Tuesday, March 20, 2018

Don't Stop Believin' - Tax Office & superannuation proceeds trusts **

Previous posts have explored various aspects of superannuation proceeds trusts (SPT).

View the earlier posts at the following links -



As explained in these posts, historically there was a concern that the Tax Office may adopt a narrow interpretation of the tax legislation and mandate that the superannuation death benefits pass directly from a super fund to an SPT in order to access the excepted trust income concessions.

This was because, section 102AG(2)(c)(v) of the Tax Act allows infants to access excepted trust income where the transfer of funds to the SPT is 'directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund'.

In Private Ruling Authorisation Number 1012994963374, the Tax Office confirms it will accept that property transferred to the benefit of a minor by the widow or widower sourced from superannuation moneys originally paid to the widow or widower (ie not to the SPT), will still fall within the requirements of the Tax Act (and in particular section 102AE(2)(c)(ii)). As usual if you would like a copy of the Private Ruling please contact me.

In support of this interpretation the Tax Office references comments in the Canberra Income Tax Circular Memorandum (CITCM) 884 published in 1981 to confirm its view that superannuation monies are to be treated as if they formed part of the estate of the deceased person, even if there is an ‘interposed step’ where the funds pass through the hands of a surviving spouse.

This means that the requirement set out in section 102AG(2)(d)(ii) of the Tax Act will be met and in turn the assessable income of the SPT will be excepted trust income. Section 102AG(2)(d)(ii) ensures access to excepted trust income where funds are transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person and was transferred within 3 years after the date of the death of the deceased person.

** For trainspotters, in 1981, when the CITCM referenced here was released, Journey's song Don't Stop Believin' was one of the hits of the year. Given the likelihood many readers of today's post were not born in 1981, further learning is available here - https://www.youtube.com/watch?v=2NQIPVqLMUg

Image courtesy of Shutterstock

Tuesday, March 13, 2018

Superannuation and skirting the shoals of bankruptcy **

Matthew Burgess - Superannuation and skirting the shoals of bankruptcy

The Federal Court's decision in Cunningham (Trustee) v Gapes (Bankrupt) [2017] FCA 787 (Federal Court, Collier J, 13 July 2017) (Cunningham) is vital guidance for all advisers in relation to the interplay between superannuation death benefits and the Bankruptcy Act 1966.

In particular, the case highlights the fact that a superannuation death benefit paid via a deceased estate to a bankrupt beneficiary is divisible amongst the creditors of the bankrupt.

At a minimum therefore, advisers should consider advising clients who have at risk potential beneficiaries to utilise a binding death benefit nomination (BDBN). The BDBN should mandate that any death benefit is paid directly from the superannuation fund to a beneficiary at risk of bankruptcy.

Testamentary trusts

One additional strategy that should be considered in the context of deceased estates generally, and specifically in relation to superannuation death benefits, is the use of comprehensive testamentary trusts.

As readers will be aware, 1 of the key reasons that testamentary trusts are often recommended is due to the asset protection offered by the structure generally, and in particular where a potential beneficiary is at risk of suffering an event of bankruptcy.

This approach can help protect beneficiaries, regardless of whether a BDBN is in place, or where a BDBN is implemented and mandates payment of the death benefits to the legal personal representative for distribution under the will.

Importantly, testamentary trusts also provide significant flexibility from a tax planning perspective, as compared to the benefits being paid directly to the bankrupt beneficiary. Previous posts have explored a number of the tax planning issues in relation to testamentary trusts (see for example Taxation consequences of testamentary trust distributions - Part I, Taxation consequences of testamentary trust distributions - Part II and Testamentary trusts and excepted trust income).

Unfortunately, we have seen a number of examples recently where no testamentary trust has been incorporated under a will, with superannuation death benefits passing directly to the estate and then in turn to a bankrupt beneficiary. In other words, creating the exact same factual matrix as existed in Cunningham.

Key issues to remember

In summary, the key issues to be aware of in this type of situation are as follows:
  1. Where a beneficiary is bankrupt at the time of the death of the willmaker, the bankruptcy legislation mandates that the bankrupt's entitlements are to pass to their trustee in bankruptcy. 
  2. If there are any assets remaining after the bankruptcy has been discharged, then the beneficiary is entitled to those assets. 
  3. The right to due and proper administration of the deceased estate is an asset that forms part of the bankrupt's estate, and therefore also vests in the trustee in bankruptcy. 
  4. If an executor of an estate seeks to avoid assets passing to a trustee in bankruptcy where a beneficiary is entitled personally under the will, the executor will themselves be personally liable. 
Importantly, each of the above issues can be legitimately avoided by the appropriate structuring of a testamentary trust into a will, prior to death.

Where testamentary trusts are not included under a will, best practice dictates that the executor should obtain a formal declaration from each beneficiary, before making distributions to them under the will, whereby each beneficiary confirms that they are in fact solvent.

If a beneficiary refuses to provide the declaration, then further searches should be made by the executor to minimise the prospect that the executor might become personally liable to a trustee in bankruptcy.

A case study example

One example of a factual scenario we have been recently asked to assist with that highlights the importance of advisers working collaboratively in this area to deliver value to clients is as follows:

  1. An accountant had provided a written recommendation to a willmaker that testamentary trusts should be included in their will for asset protection purposes - this advice included a specific recommendation in relation to 1 beneficiary who had a history of financial misadventure in business activities. 
  2. The advice was provided to the willmaker's long-standing, although unspecialised, lawyer who dismissed the recommendation for testamentary trusts on the basis that it was an 'unnecessary complication that accountants and financial planners push as part of their product sales'. 
  3. At the time of the willmaker's death, the relevant son was indeed bankrupt. 
  4. In working to discharge their duties, the executors of the will asked us to assist in obtaining probate of the will and also confirm that they were obliged to pay the bankrupt beneficiary's entitlements to the trustee in bankruptcy. We were able to obtain probate and also confirm the duty that the executor was obligated to pay to the trustee in bankruptcy. 
  5. The executors also sought advice from specialist litigation lawyers as to whether the accountant or the lawyer could be potentially liable for failing to ensure that the willmaker included a testamentary trust in their will. 
  6. The specialist litigation advice suggested that the prospects of recovering any damages were in fact quite low for the bankrupt beneficiary. 
  7. The primary reason for this was that if a testamentary trust had been used, then the bankrupt beneficiary would have simply been 1 of many potential beneficiaries, and the only 'asset' that they would have received would have been the right to due administration of the testamentary trust. This right to due administration would arguably have no monetary value and therefore the damages awarded on suing the lawyer and accountant would have probably only been nominal. 
The above conclusion was not ultimately tested through the court system. It would therefore seem an unnecessarily risky approach for advisers to dismiss the benefits of testamentary trusts for bankrupt beneficiaries on the basis that they may not be liable if their advice is later shown to be inappropriate.


The need to take active steps to protect assets and wealth, as well as concerns with the overall effectiveness of the steps taken, are not new concerns.

Arguably however, those concerns have never been taken more seriously by a greater number of people than they are currently, particularly in relation to superannuation death benefits.

The recent case law in this area is a timely reminder of the need to ensure comprehensive asset protection strategies are implemented as part of an integrated tax and estate planning exercise.

As usual, if you would like copies of any of the cases mentioned in this post please contact me.

The above post is based on the article we had published in the Weekly Tax Bulletin.

** For trainspotters, ‘skirting the shoals of bankruptcy’ is a line from a song named ‘Accountancy Shanty’ by Monty Python from their 1983 movie ‘The Meaning of Life’, watch here – https://www.youtube.com/watch?v=7YUiBBltOg4

Image courtesy of Shutterstock

Tuesday, March 6, 2018

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

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/rynjlLBormE

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

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.

** For trainspotters, ‘Don’t ask me why’ is song by Billy Joel from 1980, learn more here –


Tuesday, February 27, 2018

BDBNs v reversionary pensions – it’s not enough to debate **

Matthew Burgess BDBNs v reversionary pensions – it’s not enough to debate

Last week’s post (Scissors, paper, rock (you win again) – BDBNs v pensions **) considered the situation where there is a binding death benefit nomination (BDBN) in place for superannuation savings that are also the subject of a reversionary pension

As with many areas of potential conflict, the starting point for an answer to this type of situation will be the terms of the trust deed and pension documents.

In the absence of a clear answer in the legal documents (and as mentioned briefly last week), the Tax Office’s position appears to have been confirmed via a National Tax Liaison Group (Superannuation Technical Sub-group) in March 2010.

The minutes confirm as follows:
‘There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.

While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs.

It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust.

The ATO’s view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner.

It is only where a trustee may exercise its discretion as to which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.’
** For trainspotters, ‘It’s not enough to debate’ is a line from a song named ‘Weenie Beenie’ on the first Foo Fighters album in 1995, listen here – https://www.youtube.com/watch?v=oI1xAkzHgXc

Image courtesy of Shutterstock

Tuesday, February 20, 2018

Scissors, paper, rock (you win again) – BDBNs v pensions **

Matthew Burgess Scissors, paper, rock (you win again) – BDBNs v pensions

An issue that has been the subject of some debate over time is what takes priority where a valid binding death benefit nomination (BDBN) is in place, however the relevant member dies while in receipt of a pension which was established with a reversionary beneficiary.

Best practice dictates that both documents should ideally articulate which has priority, although often there is however ambiguity.

Where however there is limited guidance addressing the issue, it is generally accepted that the reversionary pension will take precedence over the BDBN.

The reasons for this include:
  1. A valid reversionary pension would automatically remove the deceased member’s death benefits from a fund, and therefore, any BDBN will have no assets to attach to. 
  2. The Tax Office has confirmed via its national tax liaison group committee that the preferred interpretation (subject to any specific provisions to the contrary) is that the pension does take priority. 
  3. Practically, in the client specific situations that we have seen, the approach adopted has always been that the reversionary pension takes priority. 
** For trainspotters, ‘You Win Again’ is song by legendary band the Bee Gees, learn more (including about mullet hair styles, circa 1987) here – https://www.youtube.com/watch?v=KZY9oYSSjFI

Image courtesy of Shutterstock

Tuesday, February 13, 2018

(To be) specific asset BDBNs **

Matthew Burgess - (To be) specific asset BDBNs

As highlighted in previous posts, there are a myriad of issues that should be taken into account before a binding death benefit nomination (BDBN) will be held to be valid (see for example - http://blog.viewlegal.com.au/2012/02/superannuation-and-binding-death.html, http://blog.viewlegal.com.au/2014/03/death-benefit-nominations-read-deed.html, http://blog.viewlegal.com.au/2014/03/double-entrenching-binding-nominations.html).

One issue that can arise is whether a BDBN can apply to specific assets, as opposed to simply nominating a percentage of total assets, which is the standard approach for most nominations.

The generally accepted position seems to be that given there is nothing in the superannuation legislation that prevents distributing specific assets under a BDBN, so long as the trust deed for the fund does not prohibit it, the approach is permissible.

If a specific asset BDBN is desired, it will also be necessary to ensure practical issues such as the following are addressed –

  1. the relevant asset must be segregated to the account of the member making the BDBN;
  2. compliance with all aspects of the BDBN rules under the trust deed;
  3. the various issues that should be factored into any BDBN, including changes in the values of assets, the wider estate plan, what is to occur if the intended recipient predeceases the person making the BDBN and the revenue consequences; and
  4. finally, the scenario where the asset the subject of the specific asset BDBN is sold prior to the member’s death should also be contemplated.

** For trainspotters, ‘To be specific’ is a line lifted from the song ‘Fidelity Fiduciary Bank’ from Mary Poppins, see here – https://www.youtube.com/watch?v=XxyB29bDbBA

Image courtesy of Shutterstock

Tuesday, February 6, 2018

When one is no more fun – another tip on changing trustees **

Matthew Burgess When one is no more fun – another tip on changing trustees

As highlighted in previous posts, there are a myriad of issues that should be taken into account in relation to any decision to change the trustee of a trust (see for example - Changing trustees of trusts – Simple in theory … not so simple in practice).

One critical issue under the Trusts Acts in most states is the rule that where there are two or more individual trustees appointed initially of a trust, the retiring trustees will continue to be liable unless replaced by:
  1. at least two individual trustees; or 
  2. a ‘trustee corporation’. 
For the purposes of these rules the ‘trustee corporation’ must be a formal trustee company, as opposed to a private propriety company.

Importantly, the trust instrument may override these rules and allow trustees to be discharged, even when replaced by a single trustee.

Often however trustees will be changed without the required permission in the trust instrument, completely ignorant of the Trust Acts rules, meaning the retiring trustees unknowingly continue to be liable.

For obvious reasons we therefore generally recommend an amendment to any trust deed that does not expressly override the Trusts Acts requirement, however this is approach is also subject to the standard mantra ‘read the deed’ as often deeds will not in fact permit this type of variation.

In situations where a variation is not permitted, one work around that helps in some (but unfortunately not all) states is to appoint (say) one individual trustee and a propriety company of which the individual trustee is the sole shareholder and director.

** For trainspotters, ‘More Fun’ is song by legendary Australian band Radio Birdman, learn more here – https://www.youtube.com/watch?v=xcZc5d0Wnws

Image courtesy of Shutterstock