Sham Trusts and Alter Ego Trusts in Victorian Litigation: When Courts Look Behind the Structure 

In Victorian litigation, a trust structure will not always be accepted at face value. Where a business owner, director, professional or high-net-worth individual has treated trust assets as their own, the court may examine whether the arrangement is a sham trust in Australia, an alter ego trust, an illusory trust, or a structure where one person exercises practical control of the trustee despite the trust’s apparent independence. 

This question often arises at the intersection of commercial disputes and family law. A creditor may seek access to trust assets after a judgment. A spouse may argue, in proceedings involving the Family Court and trusts, that trust assets should be treated as part of the property pool. A liquidator, beneficiary or disappointed family member may contend that the trust form is being used to obscure control, defeat claims, or quarantine wealth. 

The central issue is not whether a trust exists on paper. It is whether, in substance, the court should look behind the structure, or in some cases consider piercing the trust, and treat the assets as effectively controlled by the person who says they do not own them. 

When Can a Victorian Court Treat Trust Assets as the Controller’s Assets? 

In Victoria, there is no single “sham trust” statute. The court’s power to look behind a trust structure comes from several sources, depending on the dispute. In family law, the key provisions are sections 79 and 90SM of the Family Law Act 1975 (Cth), which allow the Court to alter property interests between married or de facto parties. In commercial and insolvency disputes, relevant provisions may include sections 120 and 121 of the Bankruptcy Act 1966 (Cth), which deal with certain transfers made before bankruptcy, and section 172 of the Property Law Act 1958 (Vic), which concerns dispositions made with intent to defraud creditors. 

The starting point is that a valid trust is not ignored merely because one person has influence over it. A discretionary trust, family trust, or unit trust can be entirely legitimate. The issue is whether the trust is being used as a genuine fiduciary structure, or whether the documents conceal a different reality. 

In Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449, the Full Federal Court considered the concept of a sham in circumstances involving transactions said to disguise their true legal effect. The principle is important for any sham trust in Australia analysis: a sham requires more than poor administration or informality. It involves an intention that the documents should not create the legal rights and obligations they appear to create. 

Family law applies a different, but related, inquiry. In Kennon v Spry (2008) 238 CLR 366, the High Court considered whether trust assets could be taken into account in property settlement proceedings where the husband had significant powers in relation to the trust. The case remains central to disputes involving the Family Court and trusts, particularly where one party argues that an alter ego trust or illusory trust has been used to quarantine wealth. Similar issues can arise in family trust and estate disputes where trustee control, succession planning and allegations of sham conduct intersect. 

For business owners, directors and high-net-worth individuals, the practical question is usually control. Who appoints or removes the trustee? Who directs distributions? Who benefits from trust income or capital? Who treats the trust assets as available for personal, commercial, or family purposes? Where the evidence shows effective control of the trustee, the court may be asked to consider piercing the trust structure or making orders that facilitate creditor access to trust assets. 

How Do Courts Decide Whether to Look Behind a Trust Structure? 

Courts do not disregard a trust merely because its effect is inconvenient for a creditor, spouse or former business associate. In Victorian litigation, the inquiry is evidence-driven. The court asks whether the trust operates as a genuine fiduciary structure, or whether the documents and conduct suggest a sham trust in Australia, an alter ego trust, an illusory trust, or a structure used to preserve control while keeping assets beyond reach. 

What evidence do courts require? 

A party challenging a trust must usually show more than influence, informality, or poor administration. For a sham argument, the evidence must indicate that the relevant parties intended the trust documents to misrepresent the true arrangement. That may appear through inconsistent financial records, unexplained transfers, backdated documents, circular transactions, or communications showing the trust was not intended to operate according to its terms. 

Where the argument is practical control rather than strict sham, the court may examine who funded the trust assets, who made distribution decisions, who received the economic benefit, and whether the trustee exercised independent judgment. 

Why does control of the trustee matter? 

Control of the trustee matters because they hold legal title to trust assets. If another person can appoint or remove the trustee, influence distributions, direct capital dealings, or cause trust assets to be used for personal or commercial purposes, that control may be significant. 

This does not make every family trust vulnerable. Many legitimate trusts give founders, appointors, or directors considerable influence. The issue is whether that influence amounts to effective ownership or unconstrained access. In disputes involving the Family Court and trusts, this distinction may affect whether trust assets are included in the property pool, treated as a financial resource, or left outside the divisible assets. 

When is piercing the trust structure most likely to be argued? 

Piercing the trust structure is most likely to be argued where the trust has been used to defeat a spouse’s claim, frustrate creditor access to trust assets, avoid enforcement of a judgment, or distance a controller from assets they still use. Timing often matters. Transfers made when a claim is expected, a debt is emerging, or a relationship has broken down will usually attract closer scrutiny. 

In commercial disputes, the focus is often on intention, solvency, and whether assets were moved to defeat creditors. In family law, the focus is usually on control, benefit, and the reality of the parties’ financial arrangements. 

When will a court refuse to look behind a trust? 

A court may refuse relief where the trust deed is orthodox; the trustee has acted independently, records are consistent, and the evidence does not show an intention to mislead, defeat claims, or treat trust assets as personal property. A trust is not invalid merely because it is tax-effective, asset-protective, or family-controlled. 

For business owners, directors, and high-net-worth individuals, the strategic point is direct: trusts should be administered as trusts. Decisions should be documented, distributions properly resolved, conflicts managed, and trust assets kept separate from personal or company assets. 

Where Do Sham Trust and Alter Ego Trust Disputes Most Often Arise? 

Disputes about trust control usually arise when the legal structure says one thing, but financial behaviour suggests another. In Victorian commercial and family litigation, these issues commonly appear where a trust holds business premises, investment properties, retained profits, shareholdings, or intergenerational wealth, while one person continues to use those assets as if they are personally available. 

Creditor access to trust assets is often pursued after a judgment, failed business venture, director dispute, or insolvency event. A creditor may examine whether valuable assets were transferred into a trust after liabilities emerged, whether the controller remained in effective possession of those assets, and whether the trustee’s decisions were commercially independent. The issue is rarely the existence of the trust alone. The sharper question is whether the trust was administered consistently with its deed, or whether it became a mechanism for preserving wealth while resisting enforcement. 

In family law, disputes involving the Family Court and trusts often arise around family businesses, discretionary trusts, investment portfolios, and property-owning entities. One party may argue that trust assets should be included in the asset pool because the other party has practical control of the trustee, receives the benefit of distributions, or can influence who receives income and capital. The trust may not be a sham trust in Australia in the strict sense. It may still be relevant as an alter ego trust, an illusory trust, or a financial resource. That distinction matters because the Court may not need to declare the trust invalid to account for its practical effect. 

These disputes can also arise between siblings in succession planning, former spouses after separation, directors after a business breakdown, or beneficiaries who say distributions have been manipulated. For high-net-worth individuals, directors, and business owners, the practical risk is that informality becomes evidence. Personal use of trust assets, undocumented decisions, inconsistent loan accounts, selective distributions, and trustee decisions made without proper records can all support an argument for piercing the trust structure. The more closely the trust’s conduct resembles personal ownership, the greater the litigation risk. 

What Should Parties Consider Before Challenging or Defending a Trust Structure? 

A trust dispute should not be approached as a general complaint about unfairness. The strategy depends on the precise relief sought. A creditor may need orders that enable creditor access to trust assets; a spouse may seek to have trust assets treated as part of the property pool, while a beneficiary or co-director may seek declarations, accounts, injunctions, or removal of a trustee. Each path requires different evidence. 

For a party challenging the structure, the first task is to identify the theory of the case. A sham trust in Australia argument requires a different evidentiary foundation from an alter ego trust, illusory trust, or practical control argument. The documentary trail matters. Trust deeds, variations, appointor records, trustee resolutions, loan accounts, bank statements, distribution minutes, financial statements and tax records should be examined together, not in isolation. 

For a party defending the trust, consistency is usually critical. The defence is stronger where the deed has been followed, trustee decisions are recorded, distributions are properly resolved, and trust assets have not been treated as personal property. Evidence of independent trustee decision-making can be particularly important where the dispute concerns control of the trustee. 

Timing should also be assessed early. Transfers made after separation, after a demand letter, during insolvency pressure or before enforcement action may invite closer scrutiny. For business owners assessing asset protection before marriage or separation, the strategic question is not only whether piercing the trust structure is legally available, but whether the available evidence supports that remedy and whether a narrower order would better protect the client’s commercial or family law position. 

Frequently Asked Questions 

What Should You Do If a Trust Structure is Under Challenge in Victoria?

Trust disputes involving control, creditor access to trust assets and family law property issues turn on evidence, not labels. Courts look at how the trust was created, controlled, funded, and administered. For business owners, directors, professionals and high-net-worth individuals, early advice can shape the claim, preserve evidence, and reduce avoidable litigation risk. 

If you are considering a claim involving a sham trust in Australia, defending an allegation of an alter ego trust or illusory trust, or assessing whether trust assets may be exposed in litigation, speak with our commercial litigation team or book a confidential consultation. 

This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.