Tuesday, June 2, 2020

Mine, all mine** - Trustees and SMSF borrowing arrangements


Over the last couple of weeks, the posts have focused on the various issues that arise in relation to having the one company act as trustee for multiple trusts.

One area of the law where the ability to have the same company act as trustee for multiple trust relationships is prohibited is in relation to the limited recourse borrowing arrangements that self-managed superannuation funds can enter into.

Briefly, we confirmed to an adviser recently that in relation to these types of borrowing arrangements:

(a) the need to have a separate bare trust is driven by the requirement under section 67A of the Superannuation (Supervision) Industry Act that the borrowing arrangement relates to a ‘single acquirable asset’, meaning a separate trust must be established for each acquisition; and

(b) the bare trust needs to have a different trustee to the super fund because under trust law, if the sole trustee is also the sole beneficiary, the trust ‘merges’ and ceases to exist.

** for the trainspotters, the title here is riffed from the Portishead song ‘All Mine’.


Tuesday, May 26, 2020

Right by your side** - Commercial issues with trustees performing many roles

View Legal blogpost 'Right by your side** - Commercial issues with trustees performing many roles ' by Matthew Burgess

As mentioned in last week's post, it is possible for the same company to act as trustee for a number of trusts.

Such an arrangement should not change the indemnity position if a liability is incurred, however there are a number of commercial reasons that need to be considered before having the same company act as trustee for multiple trusts.

Some of the issues in this regard include:
  1. While the current legal position is that the assets of each trust will be segregated if a liability was to arise, this position in theory could be changed by future cases or legislation. For obvious reasons, most clients do not want their arrangements to become a test case.
  2. If litigation was to arise in relation to one trust, this would force the parties involved to change the trustee of the other trusts not otherwise subject to the litigation. This can be practically an unnecessarily difficult process that in some instances is actually challenged by the relevant creditors.
  3. The costs for maintaining separate trustee companies are relatively nominal.
  4. From an ease of administration perspective, having separate trustee companies for each separate trust can minimise the risk of confusion.
  5. From a land tax grouping perspective, separate trustee companies can, in some jurisdictions, provide a planning opportunity to reduce the overall tax rates that apply.
  6. If the company is acting as a trustee of a SMSF concessional ASIC annual fees are only available if the company performs this role solely.
** for the trainspotters, the title here is riffed from the Eurythmics song ‘Right by your side’.

Tuesday, May 19, 2020

Trustee companies and multiple plays**

View Legal blogpost 'Trustee companies and multiple plays** ' by Matthew Burgess

Previous posts have looked at various issues that arise in relation to trustee companies (let me know if you would like access to any of these posts).

One issue that comes up relatively regularly is the way in which the trustee indemnity provisions work where the same company acts as trustee for multiple trusts.

Briefly, the strict legal position is that the right of indemnity of a trustee is limited to the assets of the trust in relation to which the liability was incurred.

In other words, where a company is a corporate trustee for multiple trusts, a claim or liability in relation to one trust should not expose the assets of the other trust.

Practically however, if the trustee becomes insolvent it can be difficult to establish the beneficial ownership of particular assets to the liquidator’s satisfaction, particularly given some third parties such as ASIC and the NSW Titles Office do not record the name of the beneficial owner.

There are a number of commercial issues that arise in relation to the same company acting as trustee for multiple trusts and some of these will be considered in next week's post.

** for the trainspotters, the title here is riffed from the John Lennon song that has a line mentioning multiple plays, namely ‘Beautiful Boy’.

Tuesday, May 12, 2020

No purging** Non-lapsing interposed entity elections

View Legal blogpost 'No purging** Non-lapsing interposed entity elections' by Matthew Burgess

Last week's post highlighted the fact that in a practical sense, interposed entity elections (IEEs) are very difficult to revoke.

For example, the Tax Office has confirmed in an Interpretive Decision (ID2013/21 – as usual, let me know if you would like a copy of this decision) that IEEs remain in force even if the trust that is a subject of the related family trust election (FTE) ceases to exist.

In particular, where an entity makes an IEE in relation to a family trust to be within the family group of that family trust, it will be taken to be revoked where the FTE for that trust is revoked.

According to the Tax Office, where a family trust is simply wound up and no steps are taken before the wind up to revoke any FTE, then both the FTE and IEE continue to remain in force indefinitely.

This means that the penal rate of tax will continue to apply to the entity that has made the IEE for any distributions it makes outside the family group of the family trust that has been wound up.

While the ability to revoke an FTE is also relatively narrow, whenever considering the windup of a trust that has made an FTE, specific thought should be given to whether the FTE should be revoked before finalising the wind up.

** for the trainspotters, the title here is riffed from the Midnight Oil song that has a line mentioning elections, namely ‘When the generals talk’.

Tuesday, May 5, 2020

Revoking an interposed entity (in the year of) election**

View Legal blogpost 'Revoking an interposed entity (in the year of) election**' by Matthew Burgess

Arguably one of the more complex areas in relation to family trusts relates to interposed entity elections (IEE).

We have had a number of advisers contact us recently in relation to the exact way in which IEEs operate, and unfortunately, preferred distribution arrangements are often effectively prevented due to historical elections that, with the aid of hindsight, were arguably were unnecessary.

While there are some circumstances where an IEE can be revoked, at least in the situations we have looked at recently, the ability to access the revocation provisions is limited.

This is because, among other requirements, a revocation is only available where:
  1. It is done within 4 years of the original IEE being made.
  2. The IEE must not have been relied on at any time.
Next week's post will look at an Interpretive Decision from the Tax Office, which further highlights the restrictive nature of IEEs.

** for the trainspotters, the title here is riffed from the U2 song ‘Desire.


Tuesday, April 28, 2020

Mr Klaw (back)** - Cummins case and the bankruptcy clawback rules



Today’s post considers the above-mentioned topic in a ‘vidcast’.

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

In terms of the timeline on the Cummins case, there was a long history here with no returns lodged. It’s going back literally decades. We’ve got a 1987 event where a house on Sydney Harbour goes into the wife’s name. No tax returns were lodged for many years in the lead up to 1987 transfer. In around the year 2000, he was about to retire. He was doing the work for a law firm and the law firm paid his bill, but short paid him to the extent of 48.5 cents. He wrote back and said hang on a second, i.e. I sent you a $100 bill, you only pay me $51.50, what's going on?

The law firm said, “Oh, Mr Cummins, (QC or whatever he was), yes, we will give you your other 48.5 cents when you give us an ABN.” Mr Cummins said, “What’s an ABN? They said you get that from the Tax Office.”

He rang the Tax Office and said, “I need one of these ABNs.” They said, “Okay, that’s fine. Give us your TFN and we'll give you an ABN.” Mr Cummins said, “What’s a TFN? I don’t know what you’re talking about.”

The suspicion is that at that point the Tax Office routed him back to the investigation division. By 2002, Cummins was in the middle of an audit because he hadn’t paid tax for decades. You do not need a tax file number if you never pay tax. That was what he had managed to do during his entire career.

Now if you get litigated against in 2002, four years from 2002 takes you back to about 1998. 1998 is a long, long way after 1987. The question was this. Was the Sydney Harbour property, which in the meantime had gone up in value quite significantly, exposed on Cummins going bankrupt?

Cummins’ argument you would guess was that no, outside the clawback period, I’m in the clear, yes, I’m bankrupt. But I don’t care about it because I don’t own anything in my name. What does it matter?

The court said no. The court said that you need to look at the main purpose that’s sitting around the 1987 transaction. The mere fact that the assessments had not actually issued back in 1987 when the transfer took place was held to be irrelevant.

The debt was still there. The fact that the tax debt hadn't crystallised, or Cummins didn’t actually know about it because the tax man hadn’t found him yet, was actually absolutely irrelevant. Cummins’ purpose at the time of moving the family home was to defeat creditors. Therefore, the whole transaction could be unwound because the 4-year limit only applies for transfers made when there are no known liabilities – if the liabilities (as here) are known, then the clawback period is unlimited.

As we understand it, it’s basically the only textbook of its kind in Australia that’s practically focused on how to deliver the asset protection piece. Very happy to give one of those away.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the They Might be Giants song ‘Mr Klaw’.


Tuesday, April 21, 2020

EPAs and SMSFs – Bit like Generals and Majors**

View Legal blogpost 'EPAs and SMSFs – Bit like Generals and Majors** ' by Matthew Burgess

Following recent posts about attorney appointments it is important to also remember the special rules that apply in relation to self-managed superannuation funds (SMSF).

As is well understood, a superannuation fund is an SMSF where all members of the fund are trustees or directors of a corporate trustee – see sections 17A(1) and (2) of the Superannuation Industry (Supervision) Act 1993.

A super fund is also a complying SMSF where an EPA of a member is a trustee or a director for a corporate trustee in place of a member during any period that attorney has an enduring power of attorney (EPA) in respect of a member of the fund who themselves is unable to act (see section 17A(3)(b)(ii)).

In order for section 17A(3) to apply the person seeking to become a trustee or director needs to be appointed under an EPA of the member who cannot act. A general power of attorney will not be sufficient.

Practically, the only way in which an attorney under an EPA can act in the role as trustee for an SMSF is for the existing member to be removed from their role as trustee (or director of the corporate trustee as the case may be), and for the attorney under that member’s EPA to be appointed as the new trustee or director in place of the member.

In addition to satisfying the statutory provisions, the trust deed for the SMSF must also be complied with.

Importantly, the attorney for the member performs their duties as a trustee of the SMSF, or a director of the corporate trustee of the SMSF, pursuant to their appointment to that position, rather than as an attorney or agent for the member.

The Tax Office has detailed their views in this area in Self-Managed Superannuation Funds Ruling SMSFR 2010/2. As usual, if you would like a copy of this ruling please let me know.

** for the trainspotters, the title here is riffed from the XTC song ‘Generals and Majors’.