Valid trust with present transfer of shares prevents trust income being taxed in the settlor's hands.
A trust deed that clearly identifies the trust property and object can create a valid trust even where the settlor reserves a future power of revocation, provided the property is presently divested in favour of the trustees on execution. On that basis, ownership of the settled shares passed to the trustees, and the income arising from the trust property could not be assessed as the settlor's income in the relevant years. The governing principle is that present transfer to trustees is not defeated by a reserved revocation right operating only at a later stage.
Issues: (i) Whether the deed of trust created a legally valid trust and effectually transferred ownership of the 30,000 shares to the trustees. (ii) Whether, on that basis, the income of the trust could be assessed in the hands of the assessee.
Issue (i): Whether the deed of trust created a legally valid trust and effectually transferred ownership of the 30,000 shares to the trustees.
Analysis: The trust deed, read as a whole, clearly identified the object of the trust and the subject-matter transferred. The reservation of a right to revoke after seven years did not negate the present transfer where the property stood divested in favour of the trustees on execution of the deed.
Conclusion: The trust was legally valid and ownership of the shares had been transferred by the assessee, in favour of the assessee.
Issue (ii): Whether, on that basis, the income of the trust could be assessed in the hands of the assessee.
Analysis: Once the transfer of the shares to a valid trust was accepted, the income arising from the trust property could not be treated as the assessee's income for assessment purposes in the relevant years.
Conclusion: The income of the trust could not be assessed in the hands of the assessee, in favour of the assessee.
Final Conclusion: The reference was answered by upholding the validity of the trust and the transfer of the shares, with the consequential result that the trust income was not assessable in the assessee's hands.
Ratio Decidendi: A trust deed that effects present divestiture of the settled property in favour of trustees creates a valid trust notwithstanding a reserved future power of revocation, and the income from such property is not assessable in the settlor's hands.
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AI Drafter ✕
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