Changing an appointor - just like (starting over**) - or changing a trustee; simple! (in theory ...)

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust.

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –

• The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor;
• The intended change complies with the trust deed (the "read the deed" mantra again highlighted);
• The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and
• The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust.

Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

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

The above post is based on an article that we originally contributed to the Weekly Tax Bulletin

** For the trainspotters, the title of today's post is riffed from the John Lennon song ‘Just like starting over’.

View here: 

One way or another** way to convert water into wine - trust to company rollovers

The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning.

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 Blondie song ‘One way or another’.

View here:

Converting water into wine (or family trusts into fixed trusts) is way cool**

Previous View posts have considered various aspects of fixed trusts.

For a myriad of structuring issues, one issue that appears to be raised more regularly is whether it is possible to convert a family discretionary trust into a fixed trust.

This issue was considered some years ago by the Tax Office in Private Ruling Authorisation Number: 1012991136582. As usual, if you would like a copy of the ruling please let me know.

Broadly the factual matrix was as follows -

1. a 'standard' family trust held an asset;
2. the trust had a widely crafted power of variation;
3. he trustee resolved to make a capital distribution of the balance in the unrealised capital profits account to certain beneficiaries, with this amount left unpaid (ie meaning it was a debt owed by the trust to the beneficiaries);
4. by agreement there was then a conversion of the debts (and some other outstanding loans) to equity such that each of the relevant beneficiaries had a certain percentage of ‘equity’ in the trust;
5. relying on the power to vary, the trustee then amended the terms of the trust deed to convert it into a fixed unit trust.

After analysing the provisions of its Tax Determination in relation to resettlements (namely TD2012/21, see our previous post that explores this) the Tax Office confirms that so long as the amendments are within the powers of the trust deed, the continuity of the trust will be maintained for trust law purposes.

This is because the ultimate beneficiaries of the trust after the proposed amendments would be the individuals who were the objects of the trust before the variation. The fact that the extent of the interests of the beneficiaries in the trust change as a result of the variation was seen as irrelevant.

Therefore, the amendments to the terms of the trust did not trigger capital gains tax (CGT) event E1 or CGT event E2, being the 'resettlement' CGT events.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement.

CGT event E2 happens if a CGT asset is transferred to an existing trust.

The Tax Office further confirmed that CGT event E5 was not triggered by the conversion of a family trust to a fixed trust.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary.

CGT event E5 does not however happen if the trust is a unit trust and thus this exemption was held to apply here.

The Tax Office also confirmed that there are no other CGT events that happened when the family trust was converted into a unit trust. This is because the amendments were within the trustee's powers contained in the trust instrument. This means that the continuity of the trust was maintained for trust law purposes.

A similar conclusion was reached by the Tax Office in Private Ruling Authorisation Number 1051886979078.

The above post is based on an article that originally was published in the Weekly Tax Bulletin.

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 King Missile song ‘Jesus was way cool'.

View here:

Another (one bites the dust**) & permutation on reading the deed - regulating family trust assets via wills

The View post last week considered aspects of the probation on a trustee fettering its discretion.

One related issue that we see arise from time to time is an attempt to regulate the distribution of the assets of a trust via a will direction. Generally this approach is adopted on the basis that some argue that a will can have legal force over a trust.

The idea that a willmaker can mandate that a company take certain steps in relation to its assets is clearly untenable (even if the will maker is the sole director and shareholder of the company). The analogous argument that a will maker can somehow force a trust to take certain steps seems (at least conservatively) similarly without basis.

In any event, if the outcome of mandating certain trust distributions is required, a simple deed of variation, with an effective date of the willmaker’s death arguably achieves the same outcome, without any of the esoteric debate about whether a willmaker can regulate trust distributions.

While we do from time to time adopt the ‘delayed commencement’ deed of variation approach we generally recommend against it as it goes against virtually all the benefits of having a discretionary trust in the first place (quite aside from the significant tax and duty risks of such a variation).

Instead, our strong preference is to use one or more of strategies such as memorandums of directions, crafting control roles (such as appointor or principal powers), family councils, bespoke constitutions, trust splitting, trust cloning, independent trustees or gift & loan back arrangements to achieve the required objectives.

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 Queen song ‘Another one bites the dust’.

View here:

When a fettering of trustee discretion is obscured by a 90-Mile water wall**

A recent View post mentioned the principle in relation to the probation on a trustee fettering its discretion. Arguably the leading case explaining when the probation on fettering of discretion will essentially be ignored is Dagenmont Pty Ltd v Lugton [2007] QSC 272. As usual, if you would like a copy of the decision please contact me.

The background in this case was as follows -

1. an agreement was entered into by the original appointor of a discretionary trust and other family members in control of the corporate trustee, whereby the appointor would resign from various roles in the trust, in return for guaranteed distributions from the trust;
2. the distributions were set at an amount of $150,000 each year, indexed for inflation;
3. the agreement by the trustee to make these future distributions was effectively a fetter on its future discretion;
4. each party received independent legal advice at the time of the agreement, however some years later the trustee attempted to cease the distributions due to the, argued, invalid fettering of its discretion.

The court specifically acknowledged the general prohibition on a trustee fettering its discretion, confirming -

'trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.'

In rejecting however the trustee's attempt to avoid the agreement the court confirmed -

1. a provision in a document authorising a trustee to release powers which they would otherwise have a duty to exercise is valid;
2. here the document confirming the agreement between the parties was in essence a release by the trustee of the power conferred on to exercise an unfettered discretion to distribute amongst all potential beneficiaries;
3. alternatively, the agreement effectively amounted to a variation of the terms of the original trust deed;
4. this meant that what would otherwise have been an unfettered trustee discretion became reduced in scope, simultaneously with an obligation being imposed on the trustee (created by the agreement with the original appointor) to distribute the annual amount of $150,000 (indexed);
5. arguably particularly where parties receive independent advice at the time, the court should uphold bargains where it can, rather than destroy them.

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 National song ’90-Mile Water Wall’.

View here:

Thinking you will let the tax tail wag the dog; plan to play a slow hand**

Last week's post explored the case of Wheatley v Lakshmanan [2022] NSWSC 583, with a focus on the (possible) exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

Another key aspect of the decision related to the tax consequences of the various proposals considered by the court. The potential tax liability was said to be in the region of $1M.

Relying on advice of a specialist tax adviser the court made the following observations (in the context of the implications of a company owned by the willmaker distributing one of its assets to a beneficiary under the will):

1. the estate, for tax purposes, would be deemed to be a trust under section 6(1) of the Tax Act;
2. any payment of any amount by the company to the executor of the estate would be a dividend assessable under section 44 or under Division 7A of the Tax Act - and, if the moneys were paid to the executor who then used them to pay the purported gift under the will, the recipient of the gift would be subject to income tax on a flow through basis;
3. if instead the company distributed to the estate and no particular beneficiary was eligible to receive those moneys, then the trustee would be taxed (at the highest marginal rate) under section 99A of the Tax Act;
4. an argument that the payment by the company to the beneficiary as a form of notional estate order would not constitute a deemed dividend had been rejected by the Tax Office in a private ruling issued before the trial - the Tax Office instead determining that the payment would in fact be treated as a deemed dividend under Division 7A;
5. although not expressly stated in the decision, it seems likely that the relevant private binding ruling in this regard is Authorisation Number 1051799201069. This ruling references Taxation ruling TR 2014/5 (Income Tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)) in concluding that the reasoning from a family law perspective also applies in the succession law setting, and as such, the requirement in section 109J(b) of the Tax Act to access an exemption from the deemed dividend regime is not satisfied;
6. the use of the word in the gift provision of the will 'unencumbered' was held to be intended to be in its common parlance - that is referring to mortgages or charges secured on the property – not the embedded tax liability. Thus, any income tax liability should be largely ignored by the court in determining the appropriate provision to be made for the aggrieved beneficiary. This conclusion was reinforced by the fact that the tax liability only arose subsequent to the sale of the property, on the distribution of the proceeds of sale - and furthermore the purported gift was held to be invalid in any event.

The court also observed that it seemed likely that tax issues 'overtook' common sense during the litigation and contributed to the high level of legal and accounting costs, which the court stated it was inclined to place a significant cap on in terms of what the estate would be liable to pay for.

The exact cap in this regard was confirmed in Wheatley v Lakshmanan (No 2) [2022] NSWSC 851. In this subsequent decision, the court held that in relation to costs that were over $620,000 for the plaintiff and more than $450,000 for the estate, the estate was ultimately effectively required to pay its own costs and a net amount of $160,000 of the plaintiff's costs.

This outcome was after a careful analysis by the court balancing between depriving the plaintiff of a substantial portion of the legacy ordered in her favour and the estate being further burdened by costs. Given the plaintiff received an award of $820,000 as further provision under the initial judgment, her final net position was likely in the region of $350,000.

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 Pointer Sisters song ‘Slow hand’.

View here: 

Don't give up** (& no it ain’t an April Fool’s post) on receiving an asset under a will - even if it is not owned by the willmaker

Previous View posts have explored cases that support an, arguably unusual (indeed arguably bordering on a joke, or at least April Fool’s Day-esk, exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

In particular, in certain situations the standard position that assets of a company are not something individual shareholders have the authority to regulate under their will has been overruled.

The decision in Wheatley v Lakshmanan [2022] NSWSC 583 provides a detailed analysis of the key rules in this area.

At the heart of the factual matrix in this case was a clause in a will that purported to gift to a child of the willmaker, unencumbered, a commercial property - with a further direction that the property 'be placed into a trust or superannuation fund of (the child's) choice'.

The relevant property however was owned by a company that the willmaker was at all material times (i.e. both at the date of the making the will and at the date of death) the sole shareholder.

In confirming that the purported gift of the property was ineffective the court stated:

1. the general position is that a willmaker can not bequeathe something that they do not own;
2. it may be that where a willmaker conveys to the executor a direction to reduce into possession an asset not owned by the willmaker, and the executor is armed by the willmaker with the power to get the asset (eg by directing that all relevant assets are to be held on trust under the estate) they will be bound to do so - and then deal with the asset as directed by the will (see Re O’Callaghan [1972] VR 248);
3. that is, if there is the conferral of power upon executors to deal with shares in a company that owns the assets in question as if they were beneficial owners, coupled with express gifts under the will, this can give rise to an implication that the trustee was required to use the shares of the company to ensure the assets of the company are transferred as set out in the will;
4. this said, the court commented that it may also be that the earlier cases were in fact decided incorrectly - a point the court did not need to resolve on the basis that in the will here, the requisite power was not granted to the executor of the will in any event;
5. the key reason for suggesting that the previous cases may be wrong at law is that they are vague in clarifying how exactly an executor exercising rights as a shareholder can cause the relevant company to divest itself of the assets purportedly bequeathed. That is, the shareholders do not manage the company’s affairs; rather the directors do and a court should not construe a will in a manner that would or might place the directors in a position where their statutory duties as directors are in conflict with the willmaker's intentions, based on a conflation of ownership with management (or day-to-day conduct) of a company;
6. the further suggestion that there should be a rectification of the will was also rejected due to a lack of evidence that the willmaker intended to create the power for the executor to achieve the gift of the property owned by the company;
7. nor was there any evidence supporting the ability for the court to correct a 'clerical error' - rather it seemed that either the willmaker did not make clear, or the lawyer drafting the will did not understand, that the property in question was owned via a company.

Ultimately, while the aggrieved beneficiary was granted a cash settlement pursuant to a court order as part of a family provision application, this amount was significantly less than the value of the property in question; and was also arguably partially reduced by a tax bill that the estate had to bear. The tax issues will be explored in next week's post.

** For the trainspotters, the title of today's post is riffed from the Peter Gabriel (featuring Kate Bush) song ‘Don’t give up’.

View here: