respect in matching their mutual intentions and purpose with the documentation and form that is used what more can they do to give legal effect to their transaction?
Ulterior purposes for the dealing
The fact that parties may have an ulterior motive in entering into a transaction is not of itself evidence of a sham. 16 In Miles v Bull 17 Megarry J held that a transaction is not a sham simply because it is carried out with a particular purpose or object. If the transaction was genuinely done, it cannot remain undone because there was an ulterior motive in doing it.
Megarry J went on to observe that, in the context of determining whether a sale of property was a sham, so as to allow a defence to an action for possession, suspicious circumstances do not establish a transaction as a sham by themselves. It must be shown that the outward and visible form does not coincide with the inward and substantial truth. Similarly, the existence of an ulterior purpose for the dealing will not be sufficient to vitiate it. 18
However, a finding of an ulterior motive is relevant to the question of whether the intention of the parties was that the transaction was to be a sham.19
Artificiality of the transaction
The artificiality of the transaction does not give rise to its characterisation as a sham or to the characterisation of the constituent documents as a sham so long as each document has the effect it purports to have, and so long as none of the documents purport to do something different from what the parties have agreed to do. 20
The fact that the transaction involves a round robin of cheques may arouse suspicion, but does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques. This is because an exchange carried out in pursuance of a real and legally permissible transaction cannot be impugned simply because each party intends that the cheques should cancel each other out or knows that neither party has the funds to meet the cheques.21
Within the limited context of a contract for the sale of goods neither party may expect the other to deliver yet the contract may create legal obligations and be a valid contract 22.
The decision of the Full Court in Oakey Abattoir Pty Limited v Federal Commissioner of Taxation 23 confirmed that a transaction, which is circular in nature and lacks any commercial purpose other than to gain a tax advantage, will not amount to a sham where "although connected, the transactions [are] genuine and real enough" and where "[e]very transaction [is] genuinely carried through and [is] in fact ... exactly what it purport[s] to be". The Court relied on Boydell v James24 where Jordan CJ observed that if transactions of the sale and subsequent hire of goods "were never intended by either party to have any legal effect, but were set up as a mere pretence to cloak a loan" then the transactions would be inoperative as a sham.
Jordan CJ in Boydell v James went on to observe that although it is not uncommon to resort to the device of sale and repurchase as a means of making money available to a person in need of it, the parties may have intended the sale and purchase transaction to be a real transaction creating the appropriate rights and obligations.
However, where a person who is intended to be the recipient of money, sells some chattel and repurchases it for a higher price payable in the future, it is obvious that both transactions are shams intending to disguise what is really a loan. Similarly, a purported disposal of property, and by analogy a purported creation of a debt, may be a sham where donor and donee (or lender and debtor) do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property. 25
In Cranstoun v Federal Commissioner of Taxation 26 Carter J held that if two people sign a document which, on its face purports to be a loan agreement, and they agree either expressly or impliedly that the document give the appearance only of a loan transaction then it is a sham. It cannot be elevated to be something which the law will recognise and enforce merely because they are documents which are drawn in legal language -- "No amount of professional ingenuity will make the agreement into what in fact it is if the parties do not so intend."
On the facts, the loan transaction was void as a sham, and a pre-payment of interest on the loan was not deductible because the borrowing by the taxpayer and the on-lending to companies associated with the promoter were by book entries only. His Honour took the view that a loan agreement would be a sham where it was agreed either expressly or impliedly between the parties to the agreement that the document was intended to give the appearance only of a loan transaction.
In Alloyweld v Federal Commissioner of Taxation 27 Derrington J applied Diplock LJ's test in Snook v London and West Riding Investments Ltd28 holding that a loan and prepayment of interest were a sham. His Honour pointed to the fact that the participants "regarded the arrangement as not really being a loan at all and did not consider the company to be under any obligation other than to complete the circularity of the transaction in law."
Complexity of the transaction
The complexity of the transaction is not of itself determinative of a sham.29 The authorities contain strong warnings against too ready an acceptance of an argument that artificiality or complexity suggests a sham. Transactions may be both complex and artificial, yet intended to have precisely the legal effect apparent on their face. It is not an intention to achieve an artificial result that makes a transaction a sham, but an intention to achieve a different result from that represented by the legal forms employed. The question is whether the legal forms were "merely scenery moved around by (the true owner of the property involved) to reflect whatever landscape he sought to construct."30
Where this question is answered in the affirmative, the Court is not "bound by the form of the agreement", and "when documents are mere shams or cloaks to hide the real nature of the transaction, the Court will not allow them to prevent it from going into the real transaction."31
This principle is illustrated by the decision of the English Chancery Division in Hitch and others v Stone (Inspector of Taxes).32 The taxpayers were assessed for capital gains tax liability on the sale of agricultural land. The Revenue contended that documents purporting to convert capital sums which represented the realisation of the development value of the land into income in the hands of the family were shams. Parker J found that the Special Commissioners had correctly directed themselves on the question of sham 33, and held that the fundamental question was whether the agreement was performed at all. If and to the extent it was performed, it was difficult to maintain that it was a sham. This was particularly so in circumstances where performance of it led to real consequences which affected third parties. The transaction in question could not be regarded as a sham because the parties had entered into an agreement to effect a particular disposition and that disposition was subsequently effected.
In Coppleson v Federal Commissioner Taxation 34 Hunt J observed that the fact "the transaction became complex and elaborate rather than simple and straightforward does not seem to me to affect its true nature if in legal form it is a gift and if the parties thereto intended it to be operative according to its tenor." His Honour emphasised the inability of the Commissioner of Taxation to identify the real transaction said to be obscured by a sham transaction, and held that this supported the inference that the gift of shares in issue was itself the real transaction and not a sham.
What is the position where part of a transaction is a sham?
"Where a portion of a transaction is a sham, its effect is limited to that portion. The rest of the transaction is not a sham." 35
Matters which may be taken into account in ascertaining the true nature of the transaction
Before any issue of sham arises, it is important that a systematic and objective approach is undertaken to ascertain the true nature of the transaction. The following points, as set out by Richardson J in Re Securitibank Ltd (No 2) 36 provide useful guidance in this context:
(1) The first step in determining whether the transactions that were under review were loans is to ascertain their true nature or substance. Where documents have been drawn to define the relationship of persons involved in a business operation, the true nature of the transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out. 37
(2) It is the legal character of the transaction that is decisive, not the overall economic consequences to the parties. 38
(3) The legal character is not determined conclusively by the nomenclature used by the parties. Consideration must be given to the whole of the contract in order to determine the true nature of the relationship. If the transaction is embodied in a number of interrelated agreements, all the agreements must be considered together and one may be read to explain the others. The first question then, in this class of case, is what is the substance of the bargain as disclosed by the documents before the Court. 39 In arriving at the answer to that question, the circumstances surrounding entry into the transactions may be taken into account. This does not mean that evidence is admissible to vary or contradict the written agreement; only that the agreement should be construed in the light of the setting in which it was made. Therefore, while it is legitimate to take surrounding circumstances into account and to look at the documents as a whole, the documents themselves may be brushed aside only if and to the extent that, the parties had a common intention not to create the legal rights and obligations which they gave the appearance of creating. In this sense the transactions were shams.
(4) Finally, the concern is with the legal arrangements actually carried out. It is what the parties eventually did that counts, not what they may initially have agreed to do. In some cases the parties may have departed from the initial agreement, in which event, questions of a new agreement or variation of the original agreement, or estoppel, or sham in operation may arise. 40
The evidence which is relevant where the essential genuineness of the documentation of the arrangements is challenged was detailed by Richardson J in Re Securitibank Ltd (No 2) 41:
In some cases the parties may have departed from the documents, in which event questions of a new agreement or estoppel or sham in operation may arise ...It is a matter of first ascertaining the true nature of the transaction by a consideration of the legal character of the agreement which embodies the transaction. It is only where the genuineness of the agreement evidenced by the documents is challenged that it is then necessary to consider whether the substance of the transaction as represented by the documents is not the true substance of the transaction and the documents themselves are a cloak to conceal its true nature. [emphasis added]
Nothing said in Sharrment Pty Ltd v Official Trustee 42 or the cases there reviewed, prevents consideration of ulterior purpose, artificiality, complexity and the exchange of cheques if they are relevant.
The need to identify the real transaction
The party asserting that the transaction is a sham, must be able to identify the real transaction: Coppleson v FCT.43 Hunt J emphasised the inability of the Commissioner of Taxation to identify the real transaction which was said to be obscured by a sham transaction supported the inference that the gift of shares in issue was itself the real transaction and not a sham.
In Official Trustee in Bankruptcy v Baker 44 Drummond J recognised that the inability to identify the real transaction said to be obscured by the sham by the party challenging a transaction will support the inference that the transaction in issue is itself the real transaction. 45 However, it is not essential to show that a transaction conceals another and different transaction before that transaction can be struck down as a sham: Northumberland Insurance Ltd (in liquidation) v Alexander,46 Clarke J held that:
[The] authorities emphasise ... that it is the intention of the parties to the transaction which determines the question whether the act or document was intended to be operative according to its tenor or whether it was simply a facade or a disguise. It is not essential, in my view, that the facade disguise another and different transaction. It is enough if it creates an appearance that the contractual relationship between parties is different from the actual relationship.
Lockhart J, who cited this passage with approval in Sharrment Pty Ltd v Official Trustee in Bankruptcy 47 expressed the same notion:
... a purported disposal of property, and by analogy a purported creation of a debt, may be a sham where donor and donee (or lender and debtor) do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property.
1 Re Securitibank Ltd (No 2)  2 NZLR 136 (CA).
2 Attorney-General v Barker Bros Ltd  2 NZLR 495; AGC v Broadlands Ltd and General Motors Acceptance Corporation (NZ) Ltd v AGC and Broadlands Finance Ltd (High Court, Auckland A 256/80, A 483/80, 11 October 1983, Thorp J).
3 Polsky v S and A Services Ltd  1 All ER 185.
4 7IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
5 Bateman Television Limited and Another v Coleridge Finance Company Ltd  NZLR 794.
6 Sonenco (No 87) Pty Limited v Commissioner of Taxation (1992) 111 ALR 131.
7 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530; and Official Trustee in Bankruptcy v Baker (Federal Court, No NB72 of 1990, FED No 530/94, 5 August 1994, Drummond J).
8 Hancock v Federal Commissioner of Taxation (1961) 108 CLR 258, 301-302.
9 Official Trustee in Bankruptcy v Baker (Federal Court, No NB72 of 1990, FED No 530/94, 5 August 1994, Drummond J).
10 Re Sonenco (No 87) Pty Limited v Commissioner of Taxation (1992) 111 ALR 131.
11 Baker and others v Official Trustee in Bankruptcy (Full Federal Court, No Qg102 of 1994, Fed No 565/95, 3 August 1995) per Burchett, Ryan and Carr JJ.
12 Re Securitibank Ltd (No 2)  2 NZLR 136 (CA).
13 Re Securitibank Ltd (No 2)  2 NZLR 136, 168.
14 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
15 Re Securitibank Ltd (No 2)  2 NZLR 136, 165.
16 Miles v Bull  3 All ER 632;  QB 258 per Megarry J; and Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
17 Miles v Bull  3 All ER 632, 636,  QB 258, 264.
18 Miles v Bull  3 All ER 632;  QB 258; and Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530, 538.
19 Re La Rosa; Ex Parte Norgard v Rocom Pty Ltd (1990) 93 ALR 571, 581 per French J.
20 See, for example, Inland Revenue Commissioners v Littlewoods Mail Order Stores Limited  2 All ER 279, 285 per Lord Reid and Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530 per Lockhart J.
21 Re Barnett (Deceased), Perpetual Trustee Co Limited v Barnett (1969) 2 NSWR 720, 730-731 per Helsham J.
22 See v Cohen (1923) 33 CLR 174, 182 per Isaacs J.
23 Oakey Abattoir Pty Limited v Federal Commissioner of Taxation (1984) 55 ALR 291, 297.
24 Boydell v James (1936) 36 SR (NSW) 620, 627.
25 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
26 Cranstoun v Federal Commissioner of Taxation (1984) 84 ATC 4876.
27 Alloyweld v Federal Commissioner of Taxation (1984) 53 ALR 459.
28 Snook v London and West Riding Investments Ltd  1 All ER 518, 528.
29 Racing Enter-Prizes Limited v Police; Organ Bros Limited v Police  NZLR 307 per Haslam J.
30 Donnelly v Edelsten (1994) 49 FCR 384.
31 In re Watson, ex parte Official Receiver in Bankruptcy (1890) 25 QBD 27, 38 per Cotton LJ.
32 Hitch and others v Stone (Inspector of Taxes)  STC 431.
33 The Commissioners had directed themselves in accordance with the test set out by Lord Justice Diplock in Snook v London and West Riding Investments Ltd  1 All ER 518, 528.
34 Coppleson v Federal Commissioner Taxation (1981) 34 ALR 377 (Supreme Court of New South Wales).
35 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997) which refers to Case W49  ATC 460, as "applying by analogy the approach in Re Mill's Declaration of Trust; Midland Bank Executor & Trustee Co Ltd v Mill and Ors  1 All ER 789".
36 Re Securitibank Ltd (No 2)  2 NZLR 136, 167-168 (CA), Woodhouse J concurring. This decision was followed by the Court of Appeal in Buckley & Young Ltd v Commissioner of Inland Revenue  2 NZLR 485.
37 Helby v Matthews  AC 471; Inland Revenue Commissioners v Duke of Westminster  AC 1; Commissioners of Inland Revenue v Wesleyan & General Assurance Society (1946) 30 TC 11.
38 Commissioner of Inland Revenue v Europa Oil (NZ) Ltd  NZLR 641, 648-649; Europa Oil (NZ) Ltd v Commissioner of Inland Revenue  1 NZLR 546, 553.
39 Re George Inglefield  All ER Rep 244;  Ch 1 (CA).
40 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
41 Re Securitibank Ltd (No 2)  2 NZLR 136, 168 (CA).
42 Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530.
43 Coppleson v FCT (1981) 34 ALR 377.
44 Official Trustee in Bankruptcy v Baker (Federal Court, No NB72 of 1990, FED No 530/94, 5 August 1994, Drummond J).
45 A similar point was also made in Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530.
46 Northumberland Insurance Ltd (in liquidation) v Alexander (1984) 8 ACLR 882, 888-889.
47 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
The application of the principles
The Courts have often been required to penetrate the outward form of a transaction to determine its true nature. Finding criteria by which judgments may be made about the true nature of the transactions in question has proved difficult. Although some broad guidelines have emerged, the task of the Courts has always been to examine the particular circumstances of the challenged transaction.
By analysing cases in which shams have been considered, it is possible to discern the several matters which must be contemplated when determining whether or not there is a sham. While these matters must be taken into account, each case will ultimately be determined by consideration of its unique set of facts.
Sham trust creditor cases
Sharrment Pty Ltd v Official Trustee1 was an appeal from a decision declaring that a portion of the funds from the proceeds of a sale of property formed part of the divisible property of the estate of a deceased bankrupt. The facts of the case are summarised in the judgment of Lockhart J as follows:
About six years before his death, Mr Wynyard engaged in a series of complicated transactions involving a number of proprietary companies and trusts. These transactions were followed a year later by the purchase of a substantial property at Moss Vale known as 'The Chase' for a price of $450,000. The transactions involved several companies controlled by Mr Wynyard, the grant of an option by one such company to two others to acquire the former's unissued share capital, the establishment of family trusts for the benefit of Mr. Wynyard's family, the allotment of redeemable preference shares by one of Mr. Wynyard's companies to another such company, the opening of bank accounts, the exchange of cheques, the making of a gift by one of the companies to a nominee company as trustee of a family trust, and the release of a debt. The Chase was sold in December 1984, some four years after it had been purchased by one of the Wynyard companies, to a company at arm's length. A portion of net proceeds of sale was placed on deposit with two financial institutions and at the date of commencement of these proceedings the total amount held was approximately $ 300,000.... the Official Trustee in Bankruptcy (the Official Trustee), as trustee of the late Mr. Wynyard's insolvent estate, applied to this Court for declarations and orders that the sum of about $ 300,000 held on deposit with the two financial institutions formed part of the divisible property of the estate of the late Mr. Wynyard within the meaning of s 249 of the Act. The learned trial judge, Wilcox J, found in favour of the Official Trustee ...... [On appeal], the Official Trustee argued that the transactions were undertaken for the purpose of putting assets in the amount of some $ 420,000 out of the reach of Mr. Wynyard's creditors and hiding those assets behind the cloak or mask of a debt. The companies concerned were said to be Mr. Wynyard's puppets. Although no such accusation was leveled against the trustee of the No 4 Trust, being the nominee company of solicitors acting for Mr. Wynyard, it was said that Mr. Wynyard could control the trusts by his power as appointor of removing the trustee and appointing another trustee in its place.
Lockhart J held that the creation of the debt as a result of the 1979 transaction was not a sham. The creation of the debt was for family purposes. If W wanted to create a debt it was in his interest to create a real debt, not the pretence of one. The fact that the W created the debt where he knew he could control any demand for repayment as he wished did not deny the legal efficacy of the debt. There was little evidence in the case which actually touched on the issue of whether the transactions were a sham. The transactions were intended to create a debt in pursuance of W's desire to benefit his family through his family trusts.
In Ashton v Prentice2 A entered into a lease of his property after committing an act of bankruptcy. The Court held that the lease was not a sham, but set aside the lease in favour of the Trustee in Bankruptcy under the provisions of the relevant bankruptcy legislation. In holding that the lease was not a sham Hill J stated there was no necessary intention to create a sham. The transfer and lease back was entered into for the purpose of defeating creditors and enabling the bankrupt to remain in the family home for a long time. That purpose could only be achieved by securing the family the right to reside in the home for the term and successive option periods. Also there was inadequate consideration for the transfer of the house and it was therefore necessary to protect the bankrupt against creditors and the vendor.
In Re Soneco (No 87) Pty Limited Commissioner of Taxation 3 the appellant embarked upon a tax "minimization" scheme on receiving professional advice. At first instance, Beaumont, Foster and Cooper JJ found there was no sham. On appeal the Court noted that given the nature of the evidence it was difficult for the appellate Court to embark on a reconstruction of each of the transactions from the transcript evidence, but that in their opinion the relevant parties genuinely intended to enter into the tax "minimization" scheme. Even though some transactions were extraordinary and even artificial in commercial terms, they were not shams. On the advice tendered, it was necessary in the respondent's perception, to enter into transactions of this kind. The transactions were entered into with the real intentions of the parties.
Sham trust loan cases
In Re George Inglefield Ltd4 the Court of Appeal had to consider certain assignments of goods, absolute in form, which a company, subsequently put into liquidation, had executed. It was contended that these were "shams", and that the true agreement was that the assignments were by way of security only, and therefore void for non-registration. Eve J upheld this submission, but his decision was unanimously reversed in the Court of Appeal. Lord Hanworth MR stated 5 that:
It is old law, and plain law, that in transactions of this sort the Court must consider whether or not the documents really mask the true transaction. If they do merely mask the transaction, the Court must have regard to the true position in substance and in fact and for this performance tear away the mask or cloak that has been put upon the real transaction.
In Bateman Television Limited and Another v Coleridge Finance Company Limited 6 McCarthy J rejected counsel's submission that the transactions were money lending transactions deliberately concealed by the facade of the structure of the two separate companies. As the two companies were legally constituted entities, the inference was that they were incorporated for legitimate commercial purposes. Even though there were no accounting patterns expected of individual entities, perhaps due to their common shareholders and directors, it did not establish that the arrangement was a sham, entitling the Court to disregard the form of the transaction and to look for something underneath.
A subsequent appeal was dismissed by the Privy Council 7, who stated in relation to the sham issue that:
It is quite clear that an allegation of sham or cloak to disguise the true transaction must be proved as a matter of primary fact and as the appellants failed to establish such allegation in either Court below their Lordships refused to allow counsel for the appellant companies to open this point before them.
The question for the Court in Paintin and Nottingham Limited v Miller Gale and Winter 8 was whether a hire purchase agreement entered into by the appellants and another company, Owers Bros Ltd, was a sham. In 1963 the appellants had commenced building a dredge for Owers and rendered monthly accounts to Owers on a costs plus basis. Owers paid what it could when it could, and when the dredge was launched in April 1965 it still owed £27,000. In July 1965, the appellants and Owers executed a conditional hire purchase agreement which was subsequently registered under the Chattels Transfer Act 1924. In December 1965, the appellants repossessed the dredge as a result of Owers failure to honour the conditional hire purchase agreement.
The respondents were creditors of Owers who, by a distress warrant, seized the dredge, claiming it was the property of Owers. The appellants argued that they were the owners of the dredge at all relevant times.
The High Court held that the contract to construct the dredge was one for labour and materials, not one for the sale of future goods and that the conditional hire purchase agreement was a sham. The Court of Appeal reversed this finding. North P concluded: 9
For my part I have reached the conclusion that it has not been shown that the parties to the conditional hire purchase agreement had a common intention to execute a document which was not intended to create the legal rights and obligations which it gave the appearance of creating: see Stoneleigh Finance Ltd v Phillips  2 QB 537;  1 All ER 513; Snook v London and West Riding Investments Ltd  2 QB 786, 802;  1 All ER 518, 528 per Diplock LJ, and Bateman Television Ltd and Another v Coleridge Finance Co Ltd  NZLR 794. With all deference to the view held by Wilson J, I am of opinion that the parties to the conditional hire purchase agreement intended to do just what they had mutually agreed upon.
A similar finding was reached by Turner J who held that: 10
In the present case the document which the parties signed was not one designed to give to outside parties, or to the Court, the appearance of one transaction while the parties had privately agreed that as between themselves its legal consequences should be different. The parties intended to do just what the document said they intended to do - viz that, the property in the dredge having been transferred immediately before its execution to Paintins, Paintins would sell it back to Owers under a conditional purchase agreement on the terms set out therein. It may be said of this contract, and even more pertinently of the oral contract which had immediately preceded it, and under which the property in the dredge had passed back to Paintins, that it might possibly be assailable in law within certain periods and under certain conditions as being a transaction preferring one creditor to others. I shall presently discuss this objection, but in the meantime do no more than observe that it does not have the effect of making the agreement a 'sham' ...
In Marac Finance Ltd v Virtue 11 the parties entered into a financing arrangement described as a conditional purchase agreement under which Marac lent the respondent $12,000 to enable him to purchase a truck and trailer for cartage work. Marac believed that the truck and trailer was being purchased for $20,000 and agreed to lend the respondent $12,000. The truck and trailer were converted and later found burnt out. No insurance was recoverable. Marac sued for the $12,000. The Court of Appeal held that notwithstanding the final documentation, the transaction was a loan of $12,000 from Marac to the respondent, and as a money-lending transaction was subject to the requirements of the money-lending legislation. Richardson J stated: 12
I think the conclusion is inescapable that the common intention of Marac and the respondent was that Marac would lend the respondent $12,000 for the completion of his purchase of the vehicles from E Seay Ltd and that the written agreement of 2 February 1977 was the means of providing security for that advance and was not intended to operate independently as a sale of the vehicles from Marac to the respondent. To that extent the instrument of 2 February 1977 did not reflect the true intent of the parties and was a sham.
In Alloyweld v FCT 13 Derrington J applied Diplock LJ's test in Snook v London and West Riding Investments Ltd14 in holding a loan and prepayment of interest to have been a sham. His Honour stated:
In coming to the conclusion that the purpose of the payment was only to set up a payment for a tax-avoidance scheme, I do not overlook that the legal form of the payment is as one for pre-payment of interest. Nor do I neglect the principle in the Duke of Westminster's case  AC 1 (HL) that if the steps of a scheme are genuine the Court must accept their legal effect and not the scheme behind them. But I also take note of the statement of Lord Wilberforce in W T Ramsay v IRC  AC 300 at 323-4 where he said: 'Given that a document or transaction is genuine, the Court cannot go behind it to some supposed underlying substance'. This is the well-known principle of Inland Revenue Commissioners v Duke of Westminster  AC 1. This is a cardinal principle, but it must not be overstated or overextended. While obliging the Court to accept documents or transactions, found to be genuine, as such, it does not compel the Court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the Court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.
Re La Rosa and Another, ex parte: Norgard v Rocom Pty Ltd 15 involved a cheque swap between unrelated parties being a short term advance to be repaid virtually instantly by the return of the moneys with a substantial premium. The transactions were dressed up to be for the purchase of cars and a boat and the repurchase of the same. After reviewing the authorities on shams, French J stated:
This finding does not of course determine the question whether the transactions attacked were shams. The existence of some ulterior purpose on La Rosa's part and its acceptance or the turning of a blind eye to it by Barbagallo, may be logically consistent with the existence of a common intention that the ostensible vendors and purchasers should be bound by their apparent obligations even if delivery and redelivery were never to be effected. It is however a factor which with other factors is relevant to the question whether that intention existed. Also relevant is the approach taken to the execution of the purported sales particularly in relation to the second group of transactions. There the relevant paperwork was not undertaken before the transaction was complete and Barbagallo made no real effort to check or have checked the stock that Rocom was supposed to be purchasing from La Rosa's companies. Nor were any steps taken to ensure that the stock, the subject of the sale, was preserved pending the presentation of the Moor Motors' cheque for $10,250,000.At the centre of the impugned transactions, however, are the payments and repayments amounting in the circumstances to exchanges of cheques subject to premium payments in favour of Rocom. These exchanges were ... in substance what the transactions were all about and it was the payments and repayments that represented all that the parties intended to do. I am satisfied that neither La Rosa nor his companies nor Rocom regarded themselves as undertaking or intended to undertake the sale and purchase of stock ostensibly the subject of their dealings. The true transaction in each case contemplated a short term advance by Rocom to be repaid virtually instantly by the return of the moneys with a substantial premium ...The transactions exposed by the characterisation of the motor vehicle sales as shams reduce to payments by Rocom of certain sums to entities associated with La Rosa and the repayment of those sums plus substantial premiums of $40,000 and $250,000 respectively to Rocom. [His Honour then considered whether the premiums paid were settlements, which could be set aside under the Bankruptcy Act.]... On the basis of my findings however, there was an agreement underlying the shams and I am not satisfied that that agreement did not have legal effect. And even if it did not and the La Rosas were in effect making a gift to Rocom, no basis has been demonstrated upon which it could be recovered.
Sham trust taxation cases
In Phillips v Foster 16 Richardson J said that:
A contract containing provisions calculated to deceive revenue authorities and evade tax is contrary to public policy and if the offending provisions are not severable the agreement is illegal and unenforceable at common law.
In Cranstourn v Federal Commissioner of Taxation 17 the Supreme Court of Queensland found, on the facts, that the pre-payment of interest under a tax avoidance scheme was void on the basis that the underlying loan transaction was a sham. After considering the statement of Diplock LJ in Snook v London West Riding Investments Ltd 18 the Court in Cranstourn said:
If two persons sign a document which on its face purports to be a loan agreement evidencing a loan from one to the other for $180,000 but it is agreed either expressly or impliedly that the document is intended to give the appearance only of a loan transaction then it is, in my view, a sham: it is something devised to delude, it is a trick or a hoax, an imposture, it is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit ...
The Court continued:
However one defines it, it is in law nothing, nor, in my view, can it be elevated to be something which the law will recognise and enforce merely because documents which are drawn in legal language appear, a series of book-keeping entries is made and extensive use of the banking system involving debits and credits of the order of hundreds of thousands of dollars. No amount of professional ingenuity will make the agreement into what in fact it is not if the parties do not so intend.
In Re Erich Fraunschiel; James Theodore Brasington and Ian David Mcnee v The Commissioner of Taxation 19 each of the taxpayers were employed by Wesfarmers Limited ("the company"). In 1985 the company sought to establish an "employee investment plan", a proposal approved by shareholders of the company at a general meeting. On 24 May 1985 the company executed a deed made between itself and Orrmand Limited (later known as Share Nominees Limited) ("the trustee") pursuant to which the company established a scheme known as the Employee Share Plan ("the plan") for acquisition of shares in the company by employees. The trustee agreed to act as trustee for and in respect of the plan. The Commissioner of Taxation sought to challenge part of the deed as a sham. Lee J stated:
The respondent called no evidence to support the contention that the deed, in part, was a sham and that an arrangement existed between the taxpayer Fraunschiel and his employer pursuant to which the taxpayer obtained a right to acquire shares ...[His Honour approved the decision of the Full Court in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 per Lockhart J at p 453 et seq. and per Beaumont J at pp 467-469.]An allegation of a sham cannot be made out by light proof when the essential matter to be proved is the existence of a mere facade or an intent that something spurious or counterfeit be mistaken for something that it is not. The structure must be shown to be false or deceptive by clear evidence.In no respect can it be said that the deed was shown to possess such characteristics ...The deed may have been constructed with limited rights being granted to employees for an ulterior purpose, but it did not become a sham in so doing. It was not illusory. It created legal obligations for which the trustee was answerable and it was designed that the share acquisition scheme be administered according to the terms of the deed. There is no evidence of any other true arrangement contrary to the terms of the deed and for which the deed was to act as smokescreen or facade. (See Gulland v Federal Commissioner of Taxation (1983) ATC 4352; at pp 4362-4363; Albion Hotel Pty Ltd v Federal Commissioner of Taxation (1965) 115 CLR 78 at p 92.) The submission, therefore, must be rejected.
Richard Walter Pty Ltd v Commissioner of Taxation 20 involved a complex attempt to avoid income tax through use of offshore structures. The appeal in respect of the first four matters concerned the restructuring of what may be described as the Wenkart group of companies ("the group") in order to achieve, for years ended 1981-1984 inclusive, the exemption of the amounts referred to by reason of the provisions and effect of Article 7 of the Australia/Netherlands Double Taxation Agreement ("the Agreement"). The 1981 arrangements were designed to channel most of the income of the Morlea Partnership, a member of the group, to a Dutch company and thereby secure the benefit of an exemption in the Agreement. The claimed result of this restructuring was to divert the entitlement to the income in question to Aurelius Commodus Investments BV ("Aurelius Commodus"), a Dutch company which was non-resident in Australia.
The tax benefit sought to be achieved was that the income of the Morlea Partnership which ultimately flowed through to Aurelius Commodus, the Dutch company, as the holder of 99 per cent of the units in the Aurelius Unit Trust which had a 95 per cent interest in the Morlea Partnership, was not subject to Australian income tax, by virtue of the provisions of the Australia/Netherlands Tax Treaty.
The Commissioner argued that the loan arrangement to Richard Walter was a "sham" in the sense that the transactions described as "loans" purportedly made by MPS Pty Ltd to Richard Walter were never intended to create legally enforceable debt obligations. The applicant maintained that the loans were not shams because they were intended to create legal rights and obligations and that this was shown by the subsequent conduct of the parties. The Court held that the transactions were shams and this finding was upheld on appeal. In dismissing the appeal, the Federal Court referred to the factors identified by the trial Judge as relevant to the finding that the transactions were shams. These were:
1. The moneys were paid without any written evidence of any agreement or obligation to repay apart from book entries made by accounts staff.
2. There was never any written or oral evidence as to the terms and conditions on which the moneys were said to be lent or repaid other than the year end financial statements which were the product of year end journal entries formulated by Holden, the Group Finance Director, to achieve the most desirable tax consequences.
3. It does not appear that any interest was ever charged, payable, or paid by Richard Walter in respect of these loans. There was no group policy that interest should not be charged on intra-group loans according to the evidence of Holden.
4. It is true that, as the applicant points out, there were book entries to indicate some substantial amounts paid by the applicant to MPS Pty Ltd. However, the net movements from MPS Pty Ltd to the applicant were far greater than the converse ... These movements back do not show, in my opinion, that there was an intention to repay all the moneys channeled to Richard Walter.
5. It was within Holden's unfettered power and discretion to move money around the group as he determined to be appropriate. MPS Pty Ltd was completely controlled by Wenkart and Holden. Holden agreed that the real money, the cash money, stayed with Richard Walter and did not go to Aurelius Commodus. He could give no explanation as to the way in which Aurelius Commodus was going to use the 95 per cent of income of MPS Pty Ltd, except that it was going to exploit it by increasing its capital account. He could give no explanation as to what it would do with the amassed capital from time to time. He agreed that part of the arrangement or agreement was that the money be lent to Richard Walter and this was acceptable to Holden because the cash money stayed with Richard Walter.
6. It was impossible for Richard Walter to repay the amounts distributed by MPS Pty Ltd without liquidating the assets of Richard Walter and the evidence was that there was never any intention or even contemplation of doing this.
7. In 1982 the nature of the liability of Richard Walter to MPS Pty Ltd was unilaterally reclassified by Holden from current liability to non-current liability without any board resolution by Richard Walter or MPS Pty Ltd. This was clearly to the detriment of Aurelius Commodus. It appears that no consideration was given by Holden to the trust obligations in this respect ... In my view this unilateral reclassification was done without any thought for, and contrary to the interests of, the beneficiaries allegedly owning the debt due from Richard Walter.
8. The evidence makes it clear that when MPS Pty Ltd needed funds of any size, it borrowed from external financiers instead of calling for repayment of the loan due by Richard Walter which was interest free. There was no evidence of any attempt or proposal to call for repayment of the loan to Richard Walter.
9. The debt alleged to be due from Richard Walter to MPS Pty Ltd was never repaid, but it appears to have been assigned by a series of 'round robin' artificial paper transactions orchestrated by Richard Walter's legal and accounting tax advisers, none of whom were called in evidence by the applicant. No explanation was proffered for not calling them.
Tamberlin J observed that, when taken together, these factors justified the finding that the transactions were shams. The Federal Court set out His Honour's conclusion which is expressed in the following terms:
My conclusion is that the purported 'loans' were simply a false label given in order to mask the real transaction intended by the parties, which was the transfer of the beneficial ownership of the moneys to Richard Walter free of any obligation to repay. The nomination of the payments as a loan was calculated to make the true transaction appear as something it was never in truth intended to be.Accordingly, I find that the loans were shams and that the reality of the situation was that Richard Walter received the beneficial ownership of the moneys without any obligation to repay.
In Faucilles Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia 21 the income of two family trusts purportedly distributed to various overseas beneficiaries was never remitted to them. Instead, there was a "round robin" of book entry payments between the trusts, trustees, and beneficiaries to whom the trust fund's income was purportedly distributed. The Tribunal found, on the evidence, that it was never intended that there be any real distribution to anyone other than one beneficiary -- namely the taxpayer (and possibly his children). The taxpayer meant to use the discretionary distribution provisions of the trust deed and the default distribution provisions, if they ever took effect, to cloak the real transactions which he intended to undertake. The Tribunal found it was never intended for the default distribution provisions to create legal or equitable obligations and therefore they were a sham.
1 Sharrment Pty Ltd v Official Trustee (1988) 82 ALR 530.
2 Ashton v Prentice (Federal Court of Australia (NSW), NG 8183 of 1997, 23 October 1998, Hill J).
3 Re Soneco (No 87) Pty Limited Commissioner of Taxation (1992) 111 ALR 131.
4 Re George Inglefield Ltd  All ER Rep 244;  Ch 1.
5 Re George Inglefield Ltd  All ER Rep 244, 251.
6 Bateman Television Limited and Another v Coleridge Finance Company Limited  NZLR 794, 821 (CA).
7 Bateman Television Limited (in liquidation) and Another v Coleridge Finance Company Limited  NZLR 929, 932.
8 Paintin and Nottingham Limited v Miller Gale and Winter  NZLR 164 (CA).
9 Paintin and Nottingham Limited v Miller Gale and Winter  NZLR 164, 168 (CA).
10 Paintin and Nottingham Limited v Miller Gale and Winter  NZLR 164, 176 (CA).
11 Marac Finance Ltd v Virtue  1 NZLR 586 (CA).
12 Marac Finance Ltd v Virtue  1 NZLR 586, 590 (CA).
13 Alloyweld v FCT (1984) 53 ALR 459.
14 Snook v London and West Riding Investments Ltd  1 All ER 518.
15 Re La Rosa and Another, ex parte: Norgard v Rocom Pty Ltd (1990) 93 ALR 571.
16 Phillips v Foster  3 NZLR 263, 269.
17 Cranstourn v Federal Commissioner of Taxation (1984) ATC 4876. This example is reproduced from IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
18 Snook v London West Riding Investments Ltd  1 All ER 518.
19 Re Erich Fraunschiel; James Theodore Brasington and Ian David Mcnee v The Commissioner of Taxation (1989) 20 ATR 955 , 980.
20 Richard Walter Pty Ltd v Commissioner of Taxation (Federal Court of Australia (NSW), No NG 681 of 1995, 14 June 1996, Lockhart, Hill and Lehane JJ).
21 Faucilles Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1989) 20 ATR 1282 where the majority of the Full Federal Court upheld the finding of sham by the Administrative Appeals Tribunal in Case W48  ATC 460. This example is reproduced from IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997).
Consequences of a "sham" trust or a "sham" transaction
When a trust fails for uncertainty of subject matter or uncertainty of persons or objects 1, or the trust or a trust transaction is a sham. In relation to a trust which is held to be a sham:
... the trustee cannot take beneficially, but will hold the trust property on a resulting trust for the settlor, or, where the trust arises under a will, for the persons entitled to the residue, or on intestacy, as the case may be. 2
The consequence of the settlor retaining ownership of the assets is that the trustees assume the obligations of a bare trustee for the settlor. In Herdegen v Federal Commissioner of Taxation 3 Gummow J stated:
Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party ... Also, the term 'bare trust' may be used fairly to describe the position occupied by a person holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property.
In relation to individual trust transactions which are held to be a sham, the documents evidencing those transactions may be disregarded to the extent that the documentation amounts to a sham and the true arrangement between the parties to the sham is given effect. 4
In Biddle v Bond 5 Blackburn J, delivering the judgment of the Court, stated:
We do not question the general rule that one who has received property from another as his bailee or agent or servant must restore or account for that property to him from whom he received it.
This rule is illustrated by the decision of the Federal Court of Appeal in Baker and others v Official Trustee in Bankruptcy 6:
32. Furthermore, when Mr Baker, in 1987, transferred the art collection from his own home to premises owned by the appellant Vestos Pty Ltd, and then in 1990 arranged for the appellant Goodglint Pty Ltd to have charge of it, those companies, on the trial Judge's findings, assumed the obligations of bailees or agents of Mr Baker. For he it was who was in reality asserting ownership, as he had always intended, and the companies, of which he was the directing mind, accepted the collection from him necessarily upon the same basis. It has long been the law that a person who accepts a deposit of goods or money, acknowledging the title of one person, cannot be permitted to set up the title of another who makes no claim: Biddle v Bond (1865) 6 B and S 225; 122 ER 1,179; Betteley v Reed (1843) 4 QB 511 at 517; 114 ER 991 at 993.
The result is that the trust assets are still the settlor's and available for claims by creditors, former partners under matrimonial laws, and Inland Revenue authorities. The practical consequences of the invalidity of the trust are to destroy the asset protection benefits of the settlor's asset protection plan. As there was never a trust, every payment out of the trust to beneficiaries must be repaid by the trustees to the settlor, and the settlor must be placed back in the same position as he or she would have been in if the trust had not been established (whether or not the loss was foreseeable).
If the settlor is deceased the beneficiaries under the settlor's will are entitled to the trust assets. If there is no will those entitled on full or partial intestacy are entitled to the trust assets. If, for instance, the settlor's will leaves all assets to a trust which is invalid, there will be a full intestacy, and the laws dealing with the distribution of intestate estates will determine who inherits the estate.
If the settlor is bankrupt his or her creditors will benefit if the trust is invalid.
If the settlor's marriage or de facto relationship ends, his or her former partner may substantially benefit if the trust is invalid and what would otherwise have been safe from challenge becomes matrimonial property open to challenge.
In the case of Inland Revenue authorities the consequences of the finding of a sham can be severe due to the imposition of tax penalties and interest on unpaid taxation, as a result of the income becoming the settlor's.
1 Unless there is an absolute gift of property in the first instance on which trusts are subsequently imposed.
2 P Pettit, Equity and The Laws of Trusts, Butterworths, 1993, p 50.
3 Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271.
4 IRD Interpretation Guideline, "'Sham' -- meaning of the term" Tax Information Bulletin Vol 9 No 11 (November 1997) referring to Buckley & Young Ltd v Commissioner of Inland Revenue  2 NZLR 485 (CA).
5 Biddle v Bond (1865) 6 B and S 225, 231, [1861-73] All ER Rep 477.
6 Baker and others v Official Trustee in Bankruptcy (Full Federal Court, No Qg102 of 1994, Fed No 565/95, 3 August 1995) per Burchett, Ryan and Carr JJ.
Can invalidity be cured?
Once it is determined that the trust was a sham, the assets of the trust are held on a resulting trust for the settlor. The invalidity cannot be cured. Instead, a new trust must be established and the assets sold by the settlor for their current market value to the new trust.
This will not be possible if the settlor is deceased, bankrupt or incapacitated. In Banton v Banton and Banton 1 the Court considered the validity of a trust established by the exercise of a power of attorney. It held that a trust may be settled by power of attorney, for protective purposes, pending a determination of competency. However, the Court held that it was not reasonable to deprive the settlor of his ability to deal with his property on his death, and a power of attorney used to deprive the settlor of his ability to deal with his property on his death was in excess of the attorney's powers. Accordingly the trust was partially invalid because it provided for gifts in remainder to the issue of the settlor, thus fixing distribution of the settlor's assets on his death.
1 Banton v Banton and Banton (Ontario Court of Justice (General Division), No 01-1539-96, 25 August 1998); 1998 Ont CJ LEXIS 1361.
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