Tuesday, March 21, 2017

The Blues Brothers and protecting family trust assets

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/kOMhiXHR-5A

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

The case of Morton & Morton (email me if you want a copy of the decision) is one we often refer to as the Blues Brothers’ case.

The structure was a corporate trustee where there were two shareholders. Those two shareholders were brother 1 and brother 2.

The percentage share that they each had was 50%. The two brothers were the two directors. There were two primary beneficiaries, being the two brothers. You might start to see a pattern with this one.

There were two appointors – again, brother 1 and brother 2. The one point of distinction was there was one bucket company, so one corporate beneficiary. That bucket company was owned by the family trust itself.

Brother 1 was busting up with his wife. Her argument was ‘everything is 50-50 here. Clearly, my husband is entitled to 50% of the trust assets because he’s got 50% of the control, got 50% of the appointorship, got 50% of the shareholding, got 50% of the distributions.’

‘My husband is entitled to 50% of everything and therefore I'm entitled to a percentage share of his 50%.’

The court said no. The court said because all relevant aspects are 50-50 for each brother, then this is in fact analogous to each brother effectively having 0%, because it was the same as nothing. Thus, the assets of the trust were protected.

Ultimately, the Blues Brothers case is a really important decision. It is a decision that should give everybody confidence that structured properly, trusts can be a very powerful instrument in the context of matrimonial breakdowns.

Tuesday, March 14, 2017

Inside Stories - latest View book release

One of key goals at View is ensuring that we have ‘written the book’ for every aspect of the law we specialise in.

Following the successful launch of books in estate planning, tax, trusts, entity structuring, testamentary trusts, SMSFs and business succession, we have now developed and launched another book – Collection of Inside Stories (Reference Guide).

This is the 6th edition of the book and contains all posts over the last seven years, edited to ensure every post is current and organised into chapters for each key area.

There are chapters on topics including estate planning, trusts, asset protection, superannuation, structuring and powers of attorney.

All of the View books (over 15 at last count) can be accessed via our website – see - https://viewlegal.com.au/product-category/books/

Anyone who likes or shares this post over the next week will go into the draw to win a free copy of the latest edition of Inside Stories.

Tuesday, March 7, 2017

Changing trustees of trusts – Simple in theory … not so simple in practice

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

The decision in Balcaskie Investments Pty Limited v Chief Comr of State Revenue [2017] NSWCATAD 19 ("Balcaskie") was reported at 2017 WTB 4 [120].

The case is a timely reminder of the critical issues that can arise from a revenue perspective in relation to the superficially simple area of changing the trustee of a trust.

The starting point for any change of trusteeship is always the terms of the trust deed. In this regard, the 'read the deed' mantra has been regularly highlighted by us.

Assuming the trust deed creates the relevant power and the change of trustee documentation follows the procedure mandated by the trust instrument, there are 2 key revenue issues to be aware of, namely
  1. Capital gains tax ("CGT");
  2. Stamp duty provisions in the relevant jurisdiction (in the case of Balcaskie – NSW). 
Each of these issues is considered in turn below.

CGT consequences

Arguably the most commonly triggered CGT event is the disposal of a CGT asset (being CGT event A1).

A question that regularly arises, particularly in estate planning and asset protection exercises, is whether a change of trustee triggers CGT event A1.

Relevantly, s 104-10 of the ITAA 1997 provides as follows:
  1. CGT event A1 happens if you dispose of a CGT asset; and 
  2. you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: 
    1. if you stop being the legal owner of the asset but continue to be its beneficiary owner; 
    2. merely because of a change of trustee. 
Therefore, it is generally accepted that CGT event A1 does not occur as a result of a change in the trustee and the ATO acknowledges this position in Tax Determination TD 2001/26.

Similarly, there are numerous private binding rulings ("PBRs") that confirm the same outcome, such as PBR 1011623239706.

Stamp duty consequences

Unfortunately, while there are generally no stamp duty consequences for changing a trustee, the rules to gain access to the relevant exemption are different in each state.

Generally however, an exemption should be able to be accessed to mirror the revenue neutral CGT position, with the requirements likely to include at least the following:
  1. the dutiable transaction was undertaken for the sole purpose of giving effect to a change of trustee; 
  2. the transaction is not part of an arrangement: 
    1. involving a change in the rights or interests of the beneficiary of the trust; 
    2. terminating the trust; and 
  1. transfer duty has been paid on all trust acquisitions for which transfer duty is imposed for the trust before the transaction. 

It is important to note that each state adopts its own approach in this area, and (for example) in New South Wales, additional requirements must be met including that the new trustee cannot be a beneficiary of the relevant trust.

Section 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:
  1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
  2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
  3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 
This prohibition is relevant for trusts established in NSW obviously. It is however also relevant in other jurisdictions as well because many trust deed providers are based in NSW, or rely on precedents originally sourced from NSW.

In addition, the NSW requirements will need to be satisfied where a trust which has been established in another jurisdiction owns dutiable property in NSW.

As noted in Balcaskie, prior to the case, there had not been a reported decision interpreting the way in which the stamp duty exemption on changing a trustee under the NSW rules operates.

The trust deed in Balcaskie had a specific clause (inserted by a deed of variation some years after the deed was originally settled) that required any change of trustee to comply with the NSW stamp duty rules to ensure access to duty relief.

In particular, the relevant clause stated –

"The Original Trustee and the New Trustee and any future and past trustees are absolutely prohibited from being a beneficiary under the Trust Deed or from otherwise directly or indirectly benefiting under the Trust Deed and this clause will not be capable of amendment or revocation."
The separate power of variation clause in the trust deed was very widely crafted, and on the reading adopted by the NSW Office of State Revenue ("OSR"), created the power for the trustee to amend (and potentially remove) the above mentioned prohibition.

This apparent power of variation meant (in the view of the OSR) that the duty exemption on changing the trustee was not available.

The NSW Civil and Administrative Tribunal decided the conflict solely on the basis of a fundamental rule of construction.

That rule being that a specific provision must be read as prevailing over a provision of general import.

In this case, the rule meant that the specific prohibition had priority over the general power of variation. In turn, the OSR was therefore required to grant the duty exemption on the change of trusteeship.

The case may also impact on the OSR's interpretation of the law in other areas – for instance, the NSW OSR has historically adopted the view that a trust will not qualify as a 'fixed trust' for land tax purposes if there is a power for the trustee to amend the trust deed in a manner which alters the fixed entitlement. The Balcaskie decision arguably means the OSR should be considering the terms of the fixed trust deed as they exist at a particular point in time, regardless of any power the trustee may have to subsequently amend those terms.

Conclusion – always start by reading the deed

As explained regularly in this Bulletin, given the range of significantly adverse consequences that can result where a purported change to a trust is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.

Invariably, best practice dictates that the starting point must be to read the trust deed.

There must then be a methodical analysis of all potential revenue consequences.

Image courtesy of Shutterstock

Tuesday, February 28, 2017

Post death testamentary trusts

Previous posts have touched on various forms of testamentary discretionary trusts, including 'post death' testamentary discretionary trusts http://blog.viewlegal.com.au/2010/05/testamentary-trusts-is-it-ever-too-late.html.

In very broad terms, these trusts are created so as to provide a pathway to access the excepted trust income rules under the Tax Act. In particular, they allow income to be distributed at adult rates to children under the age of 18.

While there are a number of rules that need to be complied with before setting up a post death testamentary trust, it is worth remembering that the structure is in fact available in a variety of circumstances, including:

  1. Where the deceased dies with assets in their own name and a basic will (i.e. not incorporating a testamentary trust);
  2. Where the deceased dies with assets in their name and has no will (i.e. they are intestate);
  3. Where the deceased dies with superannuation entitlements (including insurance); or
  4. Where the deceased dies with insurance entitlements.

Importantly, this type of trust is also available where the parties to a marriage separate and there are child support obligations that need to be satisfied.

View’s 90 minute webinar exploring the key issues in relation to post death trusts is available here - https://viewlegal.com.au/product/recorded-webinar-package/

Extracts of the webinar are also available via our podcast channel, see - https://viewlegal.com.au/view-podcasts/

Image credit: Markus Spiske cc

Monday, February 20, 2017

Gift and Loan Back Arrangements – A Practical Example

Earlier posts have looked at various aspects of ‘gift and loan back’ arrangements – see -




As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to gift and loan back arrangements in a ‘vidcast’ at the following link - https://youtu.be/hJy0OyOuLfE

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Having done the trust split, what you might look at doing is a gift and loan back. That is to say the trustee that sits over a split trust will arrange for assets that are equal to the underlying interest in the asset to be gifted into a brand new trust.

The new trust will generally be a stock standard family trust that's controlled by the relevant beneficiary.

If the split trust makes a capital gift of the underlying capital value, not the interest in the asset itself, then what is being gifted is the dollar value of the asset as a cash gift. It can be a promissory note, round robin of cheques or whatever it needs to be.

The funds are gifted into a trust that’s controlled by the relevant beneficiary. What the beneficiary then does is lends that money back into the split trust.

That is step 1 is the gift.

Step 2 is the loan.

But at the same time as that new trust is making that loan, it will also take a mortgage out over the underlying assets in the split trust.

Thus you have effectively synthetically moved all of the equity out of the split trust into a brand new trust, which is absolutely controlled by the relevant beneficiary.

Furthermore, there's no mortgage duty on a gift and loan back arrangement. In other words, you can do all of the gift and loan back arrangement without any transaction costs.

The beauty of the strategy is that it still maintains the integrity of the initial trust split, but gives each of the ultimate family members, no matter what might go wrong between the family at that split trust level, the ultimate ability to call in that debt. While they might actually have to sell the underlying asset at that point, they will still ultimately have the underlying equity where it needs to be (that is in their sole control).

Tuesday, February 14, 2017

Pre-nups, pole dancers and PI insurance

The saga involving swimmer Grant Hackett suing two law firms for negligence is a high profile reminder of the difficulties in relation to 'pre-nups'.

Broadly the Hackett matter centred on allegations that the relevant law firms failed to properly advise him to create a binding financial agreement.

In particular, Hackett argued that the original agreement entered into before marriage failed to comply with the strict legal requirements under the Family Law Act. When the agreement was later updated after the birth of the couple's twin children the alleged difficulties with the agreement were not remedied.

In many respects the issues here are analogous to the relatively well known 'pole dancer' case of Wallace v Stelzer [2014] HCATrans 135 - so named because the husband met the wife at what was described as 'an adult entertainment venue' where the wife was working as a dancer. As usual, if you would like copies of the relevant decisions please email me.

At the heart of the pole dancer case was the husband's desire to avoid the terms of the binding financial agreement that saw him liable to pay $3million dollars to his former wife when their marriage ended after only 18 months.

Some of the arguments raised included that the lawyers failed to discharge their duty to properly explain the terms of the agreement - an allegation that would have seen the lawyers potentially liable in negligence if it had been held to be correct.

It was also argued that the agreement was void in relation to some technical aspects required to be complied with under the Family Law Act and that attempted legislative fixes to the rules were also invalid, in part because the changes purported to be retrospective. While it was ultimately held that the agreement was effective and the legislative changes were valid the extent of the litigation has seen many law firms, even those that specialise solely in family law, choose to no longer prepare binding financial agreements.

Image courtesy of Shutterstock

Tuesday, February 7, 2017

All Care, No Liability

One of the questions that comes up regularly is who is responsible for providing the legal advice in the adviser facilitated (or wholesale) solutions offered by View.

View Legal provides complete support of its documentation by providing legal signoff.

This approach is one that we take extremely seriously, for obvious reasons.

Ultimately, via the View Legal platform, the adviser who facilitates the process is issued a compliance driven certificate that provides as follows –

‘View Legal Pty Ltd confirms it has provided independent legal advice to the client in relation to all legal documentation.’

There are no footnotes or disclaimers.

This one sentence certificate is issued without qualification.

Future posts will provide an interesting contrast by highlighting the style of disclaimers that most (if not all) other providers in this area rely on.

Image courtesy of Shutterstock