Tuesday, May 14, 2024

A room without a door** - Default income provisions for family trusts

View Legal blog - A room without a door** - Default income provisions for family trusts by Matthew Burgess

Following last week’s post, another issue that arises relatively regularly in relation to family trusts is the trust deed not containing a default provision for the distribution of trust income.

While there are many competing arguments, the preferred position appears to be that the absence of such a clause should not make the trust invalid.

This said, without the inclusion of a default income provision, it will generally be the case that a failure by a trustee to validly distribute income in any particular year will mean that the income is accumulated and the trustee will be taxed.
An earlier post, explains that where the trustee is liable to tax this will generally be at the maximum rate of personal tax – that is including the Medicare levy and similar surcharges and without access to the general 50% CGT discount.

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 Psychedelic Furs song 'Love my way’.

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Tuesday, May 7, 2024

Trust deeds and default provisions – (Forever) Now:** who wants to be the test case?

View Legal blog - Trust deeds and default provisions – (Forever) Now:** who wants to be the test case? by Matthew Burgess

We have received some feedback about the following comment in a recent post, namely:

‘There is also a risk that if there is no valid default or gift over provision, then the assets of the trust pass on a resulting trust to the settlor. This outcome is at best problematic, particularly given that the settlor is often an unrelated third party such as an accountant or lawyer.’ (extracted from an earlier post)

The debate about whether discretionary trusts need provisions that detail how assets will be distributed in the event of a trustee failing to make a decision is longstanding, and arguably unresolved.

For those wishing to avoid being the subject of the next test case to resolve the issue, the conservative view appears to be that the lack of a default provision for capital means the trust may be held to be void. If this is the case, the invalidity will be deemed to be from the date of creation of the trust, however only if the trustee fails to make a determination to distribute all of the capital on or prior to the vesting day.

While it is often possible to amend a trust deed to insert a default provision for capital, this amendment can potentially result in capital gains tax and stamp duty being payable on the gross assets of the trust – generally an unacceptable risk.

Specific advice should always be obtained, however practically the approach adopted is often as follows:
  1. continue to use the trust for the assets that it already owns;
  2. take all reasonable steps to ensure that the trustee exercises its discretion prior to the vesting day to distribute the capital of the trust to any of the named beneficiaries;
  3.  where possible (once the lack of a default provision is identified), ensure that the trust does not acquire any further assets; and
  4. if the group wishes to acquire further assets within a trust structure, a new trust should be established ensuring that it has none of the technical deficiencies the problematic trust deed contains.
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 Cold Chisel song 'Forever Now’.

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Tuesday, April 30, 2024

Dreamworld?** - Varying a power of variation

View Legal blog - Dreamworld?** - Varying a power of variation by Matthew Burgess

Previous posts have considered the issues about varying a trust that has not power to vary.

Previous posts have also looked at various aspects concerning the ability to vary trust instruments.

One iteration that is important to remember relates to attempts to vary problematic power of variation.

In other words, if a trust instrument has a variation power that is considered too narrow to achieve wider objectives, is it possible to use the pre-existing variation power to vary that clause of the trust instrument and create a wider power or variation?

As explained by the mantra ‘read the deed', the answer to this question will often depend on the exact terms of the trust instrument.

Very broadly however, the position appears to be as follows:
  1. If there is a restriction on how the variation power may be exercised, it is generally not possible to vary the power to remove that restriction.
  2. In other words, a trustee cannot implement steps indirectly to achieve something that is prohibited via direct action.
  3. The reason for this conclusion is largely based on the rule that a trustee has an overriding duty to comply with the terms of the trust instrument as articulated on the settlement of the trust.
  4. The corollary is also true – i.e. if the power of variation expressly contemplates itself being varied, then the trustee should be able to do so.
  5. As is almost always the case with the trust deeds, there are a number of related potential issues that should be considered depending on the factual matrix.
  6. For example, if a particular trust instrument prohibits distributions to a certain person, but not to a trust of which that person is a potential beneficiary, would a ‘back to back’ distribution from the initial trust to the second trust and then to the relevant person constitute a breach of trustee duties?
  7. There is certainly case law to support an argument that where a trustee takes steps to achieve an ulterior purpose, this can constitute a ‘fraud on the power', which means the arrangements may be held to be void by a court.
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 Midnight Oil song 'Dreamworld’ – inspired by the Cavill Hotels and Star Hotel mentions last week and the icon line ‘the breakfast Creek Hotel is up for sale’.

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Tuesday, April 23, 2024

Star Hotel** - When two wrongs make anything but a right

View Legal blog -  Star Hotel** - When two wrongs make anything but a right by Matthew Burgess

Last week’s post considered one of the leading cases in relation to a failure to follow the specific requirements of a trust instrument when appointing a beneficiary.

In that case, the failure to validly appoint a beneficiary caused significant difficulties due to subsequent purported distributions of income to the party.

In summary, it was held as follows:
  1. The attempted distribution of income to an invalidly appointed ‘beneficiary' is a nullity.
  2. On this basis, the distribution can be set aside as void ‘ab initio' – in other words, the distribution itself is taken to never have occurred (this aspect of the decision relied on an earlier case of Re Cavill Hotels Pty Ltd [1998] 1 QdR 396.
  3. Where a purported distribution of income fails, the entitlement of valid potential beneficiaries will depend on the relevant original distribution minute initially.
  4. If the relevant distribution minute does not address who receives a failed distribution, then the default provisions, if any, under the trust instrument will apply.
  5. The ability for any default clause under a trust instrument to operate effectively will depend upon whether they do in fact trigger a distribution within the relevant income year. As profiled in an earlier post, some trust deeds do not operate effectively in this regard.
  6. There is also a risk that if there is no valid default or gift over provision, then the assets of the trust pass on a resulting trust to the settlor. This outcome is at best problematic, particularly given that the settlor is often an unrelated third party such as an accountant or lawyer.
Practically, a trustee would need to reimburse the trust (or each underpaid beneficiary) to the extent of the invalid distribution from their own assets.

Trustee Exposure also potentially extends to other losses, for example overpaid income tax that may have become unrecoverable from the Tax Office (eg due to being out of time).

While in theory the trustee would be entitled to recover amounts it personally compensates the trust for from the overpaid beneficiary, practically if that beneficiary does not have assets, recovery attempts may fail.

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 Cold Chisel song 'Star Hotel’ – inspired by the Cavill Hotels case mentioned above.

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Tuesday, April 16, 2024

A seven nation army**? - How many resolutions does it take to create a valid appointment?

View Legal blog - A seven nation army**? - How many resolutions does it take to create a valid appointment by Matthew Burgess

Previous posts have looked at various aspects of trust related strategies recommended by accountant Steve Hart, that over time caught the attention of the Tax Office.

Previous posts have also considered various aspects of the mantra ‘read the deed'.

Recently, I was reminded of a decision, which highlights the importance of both of these concepts, namely the decision in Idlecroft Pty Ltd V Commissioner of Taxation [2004] FCA 1087.

The factual matrix in this matter was relatively complex. Arguably, the key aspect related to a purported nomination of a beneficiary.

The relevant clause in the trust instrument gave the principal of the trust the power to nominate beneficiaries by notice in writing to the trustee.

Under the purported written nomination, the principal did sign the document, however it was noted in the instrument that the signature was in his capacity as a director of the trustee company.

The court held that the document failed to satisfy the requirements under the trust deed for the principal to provide the trustee with written notification of the appointment of beneficiary.

In turn, this meant that the subsequent distributions of income to the beneficiary, who was not in fact validly appointed, failed.

Next week’s post will summarise some of the consequences of this failure.

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 White Stripes song '7 Nation Army’.

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Tuesday, April 9, 2024

Trust deed without a power to vary: you'd better run, run, run** to court

View Legal blog - Trust deed without a power to vary: you'd better run, run, run** to court by Matthew Burgess

Posts over recent weeks have considered the issues about varying a trust that has no, or an inadequate, power to vary.

An iteration on the theme is set out in the decision of Budumu Pty Ltd [2021] NSWSC 522.

In this case a power to vary was granted under the trust instrument, however it was only able to be relied on during the life time of 2 named (primary) beneficiaries; both of whom had died by the time the variation was required.

Court approval was therefore needed, and granted, in order to ensure the trust avoided the land tax surcharge in relation to foreign beneficiaries.

A further example is provided in the decision of Casibond Pty Ltd: In the matter of George Tsivis Family Trust [2021] NSWSC 320. In this case, a trust deed had no formal power of variation, however did have the following provision:

'(The Trustee may) generally, determine all matters as to which any doubt, difficulty or question arises in relation to the Trust Fund and every such determination shall bind all parties interested in the Trust, but nothing in this sub-clause shall prevent the Trustee or any person interested in the Trust Fund from applying to the Court.'

This provision was held to be insufficient to allow the trustee to avoid the application of the foreign beneficiary surcharge, however again the court approved steps allowing the desired outcome.

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 Hunters and Collectors song 'Run, Run, Run'.

Listen here:

Tuesday, April 2, 2024

Little room** (to move) - Varying a power of variation

View Legal blog - Little room** (to move) - Varying a power of variation by Matthew Burgess

Posts over the last couple of weeks have considered the issues about varying a trust that has not power to vary.

Previous posts have also looked at various aspects concerning the ability to vary trust instruments.

One iteration that is important to remember relates to attempts to vary problematic power of variation.

In other words, if a trust instrument has a variation power that is considered too narrow to achieve wider objectives, is it possible to use the pre-existing variation power to vary that clause of the trust instrument and create a wider power or variation?

As explained by the mantra ‘read the deed', the answer to this question will often depend on the exact terms of the trust instrument.

Very broadly however, the position appears to be as follows:
  1. If there is a restriction on how the variation power may be exercised, it is generally not possible to vary the power to remove that restriction.
  2. In other words, a trustee cannot implement steps indirectly to achieve something that is prohibited via direct action.
  3. The reason for this conclusion is largely based on the rule that a trustee has an overriding duty to comply with the terms of the trust instrument as articulated on the settlement of the trust.
  4. The corollary is also true – i.e. if the power of variation expressly contemplates itself being varied, then the trustee should be able to do so.
  5. As is almost always the case with the trust deeds, there are a number of related potential issues that should be considered depending on the factual matrix.
  6. For example, if a particular trust instrument prohibits distributions to a certain person, but not to a trust of which that person is a potential beneficiary, would a ‘back to back’ distribution from the initial trust to the second trust and then to the relevant person constitute a breach of trustee duties?
  7. There is certainly case law to support an argument that where a trustee takes steps to achieve an ulterior purpose, this can constitute a ‘fraud on the power', which means the arrangements may be held to be void by a court.
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 White Stripes song 'Little Room’.

View here: