Tuesday, May 21, 2019

Is it the end of the trust as we know it?**

A critical aspect of every trust is the period for which a trust can last – often referred to as the perpetuity period or the vesting day of the trust.

As a rule of thumb, any review of a trust deed that we perform always starts with checking the exact vesting date. We have had countless situations where this review has in fact led to the discovery that the trust itself has ended (in one instance, almost 7 years earlier).

Generally, so long as steps are taken before a trust vests, it should be possible to extend the life of a trust to the maximum period allowed at law (ie the perpetuity period), which in most cases is 80 years – see the following posts for more comments in this regard –

Extensions to vesting dates – some lessons from Re Arthur Brady Family Trust; Re Trekmore Trading Trust

Fairytale of Canberra - The Tax Office plays Secret Santa as the long awaited guidance on trust vesting gets released

In some cases, it may also be possible to extend the life of the trust so that it complies with the laws of South Australia – as most people are aware, there is effectively an unlimited perpetuity period available via South Australian law.

** For the trainspotters, the title today is riffed from REM’s song of the same name, from 1987.

Tuesday, May 14, 2019

Sunny Afternoons - Counter-intuitive Tax Planning **

We had an adviser recently wanting to explore having a client make distributions from a family trust directly to a superannuation fund.

Historically (during the mid-1990s), this was a strategy that many were using until the government closed the loophole.

The way in which the loophole was closed was to treat all such income as 'special income' of the super fund or, as it was then renamed, 'non-arm’s length income'. This type of income is taxed at a flat rate to the fund of 45%.

Interestingly, what the adviser had realised however was that many trust distributions are now effectively taxed at 47% if they go to beneficiaries on the top marginal rate, given the increase in the Medicare levy.

Trust distributions to a superannuation fund may therefore be (marginally) tax effective initially and also a good way to ensure that superannuation savings are increased at a far greater rate than would otherwise be available if relying on the contributions within contribution caps.

** For the trainspotters, ‘Sunny Afternoon’ is one of the first tax referencing rock songs by the Kinks from 1966.

Tuesday, May 7, 2019

Is death (not) the end**; or can a will be varied after death?

One of the significant distinctions between a family trust and a testamentary trust is that the ability to vary a testamentary trust is generally very limited after the testamentary trust comes into effect.

Obviously while the testamentary trust is incorporated into a will, where the will maker has yet to die, then this document may be varied at any time.

In contrast, once the will maker has died, the general position is that it cannot be amended without court consent.

One potential exception to this general position is that if the will allows variations to be made and if the variation relates only to administrative type issues (as opposed to the substantive provisions in the will), then there may in fact be the ability to vary the document.

** For the trainspotters, the title today is riffed from Bob Dylan’s song of the same name, arguably made famous by Nick Cave and the Bad Seeds, listen hear (sic):

Tuesday, April 30, 2019

Unit trusts and excluding trustee Liability**

When establishing a unit trust structure, it is important to ensure the deed is properly crafted to expressly limit liability of the unitholders for debts of the trust.

As is well known, in a corporate structure, shareholders are not liable for the debts of the company.

Similarly, there is generally no right of indemnity for a trustee of a discretionary trust from the beneficiaries of the trust as they are not absolutely entitled to the trust assets.

In relation to unit trusts however there is a general principle that unless specifically excluded by the trust deed, the trustee will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders.

Failing to exclude this right of indemnity against the unitholders can therefore significantly undermine the asset protection advantages offered by structuring the investment through a unit trust.

The position in relation to unit trusts was confirmed in the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355. As usual, if you would like a copy of the case please contact me.

In this case a liquidator of a trustee company of a unit trust was able to force the unitholders to make good the deficiency of trust liabilities over its assets. The unitholders would have not been liable however if the trust deed had contained the relevant exclusion.

Including this type of exclusion expressly in a unit trust deed has been a relatively standard practice by most deed providers since this decision, for firms that do specialise in the area.

Where the exclusion does not exist in a current deed it is normally possible to implement the provisions by a deed of variation, so long as there are no potential issues on foot.

** For the trainspotters, the title today is riffed from Lorde’s song of the same name from 2017 listen hear (sic):

Tuesday, April 23, 2019

Oops! … I did it again**: amending existing agreements

An issue that often arises is the desire to amend an existing agreement, with effect from a particular date – regularly that date will be on and from the day the original agreement was entered into.

It is generally accepted that, as between the parties, an agreement can be effective and binding on whatever basis is desired. This does not mean however that an agreement can be changed such that it is binding retrospectively on third parties, such as revenue authorities.

Arguably the leading case in this area is Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation 2000 ATC 4201. As usual, if you would like a copy of the case please contact me.

In this case the parties purported to have an agreement entered into that caused adverse tax consequences amended some time later, with effect from the date of the original document.

In rejecting the effectiveness of the amended agreement in binding the Tax Office it was confirmed that a rectification by a court or by deed between the parties is the only approach that binds third parties. Such an approach however is only available where the parties are under a mutual mistake that the document they signed recorded the terms of their bargain, when in fact it did not.

Rectification does not operate to ‘alter the past’, rather it simply recognises what had in fact always been the case, namely that the true agreement between the parties was not correctly recorded in the document that was mistakenly signed.

Critically, rectification requires that there must have been a mutual mistake. In other words, ‘a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had’.

A mistake or misunderstanding, for example, as to the revenue consequences of an agreement is not a mutual mistake allowing rectification.

** For the trainspotters, the title today is riffed from Britney Spears song of the same name from 2000 see hear (sic):

Tuesday, April 16, 2019

How does it feel** - when a deed of rectification causes a resettlement?

Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.

The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.

Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties. 

The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.

The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the following posts Statement of principles to be finally amended, ATO releases draft determination on trust resettlements, and More comments on ATO resettlements determination).

The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.

In particular, it was confirmed that:

‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).

Importantly, a rectification also has retrospective effect.

That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.

As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.

** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):

Tuesday, April 9, 2019

Have you got time to rectify?**

Previous posts have looked at various aspects of deeds of variation, and in particular, the critical need to 'read the deed' before implementing any variation (see more here).

Where a purported deed of variation later proves to be ineffective due to a failure to follow the provisions of the trust deed, one approach that can provide a solution is a deed of rectification and clarification.

Generally, this approach will be a valid way to address previous inconsistencies, without the need for court approval.

Critically however, any attempt to rectify or clarify historical issues with a trust deed cannot do something that is beyond what was originally contemplated by the parties involved.

One example in this regard that we reviewed recently, involved a situation where a trustee was incorrectly inserted under a deed of variation as a beneficiary, in direct conflict with another provision of the trust instrument.

On discovery of the conflict some years after the deed of variation, it was clear that the only way to rectify the error would be to change the trustee with retrospective effect to a new entity. The deed of rectification approach was unavailable as the deed could not ignore the clear intention of the parties, which at the time was that the trustee should remain in its role and a rectification workaround would have ignored that fact.

** For the trainspotters, ‘time to rectify’ is a line from the Beatles song from 1965’s Rubber Soul ‘Think for Yourself’ listen hear (sic):