Friday, December 17, 2010

Bamford driven review of Tax Act

While I had flagged there would be no further post this year, the Government has made a mid December announcement yesterday worth noting.

As you will read elsewhere, it has been confirmed that there will be a full review of the way in which trusts are taxed.

Relevant extracts of Bill Shorten's announcement are set out below.

While there is obviously a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out.
1. There are major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
2. A public consultation process (has been announced) as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and rewriting them into the 1997 Act.
3. "In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer
4. "The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income".
5. Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
6. “Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year".
7. "Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation".

Monday, December 13, 2010

Final blog for 2010

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s blog will be the final formal blog until 2011.

Similarly, the Twitter postings will also take a hiatus until the New Year.

Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read and the many advisers who have taken the time to provide feedback in relation to the blog postings.

Thursday, December 9, 2010

Unpaid present entitlement warning

There can be a number of traps in relation to the provisions of a trust deed in the context of the Tax Office’s approach in relation to unpaid present entitlements (UPEs).

Arguably, the most concerning trust deed provision that we have seen in recent times is a clause in the deed of one provider that on a plain reading of the deed seems to automatically cause any UPE to become a loan at call.

Obviously, this provision can have significantly adverse consequences, particularly for those clients wishing to 'quarantine' UPEs that existed as at 16 December 2009.

Until next week.

Monday, November 29, 2010

Trustee indemnity case - Appeal

Even though the post last week touched on a court case that was relatively widely reported, the importance of the streaming decision meant I felt it appropriate to profile.

This week another court decision caught my eye, even though it was simply in relation to the granting of leave to appeal a previous decision.

Many readers will have noticed the 'Bruton Holdings' case from earlier in the year. In that case, a single court judge held that a corporate trustee was not indemnified by a trust for expenses incurred in (successfully) challenging the Tax Office. The lack of indemnity was largely based on the fact that the expenses were incurred after it had ceased to be trustee of the trust.

An appeal has now been granted against the original decision on the basis that -

(a) the issues are of general importance to the powers and rights of trustees; and
(b) the state of the law regarding the powers and rights of bare trustees is not settled.

Until next week.

Monday, November 22, 2010

Streaming decision released

There was confirmation last week from the Queensland Supreme Court that where a trust deed of a discretionary trust has appropriate powers and the trustee resolutions are appropriately crafted, a trustee can allocate franking credits differentially from net income.
For those interested the full title of the case is 'Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417' (Supreme Court of Qld, Applegarth J, 11 November 2010).
The decision turned to a large extent on the terms of the trust deed and the fact that the trustee:
(a) could treat franking credits as income of the trust capable of distribution;
(b) had discretion to distribute franking credits to different beneficiaries; and
(c) had the power to stream different categories of income between beneficiaries.
In light of the above powers, in brief terms, the key aspects of the decision were as follows:
1. selective allocation of franking credits is possible under section 207-35 ITAA 1997;
2. section 97 ITAA 1936 takes a proportionate approach to the distribution of net income (as set out in the Bamford decision);
3. section 207-35 is an exception to Division 6 (and therefore section 97) ITAA 1936;
4. franking credits need not follow the shares of net income included in a beneficiary's assessable income on an equal footing;
5. net income (under section 95 ITAA 1936) does not need to exceed the franking credits included in assessable income for those credits to pass through to beneficiaries; and
6. the ATO's comments that franking credits may not be able to form part of the income of a trust estate for trust law purposes because they are 'merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach' could not be accepted;
7. ultimately, franking credits were held to have some attributes of income under the tax legislation, therefore they could be dealt with by the trustee.
Until next week.

Monday, November 15, 2010

What difference does 1% make?

Last week we were walking through an asset protection exercise with a business owner and one of the recommendations was that the family home (currently owned by the wife and husband as joint tenants) should be converted to tenants in common ownership and 49% of the total interest of the house owned by the husband was then to be transferred to the wife.

An earlier post touches on the difference between owning an asset as joint tenants as opposed to tenants in common - a summary of the distinction is available via the 'core services' section of the View Legal website (

Today’s post focuses on the reasons why an at-risk spouse might retain a 1% interest in a property.

The main reasons that an at-risk spouse would retain a nominal percentage interest can include:

1. Protection against spouse or relationship difficulties.

2. Protection against the majority owner seeking to encumber the property. In particular, if there is (for example) a gambling issue that arises, no mortgage may be taken out over the property without the consent of the spouse who owns the nominal interest.

3. For ease of security arrangements – often a financier will prefer to see the at-risk spouse’s name on title documentation, even if their actual ownership interest is nominal.

4. Stamp duty savings. This issue is not as relevant as in days gone by because generally there is no longer any substantial stamp duty benefit, even if both spouses retain an interest in the property.

In relation to stamp duty, it should be noted that in most states there are concessional provisions which apply where one spouse who owns 100% of a family home and transfers 50% (but no more or less) to their spouse and this is another concept that we may deal with in a future post.

Until next week.

Monday, November 8, 2010

Virtual company registers

We are seeing an increasing number of accounting firms that we assist with company establishments opt to receive all documentation electronically, as opposed to the traditional provision of a physical folder to store the company register.

The ability to maintain a company register in electronic form only is a relatively recent innovation under the Corporations Act and particularly for accountancy firms who act as registered office for a number of their clients’ companies, is certainly one worth exploring.

Obviously, there are a number of issues that always need to be taken into account, however broadly, so long as the following issues are addressed, it should be possible to avoid the need for a physical register to be stored:

1. The company must resolve that it intends to maintain an electronic, as opposed to a physical, register.

2. The relevant technology steps need to be taken - McR often assists accounting firms in this regard.

3. The company must have a process by which a physical register can be produced if ever required.

Until next week.

Monday, November 1, 2010

'Same plane' provisions in wills

Most estate planning lawyers recommend that every single will contain a 'calamity' provision.

This provision is also sometimes referred to as the 'same plane' clause – i.e. it is the one that applies if the will maker and all of their intended immediate beneficiaries die in the same accident.

Last week, we had a situation where the two clients (who were spouses) each had quite particular (and different) provisions that they wanted to see apply if the two of them and their children died at once. During the discussion it became clear that each spouse was considering the total combined assets as solely 'their' assets.

Our strong recommendation was that each spouse should in fact have mirror provisions under their respective wills and simply divide 50% of the entire estate according to each of their respective wishes.

The reason for this recommendation was that the only time a calamity provision does in fact apply is when both spouses and all of the immediate family have passed away. In other words, the estate should be viewed as one combined estate; not two separate ones.

Until next week.

Monday, October 25, 2010

Complete unity in relation to tax reform for trusts

Many of you will have seen the announcement last week that each of the major taxation professional bodies have called for proper reform to the taxation of trusts.

Undoubtedly, the ongoing angst caused by the ATO’s approach on UPEs has been a significant catalyst for the call, however the reality is that the piecemeal approach to taxation of trusts has been a longstanding problem.

A full copy of the press release providing more context in this regard is set out below.

Until next week.

Four of Australia's leading professional tax and accounting bodies, representing over 100,000 accountants and tax advisers, have united to call for sweeping reforms of the antiquated laws governing the taxation of trusts.

In 2009 the ATO introduced a controversial crackdown on "unpaid present entitlements" – distributions by trusts to associated private companies that were not paid, but remained intermingled with other funds of the trust.

The professional bodies believe the Tax Commissioner's technical interpretation of the taxation laws (Division 7A of the Income Tax Assessment Act 1936) that apply to unpaid present entitlements is not supportable and is at odds with the original policy intent.

While the practice statement on unpaid present entitlements released by the ATO last week embraced some of the practical recommendations put forward by the professional bodies, the fundamental incorrectness of the ATO interpretation remains. This will increase the cost of a major source of financing typically employed in the SME market.

The professional bodies have called for an urgent test case to challenge the Tax Commissioner's interpretation of the laws that apply to unpaid present entitlements, and will raise the issue again at a meeting today in Canberra of the ATO's peak external stakeholder forum, the National Tax Liaison Group.

The recommendation is for the test case to be heard by the Federal Court and funded under the ATO's test case funding program, to provide judicial guidance on whether the Commissioner's position on this important aspect of the law is correct. The Tax Commissioner has accepted the proposition that a test case is an appropriate vehicle through which to resolve this issue.

The unpaid present entitlement issue, alongside a High Court decision earlier this year on the taxation of trust income and distributions, highlights the need for major review into the taxation of trusts. The Henry tax review, along with recommendations made recently in Treasury’s "Red Book," both indicate that the government should re-write the trust laws which are more than 50 years old and are not adequate to deal with the modern use of trusts as trading and investment vehicles.

Institute of Chartered Accountants in Australia National Institute of Accountants Taxation Institute Taxpayers Australia

Friday, October 22, 2010

Company owned business succession insurance

Last week, we revisited with an adviser a strategy that had been put in some years prior by a trading company.

The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.

The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.

While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.

Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:

1. Have the funds transferred to the exiting shareholder or their estate.

2. Ensure that the exiting shareholder transferred their shares.

As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.

Until next week.

Monday, October 11, 2010

Lineal descendant trust

'Lineal descendant trusts' come in many shapes and forms.

Undeniably, the popularity of the structure has been significant not only in recent years, but right back to the establishment of trusts as an asset protection and tax planning vehicle in early English law.

Whenever considering the establishment of such a trust (or reviewing a pre-existing trust), it is critical to understand how the legal firm involved in crafting the document has approached the task.

Some common themes for the structure of this kind of trust include:

1. Providing that income distributions can be fully discretionary amongst both lineal and non lineal descendants, with capital only able to be distributed to lineal descendants;

2. Both income and capital distributions being limited to lineal descendants;

3. Income and capital distributions limited to lineal descendants, unless otherwise approved by, say, the appointor.

Until next week.

Tuesday, October 5, 2010

When is a trust not a trust

One adviser contacted me after the post a couple of weeks ago about powers of variation and sent a trust deed for a brief initial review to our office.

For probably the 5th or 6th time in recent years, we discovered a situation where the trust itself had in fact already ended.

In other words, the vesting day for the trust had passed and, unfortunately, neither the client nor the adviser had realised that this event had taken place.

Practically the question as to whether the power to vary was wide enough, was easy to answer – it was irrelevant as there was in fact no longer a trust.

The more problematic issues however revolved around how exactly the income and capital of the trust should have been dealt with over the last 3 years since the trust had ended and what issues need to be addressed under -

1. trust law;

2. trustee liability;

3. tax legislation; and

4. stamp duty law.

Until next week.

Thursday, September 30, 2010

ATO feedback on tax payer alerts

Many of you will have seen the recently released minutes from the National Tax Liaison Group meeting held on 23 June.

One item of interest relates to the ATO’s view on taxpayer alerts (TA).

In particular, the ATO claims that TAs are simply intended as an 'early warning' to taxpayers and their advisers of significant new and emerging higher risk tax planning issues or arrangements the ATO has under risk assessment.

The ATO claims TAs are essentially a 'press release' about issues causing it concern which it releases 'in the interests of an open tax administration'. The ATO stressed that TAs are not expected to replace rulings, and are not meant to be an ATO view of the law.

Until next week.

Friday, September 24, 2010

When a power to vary is not a power to vary

Last week, we touched on the fact that many trust deeds do not have any power to vary in them.

There are similarly many trusts that do have a power to vary, but that power to vary is not as comprehensive as may otherwise be assumed.

Two recent examples that we have seen are summarised below.

The first example (which was highlighted in quite a high profile case last year) turns on whether a power to vary extends to all aspects of the trust instrument. In particular, some powers to vary are restricted to either:

1. The formal provisions that actually establish the terms of the trust.

2. Alternatively, the power to vary might be restricted to the actual powers that the trustee has to run the trust.

Care should always therefore be taken to understand exactly how comprehensive the power to vary is.

Similarly, some powers to vary are subject to specific prohibitions. For example, a power might extend to all parts of a trust other than the rules regulating the appointor provision.

In these types of situations, it is generally impossible (unless court approval is obtained to vary the relevant clause), even if the affected party (for example the appointor) were to consent to the variation.

Ultimately (and generally in complete contrast to superannuation trust deed variations), there is always the need to very carefully review the exact basis on which any purported variation to a family trust is to be implemented before making a change.

Until next week.

Friday, September 17, 2010

Trust deed updates - Start at the start

Due to the recent decision in Bamford, we have seen a significant increase in the number of advisers recommending to their clients that a complete review of, particularly family trusts, be done for each client.

As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.

Previous posts have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.

Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.

There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.

In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.

Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.

Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.

Until next week.

Wednesday, September 8, 2010

ATO ruling on insurance trusts

Last week the ATO released a Product Ruling (PR2010/18) in relation to the capital gains tax consequences for the beneficiary of an insurance trust deed.

In many respects the ruling reflects what most specialists in this area (including View Legal) have been saying for many years. That is that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding that there may be other commercial issues to consider regarding the structure.

Unfortunately the positive aspects of the ruling are largely undermined by the fact that the outcomes are based on the assumption that the insurance trust deed will create absolute entitlement for each beneficiary in the relevant insurance policy. As many advisers who work in this area will know, the expressed views of the ATO concerning absolute entitlement are somewhat contentious and the ATO continues to refer to a draft ruling that has never been finalised - despite being issued in 2004.

One practical issue is that the ruling released last week confirms that in order to ensure absolute entitlement the relevant beneficiary must be able to call for the asset at any time. This largely undermines one of the main reasons advisers had historically recommended insurance trusts - that is that the trustee will have the ability to ultimately control the payment of any insurance proceeds received.

A further practical issue, given the way in which many providers have traditionally structured trust arrangements is that the product ruling only relates to insurance trust deeds where the company acting as trustee is an entity owned and controlled by the principals involved in the business entity and the relevant insurer is not be a party to the arrangements.

For those interested in reading a full copy of the ruling please email me.

Until next week.

Monday, August 23, 2010

The price of love

Two weeks ago, we touched on a situation where the gifting of a family home was potentially exposed under the bankruptcy clawback rules.

As I mentioned, if the original transaction had been structured slightly differently, around 20% of the value of the property could have been protected.

In simple terms, instead of a straight gift of the property, the following steps could have been taken:

1. The house could have been sold by the husband to his spouse for its market value 3½ years ago.

2. The transaction should have been structured under a vendor finance arrangement.

3. Following completion of the sale transaction, the husband could have forgiven the outstanding debt for 'natural love and affection'.

4. Assuming that all steps would have been properly legally documented, then the wife would have had at least a reasonably arguable case that the capital growth in the asset since the date of the initial transfer would have been quarantined to her benefit and not available to creditors on the bankruptcy of her husband.

Until next week.

Matthew Burgess

Monday, August 16, 2010

Unpaid present entitlements (UPE) & the election

Last week, the National Institute of Accountants (NIA) sought to turn the UPE issue into an election topic.

An extract from the Weekly Tax Bulletin released on Friday is set out below.

It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.

Until next week.

The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.

NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.

The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.

Tuesday, August 10, 2010

House transfers and real love

Last week, I was reminded about the importance of proper planning when implementing asset protection strategies.

The particular scenario involved the potential clawback under the bankruptcy rules of a family home that had been gifted by a husband to a wife approximately 3½ years before a bankruptcy event. Many of you will be aware that changes to the bankruptcy rules extended the clawback period from 2 to 4 years a few years ago.

Whether the transfer could in fact be clawed back for this client was an issue which is as yet unresolved. The issue last week, however, was in relation to whether the value of the house as to today’s date could be clawed back or whether its value 3½ years ago was the relevant value.

The question was quite critical because notwithstanding the intervening GFC, the value of the house had gone up by more than 20% over the 3½ year period.

As the original transfer had been crafted simply as a gift for 'natural love and affection', we had to advise the client that the house itself was the asset that would be exposed and therefore the value at today’s date was at risk.

Next week, I will try to provide an example of how the original arrangement could have been structured differently to potentially limit the total value exposed under the clawback provisions.

Until next week.

Matthew Burgess

Monday, August 2, 2010

Trustee companies multitasking

Last week we touched on the importance of trustee companies not accumulating assets in their own right.

The specific example that inspired last week’s post related to a recent client situation where the trustee company had been used to receive distributions out of the trust that it acted as trustee for.

Often advisers assume that it is not in fact possible at law for a trustee company to also act as the corporate beneficiary. While this is often a good assumption, it is not necessarily the case.

The question of whether a trustee company can in fact be a beneficiary of the trust it acts as trustee for depends on the terms of the trust deed.

Even where a trustee company is listed under the trust deed as a potential beneficiary of the trust that it acts as trustee for, we normally strongly recommend against it being used as a corporate beneficiary.

This is because the trustee is liable for any difficulties that arise against the trust.

It is therefore preferable a completely 'cleanskin' company acts as the corporate beneficiary in order to ensure that the accumulated profits of the trust are quarantined from any litigation against the trustee from time to time.

Until next week.

Matthew Burgess

Monday, July 26, 2010

Trustee companies and specialisation

Today’s post relates to an asset protection issue that unfortunately is too often overlooked.

Many of you will have heard our firm (and other lawyers) referring to the 'domino theory'.

This theory is one of the very basic asset protection concepts of ensuring that there is a deliberate limit placed on the number of assets owned by any one entity. Furthermore, the assets owned by a particular entity should be of comparable risk profiles.

A similar issue arises in a slightly different context where a company acts as trustee for a trust. In this situation, while the company will be the legal owner of all assets of the trust, it will not have beneficial ownership.

In a number of instances recently, we have seen situations where the trustee company does in fact own assets in its own right, even if this is simply cash, unpaid entitlements or at call loans.

In these situations, those assets are unnecessarily exposed to difficulties that might be encountered by the trust.

In order to maximise the trustee company structure, care must always be taken to ensure that its assets are no more than the initial capital paid up on establishment of the company (i.e. $2).

Next week, we will look at the specific scenario today’s post was inspired by, that being a trustee company that had also been used for many years as the corporate beneficiary for the trust.

Until next week.

Matthew Burgess

Monday, July 19, 2010

Insurance funded buy-sell arrangements

Over the last 2 to 3 years, there has rarely been a week gone by where we have not been fortunate to help a risk adviser implement an insurance funded buy-sell arrangement with their clients.

One issue that comes up surprisingly more regularly than it probably should occurred again last week in relation to the structure of these arrangements and the use of options.

There is an enormous amount of material on insurance funded buy-sell deeds (if you are interested, spend some time looking at our website – see the following link

Invariably, most advisers in this area will, for a multitude of tax and wider commercial reasons, recommend an option based contractual arrangement – these arrangements provide the most amount of flexibility possible for each party.

Where however a discretionary trust is involved in the business structure, it is generally the case under trust laws that the trust deed must expressly permit the granting of options.

The technical reasons for this position revolve around issues concerning the fettering of a trustee’s discretion – practically however the position is that unless the trust does have the power to grant options at the date the buy-sell agreement is signed, there is a risk that the agreement may not be enforceable as otherwise anticipated.

Until next week.

Matthew Burgess

Monday, July 12, 2010

Can an enduring attorney be a company?

The issues in relation to attorney appointment over the last couple of weeks have generated a number of questions and comments.

One common theme has been in relation to the distinction between the appointment of an attorney and the role of an executor and/or trustee under a will.

There are a number of distinctions between these various roles, however one of the overriding practical points is that the appointment of an attorney can generally only be of an individual person.

In contrast, the appointment of an executor or trustee can be of a company or a particular role – for example, you will often see the executor of a will being crafted so that it is the 'senior partner from time to time in the firm of . . . . . .’.

Until next week.

Matthew Burgess

Monday, June 28, 2010

Should I act as an attorney for a client?

A number of people contacted me following last week's post with questions in relation to the consequences of an accountant or financial adviser (or for that matter a lawyer) acting as an attorney for a client.

Many of you will have either professional body guidelines or guidelines that your firm has agreed to implement about the basis on which (if at all) you can take on the role of an attorney.

In a practical sense, the two biggest issues you need to ensure are addressed:

1. The conflict of interest rules are very strict in this area. It is always preferable to have a very clear statement in the attorney appointment document confirming that the person appointing you as their representative waives any prohibition on you acting due to an issue of conflict.
2. Similarly, on a number of levels, it is always our strong recommendation that the professional adviser be permitted to charge their standard professional fees. This ability should be clearly set out in the appointment document.

Until next week.

Matthew Burgess

Monday, June 21, 2010

Further trust deed tips

A few weeks ago (see the posting 'Trust deed tip'), I mentioned the trust where a number of variations had been implemented over the years, but those variations did not comply with the rules set out under the trust instrument.

The short term fix (in order to satisfy financier requirements) was to implement a deed of confirmation of the historical changes.

To try and minimise future difficulties, we are also implementing the following:

1. With the settlor’s consent (given that he is still alive and has capacity to do so), we are removing the requirement for him to consent to any future changes. This step has some potential tax and stamp duty consequences, however on balance, the client’s accountant has agreed with us that it is the most logical next step.

2. We are also clarifying the requirements around the consent of primary beneficiaries. For this particular situation, all primary beneficiaries are currently over the age of 18 and alive, however the client did not want a situation in the future where there were infant beneficiaries (or beneficiaries that were no longer alive) given third parties might seek to challenge whether a future purported variation was in fact effective without the consent of those people.
Until next week.

Matthew Burgess

Tuesday, June 15, 2010

Corporate trustee duty (part 2)

Last week, I mentioned the unique way in which the Queensland stamp duty rules can operate in relation to the transfer of shares in companies that act as trustees for discretionary trusts.

As touched on last week, the provisions are such that the transfer of shares in these companies can be charged with standard stamp duty rates based on the underlying market value (ignoring any debt) of the dutiable assets in the discretionary trust located in Queensland or Western Australia.

In Queensland there is however the ability to legitimately avoid this stamp duty cost, if the transaction comes within an exemption set out under the stamp duty rules.

Broadly these rules provide that so long as the transfer of shares is between individual members of a family group, and the trust is established primarily for the benefit of members of that family, then there will be no duty payable.

As the ability to access the stamp duty relief is subject to the discretion of the Stamps Office, there is the ability to get an indication on whether stamp duty relief is likely to be available and with the client that I mentioned last week, we have submitted a ruling application on their behalf.

If an unfavourable ruling is received, we will need to explore other, less commercially appropriate, alternatives to achieve the client’s overall objectives.

Until next week.

Matthew Burgess

Thursday, June 3, 2010

Trust deed tip

Again this last week, we have had some more issues arise in relation to family trusts.

As is often the case, the issue from this week was identified by a financier.

The issue arose due to a review of some historical variation deeds to the original trust documents.

Due to a relatively unusual provision, the original trust required that any variation could only be made with the consent of the settlor (i.e. the person who originally set up the trust) and all of the 'primary' beneficiaries who were set out in the schedule to the trust.

None of the earlier variations had received consent from any of the relevant parties.

The solution (which is still to be approved by the bank) was to implement a comprehensive deed of confirmation and obtain signatures from all relevant people – fortunately, the settlor was still alive and willing to assist.

Next week, I will touch on some other practical difficulties that we are going to need to consider and possibly address in the future.

Until next week.

Matthew Burgess

Wednesday, May 19, 2010

Testamentary trusts - is it ever too late?

As you may recall from previous posts, there are significant advantages of utilising a testamentary discretionary trust (TDT) as part of an estate planning strategy.

We often receive queries from clients asking whether it is possible to establish a TDT to receive estate assets after a person's death.

While establishing a TDT in a person's will is by far the simplest approach, it is possible for an estate proceeds trust (or post-death TDT) to be established following a person's death to receive the estate assets.

Any property received from the estate may be transferred to an estate proceeds trust (EPT) within three years for the date of death, provided the trust is structured to satisfy the requirements in the tax legislation. 

The summary about EPT on the View Legal website is available via the View Legal website ( via the core services section and explains the requirements in further detail.

Practically, the area where we see the biggest demand for estate proceeds trusts is in relation to receiving insurance proceeds from life insurance policies.

Matthew Burgess

Monday, May 10, 2010

Trust distributions 101 - Read the deed!

Last week, an accountant and I caught up in relation to his review of trust distributions in previous years for a new client to his firm.

The main issue related to income that had been passed to a company over a number of years.

While the trust deed allowed distributions to companies, it had a relatively unusual provision that required all of the shares in that company to be owned by the 'primary beneficiaries' set out in the schedule.

Unfortunately the company that had been used had a share structure that did not comply with the provisions of the deed and we were trying to explore if there were some potential solutions available.

Each idea we have come up with to date has not been particularly satisfactory, so this week’s practical tip is simply to remember to ensure that whenever working with trust someone is made responsible to 'read the deed’.

Until next week.

Matthew Burgess

Tuesday, May 4, 2010

Deeds of variation and stamp duty

As I flagged in my last blog posting, we had a very difficult day recently – all triggered by a simple typo in the schedule to a trust deed.

One aspect that proved unnecessarily difficult due to the particular approach of the relevant bank officer was in relation to stamping.

Most Australian states (and particularly Queensland where this transaction was taking place) do not require administrative type changes to trusts to be charged with stamp duty.

In fact, in Queensland, recent changes have been made by the Stamps Office to actively discourage people from lodging these types of documents for assessment, given that the assessment is going to be returned as no duty payable.

Essentially then the only types of trust variations that need to be lodged for assessment in Queensland are ones that historically have been loosely described as 'resettlements'.

Practically, there is in fact no definition of a resettlement under the stamp duty rules and instead there is a series of other, relatively technical, provisions that need to be considered. For those interested in the general way in which these rules operate, please let me know and I can direct you to the relevant parts of the Stamps Office website.

Until next week.

Matthew Burgess

Friday, April 23, 2010

Typos and big legal bills

Given Monday is a public holiday, the Blog for next week is posted below.

Yesterday ended up being a very long day and unnecessarily expensive (both in terms of time consumed and bank, accounting and legal charges).

The day was also a particularly frustrating one due to the relatively underwhelming cause of all the hassle – a typo in an on-line created trust deed.

While the typo was not ours, it served as an extremely timely reminder of how critical it is to get even the simple things right.

For those that attended our Master Class on trusts a few years ago (our Master Class series is run once a year and is a half day program built entirely around a practical case study), you may remember one of the examples (based on a real life situation) where the vesting (or ending) date of a trust was accidentally noted as 18 years instead of the more standard 80 years.

Yesterday, the error (which had been generated by a client’s former accountant using an online trust provider) was simply the spelling of the name Stephen with a 'v' instead of the 'ph' in the schedule.

While the trust had borrowed money from the bank before, no one had ever picked up on this typo.

Yesterday was the settlement day for a relatively large transaction and mid morning a Sydney bank officer identified the typo and insisted that the bank security could not be perfected because of it until the error was remedied.

After much (often quite illogical) negotiation, the bank finally agreed to a deed of variation being implemented.

As is often the way in these situations however, the deed (which ran to less than two sentences of actual substantive terms) was redrafted three times to satisfy the precise requirements of the bank.
Furthermore, even having produced the deed, there was the threat of the bank refusing to settle unless it was stamped prior to settlement.

The irony here of course is that the particular form of document is not liable to stamp duty in Queensland and due to recent changes at the Stamps Office trying to discourage people to lodge these documents for duty assessment (I might touch on this in more detail next week), it was going to be impossible to achieve a same day stamping.

Finally, based on a written undertaking provided by us, the bank did agree to settle.

Until next week.

Matthew Burgess

Monday, April 19, 2010

Bamford - What exactly does it mean?

As many of you will be aware, we have updated our Intensive program over the last few weeks to include some initial comments on Bamford.

The Intensives have fully booked out and we are therefore also putting on some Wednesday Night Forums shortly which will focus exclusively on Bamford and the unpaid present entitlement ruling from the end of last year.

One very practical issue that has been raised regularly over the last few weeks has been in relation to trust deeds. In this week’s post, I thought I would list out the answers to some of the most frequently asked questions in this regard.

1. Are View Legal deeds 'Bamford compliant' – every trust deed provided by View Legal is Bamford compliant.

2. Are trust deeds from other providers Bamford compliant – this is an issue that will need to be assessed on a case by case basis. Certainly the older the deed, the less likely it is to be compliant. There are also a number of non tax specialist deed providers who have not traditionally focused on some of the critical issues raised in Bamford.

3. Should we be looking to do wholesale updates of all trust deeds in our client base (similar to the recent super deed updates completed) – subject to the exact approach the ATO adopts in the decision impact statement that is due to be released shortly, we believe there is likely to be some benefit in at least conducting a full review of all deeds.

4. Are there standard distribution minutes available – as many of you will be aware, we have always been conservative in our approach to distribution minutes and strongly recommend that every trustee should independently consider both the trust deed and the exact nature of distributions on a year on year basis (in other words, not use a 'standard' minute).

Certainly given the confirmation of the proportionate approach, the crafting of minutes so that (for example) infant beneficiaries get a set dollar amount and then the balance goes in certain percentages will rarely (if ever) be appropriate.

We are already working with a number of accounting practices to develop an approach that suits the risk profiles of their clients.

Until next week.

Matthew Burgess

Monday, April 12, 2010

Trust cloning is dead (or is it?)

On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.

As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.

Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.

What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.

As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:

1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.

Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.

Until next week.

Matthew Burgess

Thursday, April 1, 2010

Pre CGT assets owned by family trusts

Given the Easter break for many next week, and our promise to post a blog posting each week - the posting that would have been next Monday is being posted today.

Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).

Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.

Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).
As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.

Best wishes for Easter.

Matthew Burgess

Monday, March 29, 2010

When is a share not a share?

Special classes of shares have, at least in recent years, always been a hallmark of company structures.

One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.

Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.

For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).

The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.

More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.

For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.

Until next week.

Matthew Burgess

Monday, March 22, 2010

How many directors does it take to have a company ?

Last week, I further explored the issues that came out of a relatively common situation of a loan or unpaid present entitlement owed to a company, where that company was a trading entity.

As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.

Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.

As directors carry personal liability, this is unnecessarily risky.

While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.

In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).

Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.

If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.

Until next week.

Matthew Burgess

Monday, March 15, 2010

In times of peace - prepare for war

Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.

As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:

1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.

Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.

The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.

As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.

Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.

As usual, until next week.

Matthew Burgess

Monday, March 8, 2010

Can a company own shares in itself ?

A couple of days ago, a financial adviser and I were looking at helping a client to implement an insurance funded buy-sell arrangement.

Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.

As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.

This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.

Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.

It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.

And no - a company can not own shares in itself.

Until next week.

Matthew Burgess

Monday, March 1, 2010

UPEs and an Asset Protection Trap

This last week I had a timely reminder that while those tax driven issues are critical, they are in fact not as important as the underlying loan or UPE itself.

In particular, I was helping an accountant who had a client whose trading company had been served with litigation proceedings. My role was to help review all structures in the group from an asset protection perspective, although as the litigation lawyer here politely reminded us (I do not get involved in any actual court work if I can avoid it), it was probably not the most opportune time to be doing the asset protection audit - hence Friday's Twitter posting 'in times of peace - prepare for war'

In any event, while the overall structure of the group was fairly sensible, there was one, very large asset on the trading company’s balance sheet. That asset was a UPE (or if the ATO chooses to ignore industry feedback and finalises its draft ruling – a loan) owed to the trading company by a passive investment trust.

Despite bankruptcy clawback rules, there may be a solution for this client that we are currently exploring. The situation they have to address, now urgently, is of course less than ideal and was a timely reminder that all clients should be encouraged to undertake an asset protection 'audit' regularly.

For those interested, the particular solution potentially available to the client here was somewhat unique and fairly complex and I have added it to the list of ideas for presentation topics at a future Intensive or a Master Class by our firm.

Next week (or if another more relevant topic arises, within the next few weeks), I will relay one other difficulty with this client’s structure that is likely to not be able to be addressed – but could have been with some forward planning.

Matthew Burgess

Monday, February 22, 2010

What exactly does 'jointly' mean?

On three separate occasions last week, the issue of 'jointly' owned assets arose.

A concise summary of the difference between owning something as joint tenants and tenants in common can be found via the 'core services' section of the View Legal website (

Practically, the distinction normally becomes most relevant at times when it is too late to implement a change – for example on death, litigation or relationship breakdowns.

As a general rule (although there are always exceptions), for most business owners, professionals or people in long term relationships, jointly owned assets should be owned as ‘tenants in common’ to provide the greatest amount of flexibility. This conclusion is not always the case and in fact often the preferred position is that one party has no ownership of the relevant asset – in other words, as part of the review process, it is transferred to another person or structure.

Ultimately, as I was reminded last week, there are two things you should keep in mind, namely:

1. Remember the distinction between the two joint ownership structures.

2. Make sure that in relation to each asset for any particular client, you know which ownership structure applies.

Until next week.
Matthew Burgess