Waiting for the day** where there is a maintaining trust records

It’s surprising how often we are provided with an original trust deed for a trust that’s been around for 10 or 15 years and are asked to give advice on the terms of the trust, only to have it turn out later that there were subsequent deeds of variation or resolutions which amended the terms of the trust, which everyone had lost or forgotten about.

As a practical tip, clients who are establishing a trust should have some form of trust register or trust folder in which they store copies of all of the trust deeds, trust variations, trust resolutions and any other documents which may impact on understanding what rights and responsibilities attach to that trust.

We also need to understand that beneficiaries can make unilateral decisions, such as deciding to renounce an interest as a beneficiary of a trust.

If an individual who is a beneficiary issues a disclaimer or a renunciation, which says that notwithstanding the terms of the trust deed they have chosen not to be a beneficiary of the trust anymore, that will impact on their standing from a family law perspective, bankruptcy perspective and a tax perspective.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the George Michael song ‘Waiting for that day’.

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Who’s (are you**) a beneficiary?

When we’re dealing with a discretionary trust, one of the first things we need to do is to identify who the beneficiaries are.

Is our client (or their spouse) in fact a beneficiary of the trust that we’re dealing with?

There are some common tricks and common issues that we should be keeping an eye out for, including ensuring we have identified all variations to the deed since establishment.

We also need to be aware of a case by the name of Yazbek, which outlines the approach that the courts take when they are asked to consider who the beneficiaries of a trust are.

Yazbek is significant because the court confirmed that a person who is eligible under a trust deed to receive income or capital from a trust is a beneficiary, notwithstanding that they may not have actually received anything from the trust at that point in time.

The Yazbek decision was handed down in the context of an assessment which had been issued to an individual beneficiary.

The ATO normally has a two-year period after that assessment was issued in which to issue an amended assessment (where they have identified some additional tax they believe should have been included in the taxpayer’s return).

However that standard two-year window is extended to four years where the individual involved is the beneficiary of a trust.

In Yazbek, ATO was trying to issue an amended assessment three years after the original assessment had been issued. So it was outside the two-year window, but within the four-year window.

The taxpayer in Yazbek hadn't received any distributions from the discretionary trust that the ATO contended he was a beneficiary of.

This was a discretionary trust which was controlled by other family members.

He was included in a wide class of discretionary beneficiaries, but had not actually received anything.

His contention was that in order to be a beneficiary of a trust, he needed to have actually received something from it.

Now the court was quite quick to shut that argument down and said that even if a person has not received any income or capital from the trust for the entire period it has existed, if they are within a class of persons who are eligible to receive income or capital at the trustee’s discretion, they are still a beneficiary of the trust.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Who song ‘Who are you?’.

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Identifying trust types (AKA – that’s not my name**)

The first step in the process is to identify what sort of trust we’re dealing with.

Discretionary trusts and unit trusts are usually relatively easy to identify. The discretionary trusts will have a range of beneficiaries, but no single beneficiary will have any fixed entitlement to income or capital from that trust.

Therefore, the rights that a beneficiary has against the trustee are limited to the right to be considered for distributions from time to time and the right to ensure that the trustee fulfils their fiduciary obligations.

If you contrast that with a unit trust, the unit trust will usually have beneficiaries with units or fixed percentages, which entitle them to determinable amounts of the trust income and capital.

Therefore, a unit trust will be treated quite differently from a bankruptcy perspective and a Family Law Act perspective in the event something goes wrong for one of the unit owners.

The hybrid trust is quite different again and there is no single agreed definition.

You could talk to 10 different lawyers and probably get 10 different definitions of what a hybrid trust is.

It is a structure that has been evolving a lot over the last 10 to 15 years and there are a lot of different variations around, which each have slightly different provisions or quirks in the way they operate.

In a general sense, a hybrid trust is a trust which has some discretionary entitlements and some fixed entitlements.

One example of a type of hybrid trust that was particularly common in the lead up to the GFC is a negative gearing hybrid trust, where we have an individual unitholder who goes out and borrows funds to buy units in that trust, and that unit gives the unitholder a fixed entitlement to the income from the trust.

The thinking behind these hybrid trusts is that because the individual had borrowed to acquire an income producing asset, being the units, they could therefore claim a tax deduction for their interest on the borrowings.

However the trust deed would then have a separate provision which said any capital gain that may be realised by the trust could be distributed at the trustee’s discretion to a wide range of beneficiaries.

In other words, we have some discretionary entitlements in relation to capital and some fixed entitlements in relation to income.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Ting Ting’s song ‘That’s not my name’.

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Go your own way - The Rinehart Ruling – a key aspect **

Following last week’s post in relation to the, suspected, Tax Office Ruling in relation to the Rinehart trust dispute matter, there was some discussion about one key aspect of the reasoning.

In particular, the question of when a beneficiary becomes absolutely entitled to a particular capital asset as against the trustee is generally seen as critical.

The position appears to be that, where a trustee has a right of indemnity (and lien over) the relevant asset, it is not enough that the beneficiary has a ‘vested and indefeasible’ interest in the trust capital.

Instead, the beneficiary must have the right to force the trustee to transfer to them the asset, subject only to the payment of the trustee's expenses.

In order for this to be the case the better view appears to be that one of the following tests must be met, despite some suggestions to the contrary in the Tax Office’s Taxation Ruling 2004/D25 (TR 2004/D25), mentioned in last week’s post –

1. If the trust is over particular assets, then the trustee has a clear duty to transfer those assets to the beneficiary, without the trustee having any express or implied power of sale under the trust instrument.
2. Alternatively, if the trustee has a power of sale, the beneficiary must have demanded a particular asset be transferred to them and must tender sufficient funds to the trustee to satisfy the trustee’s right of indemnity.
3. Finally, absolute entitlement may be created by a trustee resolving to exercise a power under the trust deed (or at law) that a particular asset be immediately distributed to the beneficiary.

Importantly, and as flagged by the Tax Office in TR 2004/D25, a trustee’s right of indemnity of itself is irrelevant to the question of whether absolute entitlement exists. Rather it is a trustee's power of sale that will generally prevent a beneficiary being able to demonstrate absolute entitlement. However this point is unfortunately not clear in TR 2004/D25, despite the Ruling running to over 100 pages.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘Go Your Own way’ is another song by legendary band Fleetwood Mac from 1977.

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Little lies ? The Rinehart Private Ruling **

Obviously, there has been an enormous amount of interest in relation to the Rinehart trust dispute matter over an extended period of time.

Interestingly, the centrepiece of the dispute, at least from a tax perspective, does not always receive a significant amount of attention.

Given what has been disclosed publicly, there are many who believe that Ms Rinehart successfully obtained a private ruling from the Tax Office in relation to whether there were any capital gains tax (CGT) consequences of the trust, which is the focus of the dispute, vesting when Ms Rinehart’s youngest child turned 25.

While it cannot be certain, it appears that private ruling authorisation No. 1012254771092 relates to the Rinehart matter. As usual, if you would like a copy of the ruling please contact me.

The private ruling carefully considers whether CGT event E5 occurs on the vesting of a trust. CGT event E5 is said to occur when a beneficiary becomes ‘absolutely entitled' to a CGT asset of trust as against the trustee.

The ruling then goes onto explore in some detail the broad position that the Tax Office adopts in these areas based on Taxation Ruling 2004/D25 (TR 2004/D25). Again, as usual, if you would like a copy of the ruling please contact me.

The Tax Office confirms that while TR 2004/D25 remains in draft, so long as it is not withdrawn, it does represent its view of the law.

Based on the analysis of TR 2004/D25, the ruling concludes that because no beneficiary was able to call for any one or more of the assets to be transferred to them, they were not entitled to any assets as against the trustee, and therefore, CGT event E5 did not occur on the vesting of the trust.

An interesting footnote in this regard is that CGT event E5 was essentially based on similar UK legislation. The CGT rules in the UK however, unlike in Australia, explicitly state that absolute entitlement can be triggered for jointly owned property even when the trustee's right of indemnity is yet to be satisfied.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘Little Lies’ is a song by legendary band Fleetwood Mac from 1987.

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Can trusts last forever now? **

Following on from recent posts it is useful to understand that the majority of Australian jurisdictions decided that a life in being plus 21 years was too complicated. Instead, the rule was replaced with a statutory provision which allows up to 80 years as the maximum length of trust in Australia.

As mentioned last week, there are exceptions to this rule. In relation to discretionary trusts, the highest profile exception is in South Australia where the rule has effectively been abolished.

Another exception is in relation to superannuation funds.

Superannuation funds are simply a form of trust instrument, although a highly regulated form of trust due to the Superannuation Industry Supervision Act which imposes a whole range of specific rules.

In relation to the core of the underlying structure of a superannuation fund however, it is simply a trust structure. Importantly however there is no concept of an ending period. In other words, in theory superannuation funds can last forever.

There are obviously tax issues for self-managed superannuation funds meaning maintaining the structure indefinitely may not be a particularly smart idea. However in the context of trust vesting, superannuation funds are a clear and obvious exception to the vesting rules.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For trainspotters, ‘Forever now’ is song by legendary Australian band Cold Chisel from 1982.

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(Don’t ask me) why do trusts have vesting dates? **

Arguably trust vesting as a concept is an area of the law where you can ask 4 different lawyers for a view and you will get 5 different answers as to where it actually came from.

The theory I enjoy the most and the one that probably resonates most closely to what is possibly the truth is that, historically, trusts or as known in early English law, 'uses' could last forever.

In other words, trusts were the same as the modern-day company. There was no ending date; a trust was a structure that could last in perpetuity.

The story goes that there were forms of death duties back in the early English law. What was happening was that wealthy families would arrange for an initial transfer of assets into a trust on death.

While, there would be tax payable on that initial transfer of assets into the trust (that is, the death duty) once the asset was inside the trust, it was effectively protected from tax forever.

In other words, from a tax perspective, it was sheltered because there would be no further transfer of the asset on later deaths and therefore no further revenue to the monarchy.

The allegation was that King Henry VIII (after it took the revenue authorities about a hundred years to work it out) eventually was unimpressed that the revenue was drying up.

The reason that tax collections were drying up was because all the wealthy families were putting their assets into trusts and then effectively just skipping the death tax and making it an elective tax for later generations.

The solution, as is often the case in the structuring area, was to create the revenue outcome by imposing a limit on the life span of trusts.

Hence, you’ll see in many trust instruments, particularly earlier trust instruments, this idea of the 'life in being' of King Henry VIII or some other member of the royal family.

This is because the rule imposing the limit was set as the life in being as at the date of establishment of the trust plus 21 years. In most states (other than South Australia, which effectively has no statutory limit) the life in being approach has been replaced with a maximum period of 80 years.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For trainspotters, ‘Why’ is song by Annie Lennox.

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